February 2016 - Bankers Anonymous

February 29, 2016February 29, 2016

Leap Day for Oil Drillers – This Makes No Sense

In honor of Leap Day, I’m writing today about something in the energy markets that shouldn’t exist. Or maybe it should exist only once every four Earth-revolutions around the sun.

The oil price crash – we’re at 13-year lows in the average price of a barrel of oil this month – creates chaos for oil-company investors. That chaos in turn causes weird contradictory signals between the stocks and bonds of some oil companies. In order to illustrate this oddity, let me first introduce two of “Mike’s Newtonian Fundamental Principles of Finance.”

Efficient markets

Principle #1 – Markets are efficient.

Like, if I see a $100 bill lying on a city street, I’ll know that it’s not real, because how could it be? If it were a real bill, I know somebody would have picked it up by now, right?

Similarly, when in doubt, I try to never assume markets are stupid. I assume instead that I am the stupid one. Or, that what I observe isn’t real.

Principal #1 matters because right now, stock market prices for some public oil companies seem really stupid to me. I’ll name a few of these companies below, but first…

Bond people v stock people

Principle #2: Bond markets always understand what’s going on better than stock markets. Bond markets are better at math. Really it’s true, just ask anyone in the bond markets. Admittedly, I developed this prejudice during my experience as a bond markets guy, but still.

Principle #2 matters because the bond market is saying completely different things from the stock market when it comes to some public oil companies.

When distress happens

One more market-instructional comment, before getting into the present weirdness of specific oil company stocks: We typically think of earning money from bonds by capturing the ‘yield’ on an investment. Investors earn this ‘yield’ on their money from a combination of the bond’s principal and interest payments, made over time.

When a company become financially distressed, however, markets begin to value its bonds not for the yield from future payments on the bond (because the company might stop paying) but rather for the ‘liquidation value’ of the company. When the market begins to believe the company can’t make bond payments, it just looks to ‘how much would this physical stuff owned by the company be worth in a fire-sale out of a proverbial garage?’

Also, when a company can’t pay its bonds, holders of stocks should generally assume – there are exceptions, but still, work with me here – they will be wiped out. The shares go to zero in bankruptcy or liquidation

Oil company weirdness

If you want to see a weird phenomenon that shouldn’t exist, check out stock values of companies like WPX Energy (WPX), Carrizo Oil and Gas (CRZO), and Laredo Petroleum (LPI). According to the stock market[1] these are all ‘worth’ over a billion dollars in market capitalization, based on their share prices. (Market capitalization is share price multiplied by the number of shares outstanding, but you already knew that).

According to their bond markets, however, they are all possibly headed for liquidation or bankruptcy. Oil and gas brokerage firm GMP reports recent bond quotes recently for these three companies at 43, 63, and 59, respectively. Typical bond prices for healthy companies start and end around 100 cents on the dollar, but generally fluctuate between 80 and 120 cents on the dollar over the life of a bond. The math is a bit complicated, but as a general rule, the further prices fall below 100 the more likely the bond market values the company for it’s “liquidation” value, rather than it’s yield as a viable company making timely bond payments.

With these oil company bonds in the 40-60 range, the bond market right now says there’s a good chance these companies go into bankruptcy or liquidation in the short to medium run. The stock market meanwhile says there are more than a billion reasons to own their shares. It’s a puzzle.[2]

Since mid-2014, when the price of oil began dropping, oil companies have scrambled to survive. Many have been in distress for more than a year. [LINK: http://www.houstonchronicle.com/about/article/Credit-challenged-drillers-draw-on-creative-6056993.php]

With these three companies’ bonds ‘yielding’ around 20%, the bond market looks to liquidation value, and says ‘this market is closed.’

And yet, many of these companies have raised money in the stock market in the past year.

Laredo Petroleum raised $650 million in a stock sale in March 2015, back when shares were valued at twice what they are worth now.

In July 2015, WPX Energy raised $653 million in a combination of stock and convertibles (debt that can be converted into shares) although again, shares were worth twice then what they are now.

Carrizo sold shares most recently – $244 million worth – in October 2015. Those shares have also lost about half their value since then.

Here’s the problem in a nutshell. With the bond market saying these companies will likely be liquidated, I just don’t get how the stock market says they’re worth over a billion dollars.

