The Money Game

PREFACE

It is now a decade since The Money Game was written. Ben Graham, the classics scholar who was the dean of security analysis, started his text with a quote from Horace: Many shall come to honor that now are fallen, and many shall fall that are now in honor. That is certainly true for the players of the money game over the decade, as it probably will be in any decade. Not only did some of the players fall, but the names of some of the companies in The Money Game have become one with those of the harness makers and the locomotive kings. Any book written in the sixties is going to have some images that become the nostalgic amber of old tintypes.

This edition of The Money Game is the same as the first—not a word changed, as they say. There are other conventions which could be brought up-to-date, should the author choose to meddle. For example, Cassius Clay has become Muhammed Ali, and so on. But the book stands as it did.

For The Money Game is not, first and primarily, about money. It is not a compendium of techniques, nor even something that could be filed under microeconomics. Such a book would have dated more. The Money Game is, it says, about image and reality and identity and anxiety and money. That seems still the proper order. The money which can preoccupy so much of our consciousness is an abstraction and a symbol. The game we create with it is an irrational one, and we play it better when we realize that, even as we try to bring rationality to it. New Book That Views Market as Irrational Is a Hit on Wall Street, the Wall Street Journal headlined, in some wonder.

Irrational? When its language was built upon numbers, the very essence of rationality? It did seem an odd idea, even as the accounting boards worried about all the dialects that could be created out of that language of numbers, so that clarity became elusive. But the false rationality of numbers was not the only symbol that was not what it seemed. Another was the image of the banker, the Prudent Man, the Steward of Capital. For behind the funds which described themselves as virtue engendered—that is, Prudent and Faithful, usually in the more Latinate form, and American and Growth-Seeking—there operated a new generation of professional money managers, unscarred by depression memories, whose efforts were bent not toward the stewardship of capital but toward its increase—and incidentally making a record for the fund, which could then be sold to more investors. The ebullient sixties—so they seem, after half a decade of the gravest economic dislocation since the great world depression of the thirties. There were cities burning, civil disorders, an unpopular war, campuses torn apart, Presidents driven from office—but also a sense of excitement that contrasted with the gray fog which was to follow. The markets churned, but the times were good. You and I know, says one of the characters in The Money Game, that one day the orchestra will stop playing and the wind will rattle through the broken window panes. I must have liked the image; I used it again after The Money Game appeared but before the market fell apart: We are all at a wonderful party, and by the rules of the game we know that at some point in time the Black Horsemen will burst through the great terrace doors to cut down the revelers; those who leave early may be saved, but the music and wines are so seductive that we do not want to leave, but we do ask, ‘What time is it? what time is it?’ Only none of the clocks have any hands.

So we knew it was going to happen, and it did. The Black Horsemen came and cut down the revelers, even those with the names of virtue engendered like Prudent and Faithful and American and Growth. If you entrusted your money to them at the end of the sixties, you were lucky to keep half. That went, too, for banks whose headquarters were vaulted like cathedrals. Not only did the market go down, it kept going down—the popular averages disguised the extent of the decline. Another day it would come back, but not until the unscarred generation, so bold without memories, had become scarred like its predecessor.

Probably the biggest error in The Money Game is an implicit one. The small investor is a lovable fool, and the professional manager is a worldly riverboat dealer; find smart people, the small investor is told. Very good. That is like Ben Graham saying, Many shall be called to honor that now are fallen. But how do you find smart people? Those who have just finished being smart are sometimes the dumb ones in the next part of the cycle. The scarred sit, frozen by memories, through the ebullient markets, and the unscarred are sliced apart by the Black Horsemen of greed at the end. Only a longer time span reveals the truly Prudent Man, who knows that the first rule of making money is not to lose it. The implication in The Money Game is that the professional investors, who have access to all the information, whose computers can churn out ratios at fingertip touch, are smarter than the small investor. They are not smarter, they merely have more information. That does not protect them from the compulsions of theology; witness the wonderful Two Tier market of the seventies, with the so-called Nifty Fifty growth stocks selling all by themselves, supported by the religion of the managers, until they collapsed. The small investors without theology fared better.

There were two legal changes—strokes of the pen on a law—that were to change the theater or stadium in which the game was played. When the brokers first met under the buttonwood tree in 1794, a kind of club was formed, with the members agreeing on the fees or commissions to be charged to those outside the club who wanted to use the facilities to trade. That fee was the same for each share, whether you were buying one share or a million. If you were buying a million shares, the commissions were quite large, though it cost the broker no more for the pencil and pad to write the order. As the institutions—pension funds and mutual funds—grew in size, sometimes there actually were million-share orders, and frequently orders in the hundreds of thousands, but the cost of making the trade involved no more people than a few shares would have.

