The money game

250 Pages·2000·7.3 MB·English

by  Adam Smith

7;1 BESTSELLER OF THE YEAR I

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'ADAM
SMITH'

A DELL BOOK

CONTENTS

I. YOU:
IDENTITY· ANXIETY • MONEY

1. Why Did the Master Say "Game"?
11
2. Mister Johnson's Reading List
" .•. the dominant note of our time is
unreality."
21
3. Can Ink Blots Tell You Whether You Are the
Type Who Will Make a Lot of Money in the
Market?
35
4. Is the Market Really a Crowd?
43
5. You Mean That's What Money Really Is?
50
6. What Are They in It For?
55
A. Cuddling Comsat
B. I Want to Be Loved for Myself
C. Was I Dumb! Was I Dumb! Kick Me!
D. IBM as Religion: Don't Touch, Don't Touch
E. The Broker as Witch-Doctor
F. Can I Tell Rosalind? Can I Tell Harriet?
G. They Make Me Do Everything Wrong
7. Identity and Anxiety
69
8. Where the Money Is
85
9. Mr. Smith Admits His Biases
90

II. IT:
SYSTEMS

10. Can Footprints Predict the Future?
-109
11. What the Hell Is a Random Walk?
127
12. Computers and Computeers
146
13. But What Do the Numbers Mean?
155
14. Why Are the Little People Always Wrong?
168

:p:I. THEY: THE PROS

15. The Cult of Performance
177
16. Lunch at Scarsdale Fats'
189
17. Losers and Winners: Poor Grenville, Charley,
and the Kids
196
18. Timing, and a Diversion: The Cocoa Game
212

IV. VISIONS OF THE APOCALYPSE:
CAN IT ALL
COME TUMBLING DOWN?

19. My Friend the Gnome of Zurich Says a Major
Money Crisis Is On Its Way
227
20. H All the Half Dollars Have Disappeared, Is
Something Sinister Gaining on Us?
236

V. VISIONS OF THE MILLENNIUM:
DO YOU
REALLY WANT TO BE RICH?

. 21. The Purposive Investor
249

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 commer-
cials of their own--commercials to keep one quiet, com-
mercials to get one to eat, and so on. But parents-indeed
all of us-are in tum being given a whole variety of com-
mercials 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 him-

11

12
The Money Game
self, identifying him as the author of The Wealth of Na-
tions; 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 eco-
nomic 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 pre-
eminence?" 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. ([he
Street runs on oral-aural communication anyway, like Me-
Luhan'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, per-
haps 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 man-
ager 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 Tele-
phone, 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

You: Identity. Anxiety· Money
13
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 under-
stand him completely. I figured if we were not too sol-
emn, everybody at Oscar's, off Wall Street hard by Leh-
man 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 "Sen-
eca" 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 1 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 Jour-
nal, scooped up my sample and ran it. (The World Journal
was a newspaper in New York which has since joined its

14
The Money Game
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 suc-
cessful, 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 mil-
lion 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 hiro
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 talk-
ing, 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 bim
to secrecy.
It's great. It's like being the Fugitive with nobody chas-
ing you.

You will notice all· through this treatise a leitmotif of
observations by John Maynard Keynes. This use of Keynes
has very little to do with Keynes the economist; it has
rather to do with Keynes the writer and speculator. Keynes
the economist is simply there, like Darwin and Freud and

You:' Identity· Anxiety· Money
15
Adam Smith of Kircaldy, County Fife, a part of history. I
bring this up because Keynes the economist still elicits an
emotional reaction from many readers. Having, in publi-
cations, quoted Keynes a few times, I began to receive
mail from gentlemen whose phrasing is generally found
in more right-wing publications, the gentlemen implying
that if I had any truck with Keynes, I was a dupe of the
internationalist bankers and the British, and that I was
probably rejoicing in the disintegration of the dollar and
the, therefore, inevitable disintegration of American moral
character. I wrote a long paper on Keynes in graduate
school which I found recently while cleaning out a file.
It is amazing how stupid one can be in graduate school,
y
because while I was puzzling through L1 (Y) = - = M 1,
V
the income velocity of money, I missed all the fun.
Here is an economist with a sparkling style, something
rare enough in itself. But more than that, here is a man
with a great sense of life and of living. Keynes was a great
speculator, and made a fortune not only for himself but
for his college, Kings College, Cambridge, and he did it
in half an hour a morning from his bed. I believe that
Keynes' participation in markets as an investor led him
to some of the observations in the "Long-Term Expecta-
tion" parts of his General Theory. They are throw-away
aperryus, 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.
We are taught-at least those of us who grew up with-
out a great deal of it-that money is A Very Serious Busi-
ness, that the stewardship of capital is holy, and that the
handler of money must conduct himself as a Prudent Man.
It is all part of the Protestant ethic and the spirit of Capi-
talism and I suppose it all helped to make this country
what it is. Penny saved, penny earned, waste not, want not,
Summer Sale Save 10 Percent, and so on. Then I came
across this sentence in "Long-Term Expectation" of
Keynes' General Theory:

- .--.-.---------.. -.--~------.-----~------

16
The Money Game
The game of professional investment is intolerably
boring and overexacting to anyone who is entirely
exempt from the gambling instinct; whilst he who
has it must pay to this propensity the appropriate
toll.