While markets are undoubtedly efficient and you should question them at your peril (Principle #1), either the bond market is underpricing these companies or the stock market is overpricing them. Not being an oil market expert, I don’t know which market is right.

But because of Principle #2, I have my suspicions.

Please see related posts:

Beward people talking their book – including the oil market folks

The Buzz in Beeville

[1] Note: these three companies are still all worth north of a Billion as I’m writing it, (last checked February 24^th) but that can obviously change. Should check again on Friday before running this column to see if that’s all still true.

[2] At the risk of heading off on a tangent, other publically traded companies sometimes exhibit this strange behavior of probable-worthlessness combined with billion-dollar public share valuations. The former mortgage giants Fannie Mae and Freddie Mac – in conservatorship since the 2008 crisis – still boast similar market caps of close to a billion dollars. But in their case they have advantages the oil companies do not, such as:

1) Hundreds of billions in profit in the last five years, sent to the US Government as owner/conservator.

2) Decades of lobbying to Washington insiders (It’s good to have friends in high places!)

3) Ownership by the world’s most powerful hedge funds, who are simultaneously lobbying for the companies and suing to wrestle ownership back from the US Treasury. The mortgage giants are special cases that these little oil companies can’t match.

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February 22, 2016February 22, 2016

Money and Politics – 2016 Edition

We are deep into Presidential primary election time, so I thought I’d share my views of candidates and the system with my green eyeshades on.

I don’t have a ‘unified theory’ of money in politics, but rather a series of thoughts, some connected, the rest not.
For starters, I have a fetish about honesty when it comes to money. Like, if I know an elected official or candidate accepted money illegally or unethically, that candidate is dead to me.

Direct bribes, however aren’t usually our problem (at the federal level). Rather, grey ethical areas as well as the wholly-legal weight of money are our system’s problem.

My goal, as always, is to offend all sides of the political spectrum in roughly equal measure. If I have been too gentle on your preferred political enemy, please let me know in an angry email. (Also, feel free to use ALL CAPS so I know you really mean it.)

The Republicans

Ted Cruz had the cleverness to marry a Goldman Sachs executive (a big plus in my household!). The meanest money-related thing I can think of about him is that he has not once but twice under-reported loans to his campaign from banks, first from Citibank and later from Goldman Sachs. For the moment I’m willing to chalk this up to sloppiness rather than a pattern – but be forewarned, Cruz, I’m watching you.

I apply personal financial prejudices when it comes to political candidates.

Marco Rubio’s well-known struggle with personal debt affects my view of him as a potential leader. I know he has presented this weakness is a strength, as it makes him ‘relate-able’ to average Americans. But I don’t want ‘average Americans’ – at least in this sense – winning the Presidency. Frankly I don’t want someone who is financially vulnerable in that way to wield so much power (and maybe to face so much temptation.) And yes, Thomas Jefferson and Winston Churchill were both amazing leaders with out-of-control personal financial situations. Still, I maintain my prejudices.

Jeb!’s anointing as the GOP favorite through mid-2015 followed logically from his ability to quickly raise a $100 million Super-PAC war chest for his candidacy. That same war chest allowed him to hang around as a moderate alternative to the rest of the field long after his less-funded rivals folded, despite his deep unpopularity with actual, you know, voters. This is interesting and troubling.[1]

In the 2012 contest, we learned that a single billionaire – in that case Sheldon Adelson – can keep a candidate afloat – in that case Newt Gingrich – long past his due date or viability with the electorate.

I think the “billionaire primary” conducted throughout 2015 – as ably reported by the New York Times, in which just 158 families contributed half of the total money raised by political campaigns – should scare the heck out of us.

A little history

I understand that the Founding Fathers of the United States went to great lengths to ensure that wealth remained a key criteria for participation in the new democracy, through gender, race, and property-based restrictions on voting. Elites of the time greatly feared “Democracy” – that radical 18^th Century notion – because the disenfranchised could theoretically vote their financial interests to the detriment of the aristocratic powers-that-be. The slaughter of The French Revolution seemed to confirm all of these fears, strengthening the resolve of elites to control the political process from start to finish.

Jefferson_and_money — Jefferson had issues with banks. In a related story, he was always broke.