But by the early seventies, the fixed-fee system had been broken. The institutions bargained for—and got—reduced rates on their commissions. For the brokers who had set their costs on the old, fixed rate of commissions, the result was loss, and many of them did not survive. Here is a paragraph from an essay I did at the time, called The End of the Buffalo Days:

Up and down the Street, various entities are waking to the possibility of their own extinction. It is an extraordinary time. There have been periods of consolidation in American industrial history before, of course. But the financial community has been built along the same lines, and with almost the same customs and mores, for the better part of 200 years. Of course, time is no guarantee. The livelihood, the customs and mores, the rhythm of life of the Sioux were centered around the buffalo. Standing on a hill, looking over a mass of hundreds of thousands of buffalo, it must have been out of the realm of consciousness that anything could ever happen to so many buffalo, and when something did, all the trusted actions of the shamans and the ghost dancers were of no avail.

Diminished commissions meant that the river of income for research and for all those brokers calling customers with tips dried up. Not so many friendly voices on the telephone.

Five million small investors cashed in their chips—if they had any left—and departed the marketplace. Most of them left because they lost money. But many of them also left because the brokerage firm they dealt with was out of business, and their broker had become a short-order cook, a ski instructor or a junior vice president in his uncle’s pants factory.

That was one result of the legal action that changed the fees. The other legal action was more complex. It involved pensions. American industry grew, the work force grew, wives went to work, more than eighty million people were at work—most covered by pension plans—and the pension money grew until it was the biggest factor in the marketplace. Then came a law which allowed investors—and pensioners—to sue their managers for improper investments. Personally. The stocks go down, you ask the court for the manager’s car and his house. That certainly diminished some of the enthusiasm for managing pension money. The trustees of the pension fund turned the money over to the banks. Banks have always run pension money, protected by their corporate form. They also know that a Prudent Man is one who does what everybody else is doing—as would any Prudent Man, said the 1831 decision. If the top six banks in the country all buy the same stock, that must have been prudent, even when the stock goes down. The result was that the top six banks—and the top thirty banks—got more and more money to manage.

More and more money in fewer hands. If Rodney at the Morgan Bank wanted to get out of a stock before lunch, the stock could be down 50 percent by the time you heard about it, even supposing you spent all your time listening. There is, in The Money Game, an institutional buying panic, when Poor Grenville tries to spend $25 million by lunch and fails. That still goes on—only more so. The market motion is more violent, not really conducive to serenity, and yet, as one wise investment counselor says, the end object of investment ought to be serenity.

Which brings us back to what The Money Game is about—image and reality and identity and anxiety and money, in that order. If you don’t know who you are, this is an expensive place to find out, the book says. That had to do with people who want to lose, people who want to play out life scripts in the marketplace, old tapes in their heads.

I was to get some remarkable reactions to The Money Game. One visitor from India brought a beautifully bound volume of The Life Divine, by Sri Aurobindo, an Indian saint. He said The Money Game was a yoga, or had elements of yoga—not the breathing and stretching of hatha yoga, which we see sometimes on television or at the local Y—but an exercise called Fair Witness. Mr. Johnson says, The first thing you have to know is yourself. A man who knows himself can step outside himself and watch his own reactions like an observer. Mr. Johnson had read a lot in Eastern literature and his daughter was a serious practitioner, so perhaps that was not as coincidental as it seemed. (The Indian visitor, incidentally, said I had been influenced by Sri Aurobindo. I said that while I looked forward to learning more, I was not familiar with that master. The Indian visitor smiled mysteriously and said that was all right, the influences didn’t always work the way you thought.)

Then there was the visiting Zen practitioner, disciple of a famous master, who said the axioms of detachment were appropriate to his own discipline. The stock doesn’t know you own it, he said. Prices have no memory, and yesterday has nothing to do with tomorrow. If you really know what’s going on, you don’t even have to know what’s going on to know what’s going on. Detachment from the consequences of actions were part of his mode, as was self-observation. The visitor was himself writing a book on Zen and business management. If you were centered, he said, you performed better at whatever the task. Golf pros know that too, he said.

The point of this is not to dignify The Money Game by analogy or to make it seem exotic. Observations about behavior, arrived at pragmatically, can extend beyond their immediate scene, and they can even find a resonance in other disciplines from other cultures.

