Highlights from The Money Game (Adam Smith)

This book was published under the name "Adam Smith", a pseudonym for George Goodman. It's a fun, quick read about how market participants think about the market.

Quoting Keynes

Lord Keynes rightful said that there is nothing so disastrous as a rational policy in an irrational world

On Keynes' observations

I believe that Keynes participation in the markets as an investor led him to some of the observations in the “Long-Term Expectation” parts of his General Theory. They are throw away aperçus, secondary to the main points, but they are the sharpest things around. I wish he had written more. No one has ever been more perceptive on markets than Keynes, and I don’t think he would have had this “feel” without himself being a participant; academic economists just haven’t.

On the Game and it's appeal

The lads with the Caribbean houses and the new sloops did not, upon the discovery that something was missing, sell those trophies and acquire sackcloth and ashes. The sloops and the houses and the art are all still there, but the players have gone back to the Game, and they don’t have a great deal of time for their toys. The Game is more fun. It probably does not make you a better person, and I am not sure it does any good for humanity; the best you can say is what Samuel Johnson said, that no man is so harmlessly occupied as when he is making money.

On the crowd

“As a lawyer,” Mister Johnson said, “I had no time to check individual companies; it was a matter of trying to sense behavior patterns. The market is a crowd, and if you’ve read Gustave Le Bon’s The Crowd you know a crowd is a composite personality. In fact, a crowd of men acts like a single woman. The mind of a crowd is like a woman’s mind. Then if you have observed her a long time, you begin to see little tricks, little nervous movements of the hands when she is being false.

Greed and fear

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 to even get started.

Smith predicted private-equity rollups long before they became common

Eventually there is no reason why doctors and lawyers should not go public too; it may take longer, but at some point a smart lawyer is going to see that if Bardell, Pickwick, Motley and Slick were a corporation instead of just a bunch of lawyers , they could sell the stock at twenty times earnings and that, in fact, a hungry underwriter has already suggested this. (In good markets, there is always a hungry underwriter. In bad markets, everybody is hungry and all the energies go into demanding that commissions be raised.)

Once the lawyers make it safely public, you can look forward to Brain Surgeons, Incorporated, which will be sold by brokers as “the most direct way of participating in the broadening growth of medical care, of Federal aid programs, of the increased attention to the nation’s health, and of the growing trend to schizophrenia.”

On IP and Moats

What is unique about a company is not the patents or products. Polaroid’s original patents have expired, and anybody who wants to turn out a 1948-type Polaroid picture, brown and fading, can do so. What is unique is always the same thing: it is people, the brains and talents of people. Sometimes these people produce patents, sometimes they produce a reputation for service; but always they produce something that cannot be easily duplicated by anyone else. In Avon Products, for example, what cannot be easily duplicated is its army of women selling Avon’s cosmetic door to door.

The game women play (keep in mind this was written in the 1968)

Women have an advantage. The smart people are likely to be men, and sometimes men can be intrigued with more than fees and commissions. The Game women play is Men, and perhaps that leaves them free to be less involved in this one.

A macro lesson on inflation and Keynes' prescription

[T]he problem is universal. It it that governments are now held responsible for the welfare of the people. The aspirations of the people can outrun their ability to pay for them, and nobody has yet found a way to create answers to the aspirations out of thin air. What this means is that if governments have a choice between attempting full employment and defending their currencies, they will nearly always pick jobs over the worth of the currency. Currencies do not vote. In this country, the Full Employment Act of 1946 spells this out. The government is committed to full employment, and if it must pump money into the economy to achieve this, and if there isn’t enough money, it creates the money. Long-range inflation is the policy, articulated or not, of every country in the world.

The aspirations of the people are a noble thing and no one is against jobs. But it does seem easy to produce them with currency rather than productivity. Central governments soon learn the utility of a deficit. It is convenient to take the views of the economists who followed Keynes and spend money during recessions. There are even problems on that side of the equation, because even with the breadth of statistical reporting and with computer speed, this kind of economics is still inexact, and the central government can find itself pressing the wrong lever at the wrong time.

It is less convenient to put some of the grain in the silo during the fat years. You can always think of something else to do with it, to take the convenient part of Keynes without the inconvenient part.

On market confidence

In the longer run, the actions of all the investors, individual and institutional, professional and nonprofessional, have to be based on the belief that leadership knows what it is doing and that rational men are handling the nation’s business rationally. If that belief fades, then so do the markets. They do not merely dive, they dive and then they disappear. It happened here in the blight of the spirit from 1930 to 1933, and it has happened in other countries.