I mention this to acknowledge that we have a long tradition of drastically tipping the scales in favor of the wealthy when it comes to politics, so what I’m talking about with the billionaire primary is not entirely new, but a certain shift on an existing spectrum. I just have this tingly spider-sense that in the 21^st Century we’ve gone a bit too far back to the Aristocratic roots of our Founding Fathers.

The Democrats

Speaking of these themes, Bernie Sanders’ appeal – as the underdog who raises $75 million in 2015 at an average campaign contribution of $27 per person – remains powerful. I really admire it. I’m totally annoyed with Sanders’ understanding of Wall Street, however, which remains cartoonish in its sophistication, at best. If you really believe, as Sanders claims, that “The business model of Wall Street is fraud,” then we’re not friends and you’re not coming to my birthday party anymore.

Hillary Clinton, on the other hand, has a sophisticated view of money, to both her advantage as well as grave disadvantage. I have a hard time getting over the idea that large donors to the Clinton Foundation – like members of the Saudi royal family or a Ukrainian oligarch, as previously reported – don’t at least believe they have purchased access and influence over Clinton through their donations. I’m not saying she or her husband have done them direct favors, but I am saying it’s reasonable to assume that’s exactly why certain people donated to the Foundation while she was Secretary of State and a strong prospective presidential candidate. She should have anticipated that clear conflict, and she should have avoided it.

The Trumpians

The Donald, meanwhile, presents an interesting money case. His supporters, I suppose, overlook his misogyny, racism, bullying and demagoguery because he’s a “successful businessman,” who would presumably apply his “negotiating skills” to solving the country’s ills. This admiration from supporters – despite some analysis that shows he would be as wealthy today had he taken his inherited wealth in 1974, bought an all-stock index fund – and amused himself by affixing gold-lettered nameplates to Lego towers he built in his playpen. That analysis is an oversimplification that probably isn’t fair to Trump or the value of his businesses today. Put it this way though: my problems with Trump aren’t money-related.

My choice

Speaking of billionaires, I enjoyed Mike Bloomberg’s mayoralty of New York City in part because of my belief that he cannot be ‘bought’ for any price. In fact I would vote for him for President over any of the declared candidates, in a New York minute. Sadly, I expect he wont run, and if he did run, he wouldn’t win.

[1] Right up until the point when he retired from the campaign Saturday night I thought there was an outsider’s chance that he would suddenly sweep in as everyone’s third choice, kind of like Romney did after outlasting Santorum, Gingrich, Huckabee, etc in 2012. I wasn’t actually disappointed Jeb! dropped out, I was just disappointed that my contrarian bet didn’t earn me “I told you so” credibility for the next year. I would have been insufferable had I been right about Jeb! though, so it’s all probably for the best.

A version of this post ran in the San Antonio Express News

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February 15, 2016February 15, 2016

Legal Pot in Texas? The Money Case

Without giving it much previous thought, I’ve historically been mildly opposed to the legalization of marijuana. I’m not a user, and on balance I haven’t seen ‘more pot in the world’ as something to advocate for.

However, I find my views shifting in recent years, and I’m likely falling behind the (high) times. I mean, from what I gather, munchies-seeking zombies are not currently overrunning the states of Colorado and Washington. And if their green light to legalization leads to a slow-rolling legalization in other states, that seems increasingly like an ok application of the Tenth Amendment and our ‘laboratories of democracy’ idea.

In fact, the steady process of legalization has significant momentum throughout the country, not only in states but also in cities. Earlier this month, Washington DC’s city council voted to study expanding the current legal private use of marijuana to ‘pot clubs.’

Oregon and Alaska, with little fanfare, decriminalized recreational use over the past two years.

In a sign of the mainstreaming of the industry, Privateer Holdings – a Seattle-based cannabis branding, production and advocacy group – raised $75 million in private equity last year, setting a high-water mark for financing of the industry.

Follow the money

Since I’m a “follow-the-money” guy when it comes to public policy, I have to hand it to the legalization folks for building up the financial base for their case.

One of the advantages of exploiting the medical-use loophole for marijuana products over the past decade is that – as more legal companies got in the game – a legal business lobby has new resources for the fight. But private-industry lobbying only forms only one pillar of the industry’s financial strength.

The more important pillar is that state tax revenues derived from the business – and dedicated to some public purpose – form a difficult habit for governments to break.

Colorado and Washington

I downloaded and tallied state tax receipts in Colorado. These include a 2.9 percent tax for retail and medical marijuana, 10 percent special retail tax, a 15 percent excise tax, plus licenses and fees.