When I reread the parts of The Money Game that have to do with behavior, I do not have the same itch to meddle and correct that I do when going over the nuts-and-bolts marketplace stuff. They seem all right, and I will stick by them. When you read that the gunslingers at the banks believe in concentration and turnover, you should know that so many of them tried it that that portfolio theory became disastrous, and now the mode is for non-concentration and non-turnover. Enantiodromia, the tendency of men to swing to their opposites. Any remarks about portfolio theory are an attempt to freeze some pattern into rationality, and Lord Keynes rightfully said that there is nothing so disastrous as a rational policy in an irrational world. But you are well served to know that a stock is going up as long as it is going up, or that a stock doesn’t know you own it.

So, in the sense that The Money Game is about money, it is certainly not a how-to-do-it book. Any book that is merely about some technique for manipulating securities can be expected to fade once that technique is popular. We have had books that say, Buy assets. That worked for a time. Books that say, Convertible bonds. Fine until collapse. Books that say (even as this one does), Find rapidly growing companies. That is still a good philosophy, if you think of yourself as a partner in a growing business, but you must be sure that the price does not outrun the growth, and that the growth continues. No, oddly, the how-to-do-it, if there is such, is all about behavior. You don’t have to worry about it. Enjoy the stories, they always teach more than the rules.

If the years since The Money Game have been financially somber, remember enantiodromia, and Ben Graham’s classical axiom from Horace. When J. P. Morgan was asked what the market would do, he said, It will fluctuate. The moment of this new preface is one of rising euphoria in the marketplace, in which the money game is once again the dictionary definition of a game—sport, frolic, fun and play. New players, new profits. Now it may indeed be that the money game is not the highest order of game. One of my correspondents, the author of a mystic book called The Master Game, said it was only one game, amid that of Fame and Householder and Art and Science, all subservient to the Master Game. But the Swiss psychiatric pioneer Carl Jung wrote, One of the most difficult tasks men can perform, however much others may despise it, is the invention of good games, and it cannot be done by men out of touch with their instinctive selves. It may be that a hundred years from now, or even less, the money game played in the securities markets may be seen as a passing phase of capitalism. It may even be seen as Keynes saw it, as a game of musical chairs. Great rewards accrue to the successful, and even though, he said, there will be some without chairs when the music stops, all the players can still play with zest and enjoyment.

Adam Smith

February 1976

I

YOU

Identity

Anxiety

Money

1. WHY DID THE MASTER SAY GAME?

The world is not the way they tell you it is.

Unconsciously we know this because we have all been immunized by growing up in the United States. The little girl watching television asks will she really get the part in the spring play if she uses Listerine, and her good mother says no, darling, that is just the commercial. It is not long before the moppets figure out that parents have commercials of their own—commercials to keep one quiet, commercials to get one to eat, and so on. But parents—indeed all of us—are in turn being given a whole variety of commercials that do not seem to be commercials. Silver is in short supply, and the Treasury is running out and begins to fear a run. So the Treasury tells the New York Times that, what with one thing and another, there is enough silver for twenty years. Those who listened to the commercial sat quietly, expecting to get the part in the spring play, and the cynics went and ran all the silver out of the Treasury and the price went through the roof.

This is a book about image and reality and identity and anxiety and money. If that doesn’t scare you off, nothing will. It isn’t really that serious and there is a message in here from Lord Keynes to that effect. You already know about image and reality, and you probably already know all about identity and anxiety, and everybody knows about money, so all we are doing is stirring them up together. In this introduction, I have two things to tell you. One is who I am not and the other is the single sentence, the illumine, the apple falling on the head, that led me to the attitude expressed in the first sentence, that the world is not the way they tell you it is.

I am not, of course, Adam Smith. Mr. Smith lies in the churchyard at Canongate, his tombstone, written by himself, identifying him as the author of The Wealth of Nations, and he has been there since he died in 1790, rich in respect and honors, having made himself immortal as the first great free-market economist in all the texts of economic history. Mr. Smith did not think of himself as an economist but as a moral philosopher. To what purpose, he asked in The Theory of Moral Sentiments, is all the toil and bustle of this world? What is the end of avarice and ambition, of the pursuit of wealth, of power, and preeminence? I like that, but it wasn’t because of it that I picked the name Adam Smith as a pseudonym. That was a happy accident.

