Words Of Wisdom From ‘The Money Game’ By Adam Smith


“The Money Game” by Adam Smith is a classic book on finance and investing, first published in 1968. It provides an overview of the stock market and investment strategies, and offers insights into the behavior of market participants and the impact of their actions on the market.

The book is written in a conversational and accessible style, making it popular with both novice and experienced investors. Smith argues that the key to success in investing is understanding how the market works and having a long-term perspective, rather than trying to time the market or make quick profits.

It also provides a practical guide for making informed investment decisions. By reading “The Money Game,” you will gain a deeper understanding of the financial world and be better equipped to make informed investment decisions.


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Words of Wisdom From ‘The Money Game’

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

It has taken me years to unlearn everything I was taught, and I probably haven’t succeeded yet. I cite this only because most of what has been written about the market tells you the way it ought to be, and the successful investors I know do not hold to the way it ought to be, they simply go with what is.

The irony is that this is a money game and money is the way we keep score. But the real object of the Game is not money, it is the playing of the Game itself: For the true players, you could take all the trophies away and substitute plastic beads or whale’s teeth; as long as there is a way to keep score, they will play.

There is no such thing as a final answer to security values. A dozen experts will arrive at 12 different conclusions. It often happens that a few moments later each would alter his verdict if given a chance to reconsider because of a changed condition. Market values are fixed only in part by balance sheets and income statements; much more by the hopes and fears of humanity; by greed, ambition, acts of God, invention, financial stress and strain, weather, discovery, fashion and numberless other causes impossible to be listed without omission.

“The market,” says Mister Johnson, “is like a beautiful woman-endlessly fascinating, endlessly complex, always changing, always mystifying. I have been absorbed and immersed since 1924 and I know this is no science. It is an art. Now we have computers and all sorts of statistics, but the market is still the same and understanding the market is still no easier. It is personal intuition, sensing patterns of behavior. There is always something unknown, undiscerned. “

The first thing you have to know is yourself. A man who knows himself can step outside himself and watch his own reactions like an observer.

The market is a crowd. In fact, a crowd of men acts like a single woman. The mind of a crowd is like a woman’s mind. Then if you have observed her a long time, you begin to see little tricks, little nervous movements of the hands when she is being false.

“You can have no preconceived ideas. There are fundamentals in the marketplace, but the unexplored area is the emotional area. All the charts and breadth indicators and technical palaver are the statistician’s attempts to describe an emotional state.”

The analyst really wants to be right, his ego needs the pleasure of being right, and he would almost rather be right than make money. The aggressive portfolio manager doesn’t really care about being right on each judgment, as long as he wins when you add up the score. He has to be right more than wrong, naturally.

“The crowd always loses, because the crowd is always wrong. It is wrong because it behaves normally.”

“If you can keep your head when all about you are losing theirs, maybe you haven’t heard the news.”

The strongest emotions in the marketplace are greed and fear. In rising markets, you can almost feel the greed tide begin. Usually it takes from six months to a year after the last market bottom even to get started. The greed itch begins when you see stocks move that you don’t own. Then friends of yours have a stock that has doubled; or, if you have one that has doubled, they have one that has tripled. This is what produces bull market tops. Obviously no one rationally would want to buy at the top, and yet enough people do to produce a top.

Investors can start out tentatively after a market bath, and they buy something they hope will go up 50 percent in eighteen months. But as the pace accelerates, 50 percent in eighteen months seems much too slow, when there are stocks around-owned by somebody else-that are going up 100 percent in six months. Finally it all turns into a marvelous carmagnole that is great fun if you leave the party early.

When stocks start down, the tendency is to wait until they come back a little before lightening up. They head down further, and the idea that you have made a mistake, that you have been betrayed by your own judgment, can be so paralyzing that you wait a little longer. Finally faith evaporates entirely. If stocks were down 10 percent yesterday, they may be down 20 percent today. One day, when all the news is bad, you have to get rid of the filthy things which have treated you so cruelly. Again, it all ends in a kind of paroxysm that is no fun unless you have anticipated it.

The end object of investment is serenity, and serenity can only be achieved by the avoidance of anxiety, and to avoid anxiety you have to know who you are and what you’re doing.

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 you know that the stock doesn’t know you own it, you are ahead of the game. You are ahead because you can change your mind and your actions without regard to what you did or thought yesterday. Every day is a new day, providing, in the Game, a new set of continuously measurable options.

If you really love playing the Game, any action is better than inaction, and sometimes inaction is the proper course, if it has been taken after measuring all the measurable options. If a decision is made not to make a decision, that is just as much a decision as a decision which initiates action.

By concentration, I mean limiting the number of issues. Limiting the number of issues means that attention is focused sharply on them, and the ones that do not perform well virtually beg to be dropped off. If you have two hundred stocks, no one of them can make a real difference to you, but if you have only six stocks, you are really going to be watching all six. Furthermore, you are going to be scouting for the best six ideas, because if you find a really good one it may bump one of your other ones off the list.

The assumption of the chart is that you ought to pay attention to it because the people who have already acted, and therefore created the chart, are smarter than you, or know something you don’t know.

There is one indicator that professionals still use that is simple. That is to find out what the average investor, or the little investor, is doing. Then you do just the opposite. The sophisticates never feel comfortable unless they can be reassured that relatively uninformed investors are going the other way with some conviction. It all has to do with Accumulation and Distribution. When the sophisticates are Accumulating, they have to be Accumulating from someone, and when they are Distributing, somebody has to be there to buy.

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 at 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. 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 we don’t know.

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