Where Are the Customers' Yachts: or A Good Hard Look at Wall Street (Wiley Investment Classics) (Paperback)

This book's fame far exceeds the number of people who have read it. Almost every experienced stock investor will cite examples from the book, without even knowing their source.

The title refers to an ancient story (which the author finds is probably at least 100 years old by now) about a visitor to New York who admired the yachts that the bankers and brokers had in the harbor. Naively, he then asked where the customers' yachts were. Naturally, there were no customers' yachts.

Let me set the stage. The author spent two years on Wall Street in the 20s, but knew it better than that and continued to invest in stocks. He wrote the book in 1940 after the horrible bear years of 1929-1940. The memories of the 1920s were still fresh. Then he updated the book in 1955 in the midst of the 50s bull market with a new introduction in which he explained that the book did not need updating.

Although commissions are no longer fixed, and few spend the day sitting in a broker's office, many of the other observations in the book remain as timely as those in The Madness of Crowds. Human nature doesn't change.

Behind all of the hype about getting rich with stock investments is a sad reality. Over a lifetime, the vast majority of people get poor results from their stock investing. Around 90 percent of professionals will also underperform the market averages over their careers.

But the desire to "outsmart" everyone else is almost universal. Raging bull markets, like the one we had until March 2000 on the NASDAQ, only tend to reinforce these ultimately expensive urges.

I have been around professional investors for over thirty years and all the big scores I remember involving stocks came after someone who was a founder or worked for a company that went public cashed in their stock and stock options after many years of service. These are not stock-investing events, they are entrepreneurial compensation. In the Money Game, Adam Smith pointed that out, and it remains as true today as it was then.

One of the classic stories in this book is about what would happen if 4000 people started flipping coins against each other. You are eliminated from the competition after one loss. Although by definition, half would win and half with lose with each flip, those who had won ten times in a row (as must happen for some in this format) would soon start to give lessons in coin flipping techniques. That story nicely captures the folly of Wall Street. Even though some may win, it usually doesn't mean anything.

The book contains other investment classic stories that you must have in your repertoire. The book is brilliantly illustrated by the classy cartoons of Peter Arno. It is worth acquiring the book just for those.

The subjects covered include Wall Street's passion for prophecy, financiers and seers, customers (or the sheep to be shorn), mutual funds, short sellers, options, speculators and the bull market of the 20s, and the excuses handed out to those who are relieved of their money.

The writing style is urbane and witty. For example, there is the usual disclaimer on not following the advice in the book in the beginning. Except, it is illustrated by two hands with fingers crossed. And, the warnings are a just little different. The information in this book "while not guaranteed by us, has been obtained from sources which have not in the past proved particularly reliable."

The author had discovered that titles cannot be copyrighted, and he "had planned to have my book appear under a good title, The Adventures of Huckleberry Finn."

The author's favorite review of the book contained this phrase, "If I were J.P. Morgan, and I have no reason to suspect that I am not . . . .", and was signed by the author of the review, Mr. Frank Sullivan. The subsequent witty correspondence between them is included in the introduction.

If you are a fan of Louis Rukeyser, you will find the humor here comparable with the badinage on Wall $treet Week during the opening comments.

Seriously, the humor in this book will help you to better understand the risks associated with stock investing. There is a wonderful quiz you can take that will tell whether or not you should be a stock investor. Most will not pass that quiz.

If you still want to own stocks, I suggest that you advance to John Bogle's book, Common Sense About Mutual Funds. It can make you some real money.

If you do not want to own stocks, go instead to Rich Dad, Poor Dad. Follow on to Cash Flow Quadrant.

I also suggest you think about where else folly is taken seriously. This will also put things in perspective for you. My favorite location is the Congress of the United States.

Keep looking for those yachts when you make your investments! To whom do they belong?

As the other reviewers note, Schwed worked as a broker in the early 1920's. He then wrote this book -- the "Liar's Poker" of its time -- in the 1940's, with the wry perspective that only a crash and ten years of stagnation can bring. Ancient history? Au contraire. What makes this book such a must-read is two things.

First, the things that firms and brokers do to separate customers from their money haven't really changed. Touting low quality underwritings, cramming unwanted inventory down customers' throats at inflated prices, using fancy phrases to flog dogs were as prevalent then as now.

But this is not a one-sided bashing of the Street and its techniques. Schwed gives equal time to customers' susceptability, even eagerness, to play their part in the game. Schwed's fundamental point is that people -- clients and brokers alike -- are forever led astray by their wanting to earn outsized returns without having to take any risk.

But the thing that really sets the book apart is Schwed's lucid yet highly entertaining style. You'll walk away with fresh insights into industry practices and market structures that you can apply to today's events. And even when you realize the target is you -- the ever-hopeful investor -- you'll be laughing so hard you won't mind.

If you even mildly liked Liar's Poker, you'll love "Yachts."