Not so long ago I was asked to write something about Wall Street in a new publication, and I had what I thought was a bright idea. There is not very much written about Wall Street that Wall Streeters themselves believe. (The Street runs on oral-aural communication anyway, like McLuhan’s global village.) The reason for this is that the writers about the Street are Outside, and Wall Street tells them more or less what it wants. Wall Street is well paid, and the writers aren’t, and when the writers learn enough they get offered jobs in Wall Street and off they go, perhaps satisfying their creative urge by working on a black comedy on the weekends. Then they are Inside and rich and don’t write about Wall Street any more. Writers who really want to write would rather ride with the President in Air Force One, or sit in the Polo Lounge of the Beverly Hills Hotel with some movie star. Such writers are heroes at the next dinner party. Wall Street writers are never heroes at dinner parties because any broker or fund manager knows as much Street gossip as they do.

There are, of course, Wall Street writers, as opposed to writers on Wall Street, and some of them are essayists as good as Addison, Steele, and writers writing anywhere. Bradbury Thurlow, for example, writes a weekly market letter which has the grace of a Mozart sonata. But these essays are musings on the scene related to particular stocks; the coda of the essay is a therefore, as if the essay were an argument: therefore should we now buy Telephone, Q.E.D., so have I proved.

What is really going on is very difficult to report except for an insider. (B.C. Forbes, the founder of the magazine of that name, knew this. He noted that reporters with notebooks and pencils had to wait by the kitchen of the old Waldorf, so he got himself top hat, striped pants, and circulated with the tycoons.) But for an insider, there are problems, namely, how do you keep your friends from getting irritated if you are putting the Breughel scene to paper?

My bright idea was to use a pseudonym and to change the names and numbers of my friends, the players. A fund manager will tell another fund manager the innermost state of his emotions, the condition of his marriage, and even his purchases and sales, but he will not tell a broker or a magazine or any outsider who is likely not to understand him completely. I figured if we were not too solemn, everybody at Oscar’s, off Wall Street hard by Lehman Brothers, would get into the spirit of the game.

Pseudonyms are not much used in this country. Mr. George Kennan, upon leaving the State Department, did sign his famous article on containment in Foreign Affairs as Mr. X. But then he went right back to being George Kennan again. In England, where on some levels literacy seems to arrive at birth, the business of pseudonyms has gone on quite a long time. In the early nineteenth century, if something in the marketplace was bugging a merchant banker, he did not hire a P.R. man but wrote his own polemic, signed it Cato or Justinian and dispatched it. If a governor of the Bank of England wanted to loose a salvo at his opponents, he could sign it Plautus or Seneca and be as acid as he wanted. He knew he would get rapt attention, because his expertise was so obvious. Some of this still survives in England, but often it is just so that Justinian can be several people. (I am not saying he is, and for all you know, six of us are Adam Smith.)

So I had Procrustes all picked out. Procrustes, as you remember, was a highwayman of Attica who placed his victims on a bed of iron. If they were too short, he stretched them, and if they were too long, he chopped off their feet. It seemed appropriate for Wall Street.

The new publication did not come to pass, and the editor of New York magazine, in the Sunday World Journal, scooped up my sample and ran it. (The World Journal was a newspaper in New York which has since joined its ancestors.) I had to change your name, said this editor on the phone. They wouldn’t believe here that anyone was named Procrustes; just plain Procrustes sounds too much like a pseudonym, and we don’t use pseudonyms. So I put down the first name I could remember that would fit. I think it was Adam Smith.

So then there was Adam Smith, my Sunday recreation, and it all became too much fun to stop.

First of all, when the situations I described were successful, Wall Street filled in all the details of my sketches. Take Poor Grenville, a fund manager I described who bet the wrong way. He had just gotten himself a nice $25 million cushion of cash in his fund when the market turned around and ran away without him. Everybody knew Poor Grenville, only—it was pointed out to me—Poor Grenville wasn’t caught with $25 million but with $19 million or with $33 million and his hair wasn’t blond, it was red or it was brown. Otherwise it was Poor Grenville all right. I have since met six Poor Grenvilles and there are more coming into town all the time.

Then there were the Lamont Cranston aspects of it all. (If you don’t remember Lamont Cranston, the Shadow, and the secrets he learned in the Orient which enabled him to pass invisibly among men, we must not be in the same generation.) I was at a cocktail party once and I joined a respectful circle listening to a New York Times reporter I had never met. The reporter said he knew Adam Smith well and had for years, and he told us all about him. I listened raptly. In another instance, my seat-mate on a cross-country jet introduced himself, and we got to talking, and he told me about Adam Smith. When I seemed to be impressed, he said he knew Adam Smith but he couldn’t tell me who he was, because Smith had sworn him to secrecy.

It’s great. It’s like being the Fugitive with nobody chasing you.

You will notice all through this treatise