Like many others, I became aware of John Brooks’ Business Adventures after the recent WSJ essay by Bill Gates wherein Gates said the book was his favorite of the business genre and that it was Warren Buffett’s recommendation to him in 1991 when he asked Buffett for his best business read (the story goes that Buffett mailed Gates his personal copy and Gates has kept it to this day). I’m in the middle of chapter three (about the U.S. federal income tax) but wanted to share a few notes from the first chapter, “The Fluctuation: The Little Crash in ’62” [chapter two is a 50-page entry about the failed Ford Edsel, a rather quick, enjoyable and informative read].
“The Fluctuation” begins: “THE STOCK MARKET — the daytime adventure serial of the well-to-do — would not be the stock market if it did not have its ups and downs.” Later at the end of a long first-paragraph: “… the New York Stock Exchange is also a sociological test tube, forever contributing to the human species’ self-understanding.” Right out of the gate this is great material and it gets better. To my surprise, the author, the late John Brooks (1920 – 1993), then introduces Joseph de la Vega, himself the author of the first book ever written about a stock exchange and its players, Confusion of Confusions (about traders on the Amsterdam market, published in 1688). While the overall story about the May 1962 rout (featuring the then largest single-day drop since 1929) is a worthwhile read and reminds one of the flash crashes of more recent history, I was pleased to see multiple quotes from de la Vega and below I am sharing some of them.
Select observations and quotes from de la Vega’s Confusion of Confusions:
17th c Amsterdam traders were “very clever in inventing reasons” for a sudden rise or fall in stock prices.” [Reasons are of course still being invented and will always be invented.]
“The news is often of little value.” And to that, Brooks adds: in the short run, the mood of investors is what counts. [Reminder, de la Vega published his book in 1668; Brooks, 1969, with his reporting live in 1962]
“The expectation of an event creates a much deeper impression … than the event itself.” [The taper, Fed statement watching, ….]
“Never give anyone the advice to buy or sell shares, because, where perspicacity is weakened, the most benevolent piece of advice can turn out badly.” [Life hacking in 17c]
“It is foolish to think that you can withdraw from the Exchange after you have tasted the sweetness of the honey.” [Greed/animal spirits; Short memories … compare that to Buffett, who has commented on being comfortable with his investment so much that he wouldn’t mind if the exchange were closed for five years.]
As for the conclusion of the 1962 crash (as narrated by Brooks in this chapter), without giving it away, there is a great lesson here about the value of having at least a modest cash position (a timely reminder of the “optionality of cash”). I will say the hero of the 1962 fluctuation is an unlikely one. Cash arguably carries a very negligible opportunity cost, ultimately if any, considering one’s ability to deploy it opportunistically in a down market and achieve potentially significantly higher risk-adjusted returns than being fully-invested and trying to perfect timing to maximize gains. For fund managers, there’s another benefit behind maintaining a modest cash position should one’s investors panic.