Summing these up we can see that tax revenues in Colorado from marijuana have grown faster than hothouse hydroponics under continuous ultraviolet rays.

In the last full fiscal year Colorado reported $102 million in total receipts from marijuana-related taxes and fees, with a year-over-year growth rate above 60 percent, suggesting significantly more money to come to the state in future years.

Washington State – with a 30% retail tax on marijuana sales, has had a similar experience. Bloomberg reported that Washington expected $135 million in tax receipts in 2015 at the state, county and local levels, with year-over-year growth above 100%.

I don’t know much, except this: When you have a massive revenue stream like this going into otherwise needy public coffers, there’s no going back.

In previous decades states got addicted to lottery revenues. This past decade has seen the burgeoning of casinos with their hefty state tax revenues. It seems highly likely that marijuana-tax revenue will follow in many more states in the next few years.

Texas – $500 million?

If you compare the populations of Colorado and Washington to Texas you begin to see the tax revenue potential of legalization here.

The per-capita marijuana tax revenue of Colorado, adjusted for Texas’ population, would be $519 million. Now, you might just argue to me that – culturally at least – the Mile-High state isn’t a good comparable for Texas. And I might just argue back to you that everything’s bigger in Texas.

Meanwhile, per-capital tax revenue of Washington State, adjusted for Texas’ population, would be $516 million.

These amounts understate the financial potential since they reflect less than two years’ data, and the numbers keep growing rapidly. I’m confident we’re looking at –conservatively – an estimated $500 million in incremental tax revenue per year for Texas from marijuana taxation.

Back To Reality

I know what you’re thinking – what is this guy smoking? In Texas, we see little evidence of a statewide push for marijuana legalization. In the near future, however, we could imagine a rainbow coalition of Libertarians, Rastafarians, small business owners, and fiscal conservatives each puffing from the same pipe on these issues. I’d say given the rapid spread of legalization to other states and cities, the formation of that coalition in Texas is not a question of if, but when.

My policy advice

My advice to the pro-stoner crowd – who should, by the way, never take political advice from a finance columnist – is to exploit Texas’ financial weakness on the state revenue side. Without a state income tax, important policy initiatives go unfunded all the time, starved for new revenue streams.

Add in one more key constituent group – let’s say the liberal public education crowd – and you’ve got yourself a winning statewide coalition here. Do you think the education-policy folks could find a use for an extra $500 million? As my close personal friend Sarah Palin might say, ‘You Betcha!’

Wait! Hold on. Deep breath. Inhale with me on this vision for a moment. With a tax on marijuana, what educational programs could suddenly happen? Picture the expansion of San Antonio’s well-known “Pre-K for SA” statewide, for example, but now with a dedicated revenue stream.

When you name it “Tokes for Tots,” how could anyone object?

Think of the children!

Ok, obviously I’ve gotten a contact high just thinking about this. Disregard my loopy political advice. But the rest is serious.

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February 12, 2016February 16, 2016

Book Review: A Conspiracy of Paper by David Liss

David Liss’s protagonist Benjamin Weaver is the black-sheep son of a recently murdered Jewish stock-trader in 18^th Century London. In A Conspiracy of Paper Weaver tracks his father’s killer in private-eye novel procedural fashion – roughing up small-time street urchins, checking in with his wise but eccentric sidekick, flirting with his beautiful love interest, in turn getting roughed up by tougher criminals, all while seeking clues to solve the mystery.

Adding to the historical interest, we explore Weaver’s world at a moment of financial transformation. The stock market, letters of credit, and bank notes are quickly replacing traditional sources of wealth. Whereas Trollope and Austen describe the 19^th Century world of English gentry – with their status built upon inherited real property – Liss describes a scrappier 18^th Century Jewish and merchant-trading world built on hustle, fists, securities trading, and street-smarts.

The ones who push for and benefit from this transformation in London are the foreigners and Jews, outsiders to the traditional English wealthy aristocracy.

