The Money Game is a book lauded by everyone and I finally made time to read it. It’s an interesting, sometimes sarcastic, take on the game of investing. And it is a game unlike any other.
Unlike most games, in this one, there are no clear-cut set of rules or a defined way to win. There are no innings or quarters or final whistle.
In fact, all the participants play the game differently and for different reasons. They make up their own set of rules and have a different definition of winning. And they often change the rules and the definition multiple times depending on how well they’re playing.
The most important thing to know about this game is to know thyself. And if you can do that, the second most important thing is that you can’t take the game personally. You have to separate yourself from the investments you own.
Without those two things, the rules and definition won’t matter because playing the game will be costly. There are other important things to know too, but those two stood out because I haven’t finished the book yet.
In this often quoted but rarely followed passage, Adam Smith (George Goodman) explains all of the above and why:
The strongest emotions in the marketplace are greed and fear. In rising markets, you can almost feel the greed tide begin. Usually it takes from six months to a year after the last market bottom even to get started. The greed itch begins when you see stocks move that you don’t own. Then friends of yours have a stock that has doubled; or, if you have one that has doubled, they have one that has tripled. This is what produces bull market tops. Obviously no one rationally would want to buy at the top, and yet enough people do to produce a top. How do they manage it? It must be that element of contagion from Le Bon’s crowd, from the unwillingness to be out of step. It is really quite amazing how time horizons and money goals can change. Investors can start out tentatively after a market bath, and they buy something they hope will go up 50 percent in eighteen months. But as the pace accelerates, 50 percent in eighteen months seems much too slow, when there are stocks around — owned by somebody else — that are going up 100 percent in six months. Finally it all turns into a marvelous carmagnole that is great fun if you leave the party early.
The same thing happens in reverse. When stocks start down, the tendency is to wait until they come back a little before lightening up. They head down further, and the idea that you have made a mistake, that you have been betrayed by your own judgment, can be so paralyzing that you wait a little longer. Finally faith evaporates entirely. If stocks were down 10 percent yesterday, they may be down 20 percent today. One day, when all the news is bad, you have to get rid of the filthy things which have treated you so cruelly. Again, it all ends in a kind of paroxysm that is no fun unless you have anticipated it.
No matter what role the investor has started with, in a climax on one side or the other the role melts into the crowd role of greed or fear. The only real protection against all the vagaries of identity-playing, and against the final role of being part of the crowd when it stampedes, is to have an identity so firm it is not influenced by all the brouhaha in the marketplace. Mr. Linheart Stearns, a New York investment counselor now deceased, wrote a very interesting essay on investing and anxiety, for anxiety is the threat to identity… Mr. Stearns must have been a soothing investment counselor to know, for his thesis is that the end object of investment is serenity, and serenity can only be achieved by the avoidance of anxiety, and to avoid anxiety you have to know who you are and what you’re doing.
…
It can be granted right away that if you have been a brilliant decision-maker, over a long enough period of time, maybe that’s who you are, and it won’t hurt you to walk around feeling brilliant. But it is a dangerous procedure, for the market has a way of inducing humility in even its most successful students. It is dangerous because to know what you’re doing, you do have to be able to step outside yourself and see yourself objectively, and this is very tough if you think of Comsat as your baby, or even think “That’s mine, and I bought it a lot lower.”A stock is for all practical purposes, a piece of paper that sits in a bank vault. Most likely you will never see it. It may or may not have an Intrinsic Value; what it is worth on any given day depends on the confluence of buyers and sellers that day. The most important thing to realize is simplistic: The stock doesn’t know you own it. All those marvelous things, or those terrible things, that you feel about a stock, or a list of stocks, or an amount of money represented by a list of stocks, all of these things are unreciprocated by the stock or the group of stocks. You can be in love if you want to, but that piece of paper doesn’t love you, and unreciprocated love can turn into masochism, narcissism, or, even worse, market losses and unreciprocated hate.
It may sound a little silly to have a reminder saying The Stock Doesn’t Know You Own It were it not for all the identity fuel provided by the market these days. You could almost sell these identities as buttons: I Am the Owner of IBM, My Stocks Are Up 80 Percent; Flying Tiger Has Been So Good to Me I Love It; You All Laughed When I Bought Solitron and Look at Me Now.
…
If you know that the stock doesn’t know you own it, you are ahead of the game. You are ahead because you can change your mind and your actions without regard to what you did or thought yesterday; you can…start out with no preconceived notions. Every day is a new day, providing, in the Game, a new set of continuously measurable options. You can live up to all those old market saws, you can cut your losses and let your profits run, and it doesn’t even make your scar tissue itch because, being selfless, you are unscarred.
