The Pequod Review:
Adam Smith's The Money Game, published in 1968, dates from a period when investing mostly meant buying and selling individual stocks. While the financial instruments available today are considerably more diverse, the book remains an enormously insightful read that reveals deep truths applicable to all forms of investing. Smith (whose real name was George Goodman) has dark humor throughout:
Generally – but not always – a real sleuth of an analyst who doesn’t have to spend time answering his own phone, talking to customers, selling stock to pension funds, and attending meetings, can crack an income statement and balance sheet in a couple of days. This means real donkey work, digging out notes, making comparisons, finding the tunnels, and in general unpainting the carefully painted picture. But most analysts do have to answer their own phones, sell stocks, attend meetings and still cover all the developments in their areas. So there are not many analysts who can do their job.
Logic, to an outsider, would say that you have a company selling at 10 and you go and do a lot of research on it and figure out the sales and the profits and you figure if they can earn one dollar it will sell for 20. So you buy it and wait, and the story gets that they earn the one dollar and it goes to 20. But the market does not follow logic, it follows some mysterious tides of mass psychology. Thus earnings projections get marked up and down as the prices go up and down, just because Wall Streeters hate the insecurity of anarchy. If the stock is going down, the earnings must be falling apart. If it is going up, the earnings must be better than we thought. Somebody must know something that we don’t know.
A stock is for all practical purposes, a piece of paper that sits in a bank vault. Most likely you will never see it. It may or may not have an Intrinsic Value; what it is worth on any given day depends on the confluence of buyers and sellers that day. The most important thing to realize is simplistic: The stock doesn’t know you own it. All those marvelous things, or those terrible things, that you feel about a stock, or a list of stocks, or an amount of money represented by a list of stocks, all of these things are unreciprocated by the stock or the group of stocks. You can be in love if you want to, but that piece of paper doesn’t love you, and unreciprocated love can turn into masochism, narcissism, or, even worse, market losses and unreciprocated hate.
If the profit numbers on income statements are treated with such reverence, it was obviously only a question of time before some smart fellows would start building companies not around the logical progression of a business but around what would beef up the numbers.
Sadly this book seems to be somewhat forgotten today, even though its lessons are timeless. It is ripe for a modern rediscovery.