Weaver describes his first visit to Jonathan’s Coffee House, one of the active stock exchanges, where ‘stock-jobbers’ trade paper and run lotteries. We’re witness to a virtual Tower of Babel:

“Looking about me, I could see why my Christian neighbors were so quick to associate Jews with ‘Change Alley, for there was a superfluity of Israelites in the room – perhaps as many as I had ever seen together outside of Dukes Place. But Jews were hardly dominant in Jonathan’s and by no means the only aliens. Here were Germans, Frenchmen, Dutchmen – and Dutchmen aplenty, I assure you – Italians and Spaniards, Portuguese, and of course, no shortage of North Britons. There were even some Africans milling about, but I believed they were servants, and not upon the ‘Change for business. The room was a cacophony of different languages, all being shouted at once. It was a dizzying array of papers changing hands, of pens signing, of envelope-stuffing, of coffee-pouring, and of coffee-drinking. I thought it the very center of the universe itself, and I admired in no small degree any man who could conduct business in a place of such distraction.”

Chaotic markets

Participants in these exchanges use manipulation, rumors, inside-trading and false-stock issuances to gain an edge over rivals and the markets. Like many participants in a stock market today or then, Weaver has very partial information. His clients are not who they seem. Multiple competing interests hide facts and motives from him. He’s quick, but the whole scheme of his father’s death remains elusive.

Anti-Semitism

Jews may be important in this 18^th Century world, but casual and pervasive anti-Semitism rules society. Weaver suffers continuous insults from the English gentry with whom he interacts, but still manages to assert his will. Prior to becoming a private eye, he had built his street-tough reputation as a successful boxer, the ‘Lion of Judah.’ His tough-guy exterior as well as a thick-skinned confidence serve him well under the constant onslaught of prejudice.

Market fraud

The imminent collapse of the South Sea Company menaces Weaver’s world. His father’s death clearly stems, in part, from a conspiracy to hide the shaky and likely fraudulent dealings of the South Sea Company. The Bank of England – then a private company – competes with the South Sea Company and resists its entrance into dealing in government debt. When Weaver receives assistance from a prominent member of the Bank of England in his investigation, is it because that member seeks to undermine the South Sea Company?

To read present-day internet comments on the financial news (Important advice: Never read internet comments on anything) many still resist the move from physical assets to unsubstantial paper or ‘notional’ stores of value.

Television news on certain stations runs constant advertising on the seeming substantiality of gold over paper money or insubstantial stock and bonds. This paranoia extends to the mysterious money creation and restriction of the Federal Reserve. Whenever a financial crash occurs a portion of observers will throw up their hands and retreat from markets, while another portion spots a conspiracy somewhere in the shadows.

Reading A Conspiracy of Paper we think: Perhaps not much has changed since 18^th Century London.

I recently met author David Liss, a fellow San Antonio-transplant who lived for a time in my Manhattan neighborhood. When I heard he’d written a historical financial thriller, I knew I had a to read and review it. Two more David Liss novels featuring Benjamin Weaver await me, The Devil’s Company and A Spectacle of Corruption.

Others clearly enjoyed A Conspiracy of Paper as much as I did, as it won the Edgar Award for “best first novel” in 2001. My daughter enjoyed Liss’ latest book, the sci-fi novel Randoms.

Please see All other Bankers-Anonymous Book Reviews in one place!

Please see other book reviews of finance-oriented novels:

The Way We Live Now by Anthony Trollope

Capital, by John Lanchester

And other review of books for kids by a San Antonio-based author:

Going Going by Naomi Shihab Nye

The Turtle of Oman by Naomi Shihab Nye

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February 8, 2016March 16, 2017

Rat Holes and Small Biz Crowd Funding

When I started my business twelve years ago I needed to raise what was for me a substantial amount of money. A good friend introduced me to his wealthy boss, who agreed to meet about my business pitch.

He listened carefully, nodding sagely at the appropriate times.

Mr. Rat Hole

“Well Michael, it sounds plausible,” he replied, “But I’m not going to invest any of my own money. I’ll tell you what, though. I know a few guys who like to throw money down a rat hole. I’ll give you their names.”

“Um. Okay! Thanks!”

Of course I was happy to be referred to other potential investors. I tried not to think too deeply about his jaundiced assessment of my business’ prospects.

Forever after, my friend and I referred to a prospective investor gained through his boss as ‘Mr. Rat Hole”

[note: This video is only tangentially related to the theme of rat-holes, but it’s just one of my favorite Onion videos of all time]

Raising money is hard

I wrote recently about the various difficult ways of raising money for your startup business that you could try.