Game? Game? Why did the Ma,ster say Game? He could
have said business or profession or occupation or what
have you. What is a Game? It is "sport, play, frolic, or
fun"; "a scheme or art employed in the pursuit of an ob-
ject or purpose"; "a contest, conducted according to set
rules, for amusement or recreation or winning a stake."
Does that sound like Owning a Share of American Indus-
try? Participating in the Long-Term Growth of the Ameri-
can Economy? No, but it sounds like the stock market.
Let us go one step beyond. Drs. John von Neumann and
Oskar Morgenstern developed, some years ago, a Theory
of Games and Economic Behavior. This game theory has
had a tremendous impact on our national life; it influences
how our defense decisions are made and how the market-
ing strategies of great corporations are worked out. What
is game theory? You could say it is an attempt to quantify
and work through the actions of players in a game, to
measure their options continuously. Or, to be more _ for-
mal, game theory is a branch of mathematics that aims to
analyze problems of conflict by abstracting common stra-
tegic features for study in theoretical models. (You can tell
by the phrasing of that last sentence that I have the book
before me, so let me go on;) By stressing strategic as-
pects, i.e., those controlled by the participants, it goes be-
yond the classic theory of probability, in which the treat-
ment of games is limited to aspects of pure chance. Drs.
von Neumann and Morgenstern worked through systems
that incorporated conflicting interests, incomplete infor-
mation, and the interplay of free rational decision. and
choice. They started with dual games, zero sum two-
person games, i.e., those in which one player wins what
the other loses. At the other end you have something like
the stock market, an infinite, n-person game. (N is one of
the letters economists use when they don't know some-
thing.) The stock market is probably temporarily too com-
plex even for the Game Theoreticians, but I suppose some

You: Identity. Anxiety. Money
17
day even it will become a serious candidate for quantifica-
tion and equations.
I bring this up only because I think the market is both a
game and a Game, i.e., both sport, frolic, fun, and play,
and a subject for continuously measurable options. If it is
a game, then we can relieve ourselves of some of the
heavy and possibly crippling emotions that individuals
carry into investing, because in a game the winning of the
stake· is clearly defined. Anything else becomes irrelevant.
Is this so startling? "Eighty percent of investors are not
really out to make money," says one leading Wall Streeter.
Investors not out to make money? It seems almost like a
contradiction in terms. What are they doing then? That
can be a subject for a whole discussion, and will be, a
bit later.
Let us go back to the illumine, that the investment game
is intolerably boring save to those with a gambling in-
stinct, while those with the instinct must pay to it "the
appropriate toll." This really does say it all. We have
more than twenty-six million direct investors in this country,
i.e., people who have actually bought stocks. (I say direct
investors because indirectly, through insurance companies
and pension plans, we have more than a hundred million
investors, which is just about everybody except children
and the truly poor.) Not all of the twenty-four million are
fiercely active, but the number grows ali the time, making
the stock market a great national pastime. Active investors
do not pursue bonds (except convertibles) and preferreds
(except convertibles). It isn't that one can't make money
with these instruments, it's that they lack romance enough
to be part of the game; they are boring. It is very hard to
get excited over a bond basis book, where your index
finger traces along a column until it gets to the proper
degree of safety and yield.
Sometimes illusions are more comfortable than reality,
but there is no reason to be discomfited by facing the gam-
bling instinct that saves the stock market from being a
bore. Once it is acknowledged, rather than buried, we can
"pay to this propensity the appropriate toll" and proceed
with reality.
I mean here no more than recognizing an instinct. Dr.
Thomas Schelling, a Harvard economist and the author

18
The Money Game
of a number of works on military strategy, goes a lot fur-
ther.Writing on "Economics and Criminal Enterprise,"
Dr. Schelling says:

The greatest gambling enterprise in the United States
has not been significantly touched by organized crime.
That is the stock market. . . . The reason is that the
market works too well. Federal control over the stock
market, designed mainly to keep it honest and infor-
mative •.• makes it a hard market to tamper with.

..
Sentences like the first one in that excerpt must make the
public-relations people at the New York Stock Exchange
wake up screaming. For years the New York Stock Ex-
change and the securities industry have campaigned to cor-
rect the idea that buying stocks was gambling, and while
there may be some dark corners of this country that per-
sist in a Populist suspicion of Wall Street, by and large
they have succeeded. Dr. Schelling's phrasing has to be
counted as unfortunate, and in no sense is the stock mar-
ket a great gambling enterprise like a lottery. But it is
an exercise in mass psychology, in trying to guess better
than the crowd how the crowd will behave. Sometimes the
literature which was produced in order to dispel the pre-
1929 suspicions can get in the way of seeing things the
way they are.
All this is simply leading up to a pragmatic observa-
tion. It has been my fate to know a number of people
in and around markets: investment bankers, economists,
portfolio managers of great institutions. 1 have been
through the drill of security analysis-that set me back
quite a bit-and in a minor way through portfolio man-
agement. (I haven't ever been a broker or sold securities;
that is another talent.) During lundl at my own house 1
have seen "random walk" theoreticians grow apoplectic
over their dessert at the thought that there were people
who called themselves "technicians" and believed that
prices forecast the future, and 1 have known technicians,
backed by computers, who got themselves so wound up
into their own systems they forgot what they started with.
It has taken me years to unlearn everything 1 was taught,
and 1 probably haven't succeeded yet. 1 cite this only be-