The other primary startup-funding source is not a loan, but rather a direct equity investment in your company. You sell part ownership in your business to an investor who hopes to earn a return on their money, if and when your business proves profitable.

With Equities: Lawyer up

If you happen to have wealthy acquaintances who enjoy throwing money down a rat hole, I recommend approaching them with your business startup plan. Generally speaking, however, the sophisticated ones will understand that direct equity investments in startups are extremely risky endeavors. This is why securities regulations have traditionally imposed barriers to prevent ‘regular’ non-accredited (meaning: non-wealthy) people[1] from investing in startups.[2]

The more money you seek to raise, and the more investors you seek to raise it from, the more quickly you will approach legal thresholds that require you to either register with state or federal entities for selling ‘securities’ or seek exemptions from that registration.

I guess what I’m saying is two things. First, obviously, you should never take legal advice from a newspaper columnist.

Second, get thee to a lawyer’s office now! I can’t overstate this second point. Never – EVER – sell a piece of your business without getting a good business lawyer involved. She will protect your business, your investors, and most of all, you.

Newfangled crowd-sourcing

But what if you don’t have wealthy acquaintances with an abiding interest in rat holes? The good news (I guess) is that a combination of federal securities law changes following the 2012 JOBS Act as well as ‘fin-tech’ solutions, are attempting to open up the wallets of ‘regular’ people to the capital needs of startups.

As of a week ago, in fact, crowd-funding ‘portals’ can now apply to the SEC – with a target date of May 2016 – to go live for the first time, allowing regular investors access to private investments. Federal investment limits range from $2,000 to $10,000 per investment, with annual limits of $100,000, in any given year, per individual.

In Texas

Meanwhile, a relatively new state crowd funding law allows Texas-based regular investors to invest in Texas-based startups, with a $5,000 limit per deal, and no limit on the number of deals one can do.

This Texan-to-Texan funding makes sense because allowing non-Texans to invest in startups in this state would be tantamount to treason. No, obviously this doesn’t make any sense at all, but it is the kind of Texas-y thing you could imagine a Texas legislator would like to vote for.[3]

I remain skeptical

I mention the crowd-sourcing route for funding your small business partly because it’s hip and topical. As of now I don’t see it, however, as very practical. In my opinion and experience a non-insane entrepreneur would always prefer the fewest number of relatively wealthy investors over a larger number of people who cannot afford to lose their money.
If your business plan is good enough to attract hundreds of ‘regular’ people, it should be good enough to attract a handful of wealthy people, is one way of thinking about it.

Maybe for marketing?

Another way of thinking about crowd sourcing, however, is that this is a way to cement a relationship with your most fervent customers. You raise the bulk of your money through a few wealthy folks, and then use crowd sourcing as a marketing tool. I can live with that method.

Howard Orloff, Chief Marketing Officer for ZachsInvest, a Chicago-based firm that expects to be involved as a crowd funding portal in 2016, agrees.

“As a pure fundraising mechanism, the equity crowd funding rules may be a bit clunky as is, but we view this from another perspective. As a marketing tool, and possibly used in conjunction with social media among your best customers – we think this is phenomenal.”

Finally, be wary

I understand that as a startup entrepreneur seeking money right now your primary focus remains: How do I get my hands on that sweet, sweet, money?

But I hope I don’t have to belabor the point that this ‘opening up’ of equity investments to regular folks via crowd sourcing is a mixed blessing, at best.

I mean, we like to think it’s a free country and non-wealthy people should be allowed to throw their money down a rat hole too, right?

At some point, and in many cases of course, ‘regular’ people will be hurt.

A version of this ran in the San Antonio Express-News.

Please see related posts

Small business startup money is hard to get

Entrepreneurs are a touch funny in the head

Small business startups – a few sources of debt capital

Entrepreneurship – The Air, The Taxes, The Retirement

[1] Traditionally, ‘non-accredited’ in this context has really meant non-wealthy. The theory generally being that a) wealthy people can afford to lose their money and b) wealthy people may themselves be unsophisticated but they have the wherewithal to hire sophisticated advice from lawyers and accountants to sufficiently protect them from their own mistakes, as well as from greedy and unscrupulous stock-sellers.

[2] The SEC’s definition of ‘wealthy’ may be debatable. An ‘accredited investor’ is one with a $1 million net worth or $200,000 in annual income for the past two years, with a reasonable expectation of maintaining that income level.

[3] Actually 30 different states have passed new versions of ‘intra-state’ crowd funding laws, so its not just a result of only-in-Texas chauvinism. But Texas did pass a more restrictive rule mandating that Texas deals only be listed by Texas-based portals. This, in fact, makes no sense.

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February 2, 2016July 9, 2018

Book Review: Where Are The Customers’ Yachts by Fred Schwed

Sometimes I procrastinate reading something really important to the point that I want to kick myself. Over the years I’ve seen Where Are The Customer’s Yachts? By Fred Schwed listed on numerous ‘Best Of’ lists of financial books, but only now got around to it in 2016? Ugh, no excuse for me.

But don’t think of this as a financial book.

This is one of the best pieces of comedic writing I’ve ever read. Seriously.

Schwed’s voice at points reminds me of A.A.Milne, in that he begins with a banal-sounding truism, and then veers off – in the second part of his sentence – into an unexpected absurdity, unveiling a deeper truth. It’s not unlike my favorite faux-philosopher Jack Handey’s style, except Schwed’s actually somewhat useful, rather than just plain bonkers.

I say useful because we all need clever ways to defend ourselves against myths of Wall Street and its fawning handlers within the Financial Infotainment Industrial Complex. Schwed satirically punctures our deeply-held myths in a totally goofy way.

He published this in 1940, following his experience on Wall Street in the 1920s and 1930s, but you know what? Yes, you do know what. Plus ca change plus c’est la meme chose.[1]

The title, if you didn’t know, refers to an apocryphal story of a newbie visiting lower Manhattan who is shown all the bankers’ and brokers’ impressive yachts. Long before #FeelTheBern and Occupy Wall Street, Schwed’s retelling of the joke tapped into our suspicions about the inflated compensation of the financial industry.

So, read this for the hilarity, but understand that the sly truths slipped in there might just help us as well.

On market predictions

Schwed nails the point that Wall Street’s and the Financial Infotainment Industrial Complex’s predictions aren’t worth more than a printed almanac describing the weather over the next 365 days.[2]

I received a link from a friend genuinely concerned about this headline in the beginning of 2016: “Sell Everything! 2016 Will Be a Cataclysmic year, warns RBS”. It’s hard to explain just how useless these types of predictions really are, unless you’ve been inside the beast and can see these prophesies for what they are. Schwed has some hilarious stuff on this topic.

On Short-Selling

Back in the midst of the 2008 crisis short-selling became unpatriotic and in some limited cases (like naked-shorts) illegal. Popular aversion to short-selling clearly has a long history, as Schwed describes the early 20^th Century views and blows up the mythology there as well.

On Options Trading

Schwed describes, tongue firmly in cheek, the possible mechanisms and joys of options trading. Helpfully, he follows that up with a few explanations of how puts and calls and straddles work, although mostly he describes the funny patter of options traders attempting to attract customers. If you’ve ever dealt with options traders (I have!) its pretty funny, and true.

We read useful other thoughts, couched in humorous self-deprecation. The author directly addresses why Schwed – by 1940 a former stock-broker and dabbler in stocks himself – isn’t wealthier.

In his own words:

“…[M]y tendency has been to buy stocks, all a-tremble as I do so. Then when they show a profit I sell them, exultantly. (But never within six months, of course. I’m no anarchist.) It seems to me at these moments that I have achieved life’s loveliest guerdon[3] – making some money without doing any work. Then a long time later it turns out that I should have just bought them, and thereafter I should have just sat on them like a fat, stupid peasant. A peasant, however, who is rich beyond his limited dreams of avarice.”

See, that’s what I’ve been trying to say all along.

That, and also, read his book.

Please see related posts:

All Bankers Anonymous Book Reviews In One Place

Never Sell! From Disney to Churchill

Mutual Funds v ETF

Talking One’s Book – Mistrust ‘The Experts’

[1] Important note: I have no idea what that means. As my close personal friend Steve Martin says, the French have a different word for practically everything.

[2] Every year a favorite restaurant-owner in my neighborhood hands out an annual paper calendar printed with exactly that: The upcoming weather for the next year, throughout the various regions of the United States. Every time I tear off the page of a new month, I take the time to read that months’ weather. For some reason the subtle humor of the The Liberty Bar calendar never gets old for me.

[3] I learned a word today!

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