9. MR. SMITH ADMITS HIS BIASES

Now that I have shown you the path to the really big money, you may no longer be interested in the market as a tool. If you are, I have, in all honesty, to confess my own limitations and biases. What you can then do is to correct these biases—and they will run not only through this chapter but through all of them—and by correcting them, you may get a clearer vision of the elusive Australopithecus. I cannot supply that vision for you. All I can do is to note my own astigmatism. There are all kinds of ways to make money in the market, and we are all creatures of some sort of behavior patterns. If we have been rewarded by pushing the red button when the bell rings, we are going to look with particular favor on the red button until pushing it gives us a nasty shock. What follows, after a slight detour, is simply my own red button. When the red doesn’t work, you have to retire to a safe eminence, or find the people who are good at the yellows and the blues.

One of my biases is so strong that I have to mention it immediately, because it runs counter to an idea that is very common, i.e., that if you buy good stocks and put them away, in the long run you can’t go wrong. Well, as Keynes once remarked, “In the long run we are all dead,” and, as the line in the ballad says, everything is born to die. The best anti-testimonial to buying good stocks and locking them away was published by the heirs of one Timothy Bancroft. Mr. Bancroft was shrewd enough to ride out the Panic of 1857, which he diagnosed thus: “I blame the Dred Scott fiasco, the easy money policies of the past few years, and the far, far too overconfident speculation in the railroads and farm lands of the Western states.” What one should do, counseled Mr. Bancroft, is to “buy good securities, put them away, and forget them.” These good securities, of course, should be companies “dealing in essential commodities that the Union and the World will always need in great quantities.” Sounds reasonable enough. Mr. Bancroft died leaving an estate of $1,355,250, and if you remember that those are untaxed mid-nineteenth-century dollars, and that a full eight-course meal at Delmonico’s cost less than a dollar at the time, that is quite a fortune. Where Mr. Bancroft erred was in the locking up and putting away, for by the time his descendants managed to get their fingers on the portfolio, Mr. Bancroft’s Southern Zinc, Gold Belt Mining, Carrell Company of New Hampshire, and American Alarm Clock Company were all worth 0, and in fact, so was the estate, an event which prompted one of the descendants to take to print as a warning to his fellow heirs.

Nothing works all the time and in all kinds of markets. This is what is wrong with systems and the books that tell you You Can Make a Million Dollars. What is important to realize is that the Game is seductive. If playing it has been fun, it may be difficult to stop playing, even when that button of yours is burning your finger. Repeated shocks will give you anxiety, and anxiety is the enemy of identity, and without identity there is no serenity. (This is the lyric from the song that will end the first act in the musical made from this chapter.) 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. I got this out of a book called The Functions of the Executive by Chester Barnard, who was many years ago the president of the New Jersey Bell Telephone Company. It has been a long time since I have read the book, and the sections on deciding not to decide are all I can remember of it, but it has served me through all sorts of delightful procrastination.

Let us look first at some of the non-red buttons.

Some people can make money in the market by anticipating the business cycle. The great mature American companies do not increase their profits every year. When business is good, they make a lot of money, and when it is not so good, they make less. How well this game is played depends on perspicacity in evaluating economic intelligence. Let us say that we have had two disappointing automobile years. By determining the scrappage rates, the average age of cars on the road, the disposable personal income, the number of new buyers coming into certain age brackets, the average length of credit paper outstanding on existing cars, and a few other factors, we can have a pretty good guess that next year may be better for automobiles if the ecenomy turns up or holds up. Once—from our learned economists—we have made a guess at the economy, we are ready to make one of three choices, for that is all there are. (Other factors are involved in American Motors.) General Motors dominates the industry and the conservatives will take the safe way there. Chrysler is the most leveraged and hence the riskiest and hence the most dependent on subfactors within the major factor, i.e., whether or not its specific models will be well accepted. It is also the most profitable play if everything goes for it. Ford is the middle way.

There is a variation on this approach called the Rising Base of Cyclical Earnings. General Motors’ earnings are cyclical, it is admitted; that is, they go up and down from year to year according to how good business is. Then some smart analyst will—as smart analysts did in the early 1960s—point out that while General Motors’ earnings do fluctuate, both the tops and the bottoms are higher over a five-year average than the previous five-year average. In other words, the mean line drawn through all the fluctuations is rising, because the overall market is expanding, General Motors holds its share of the market, and its profit margins remain the same or improve. Therefore, it is argued, General Motors should not sell at the washed-out multiple of eight or nine times earnings like a copper company, but at something closer to the Dow Jones multiple, say fourteen or fifteen times earnings.

When General Motors goes up 30 or 40 percent, the rise adds more paper value to the total of all market values than all the whingding computer companies put together. General Motors has 286 million shares outstanding, and hence a thirty-point rise is additional wealth of nearly $9 billion. Itek, Solitron, Flying Tiger, Emery Air Freight, Northwest Airlines, and all the favorites of this decade together do not come to $9 billion.

However, you are starting a bit late with General Motors. What you should do with General Motors is inherit it. That $9 billion of additional wealth benefits the existing holders, but if you buy General Motors shrewdly before one of its major moves, you will do well to make 40 or 50 percent on your money, and that will never get you very rich, however satisfying it may be to be in the company of all that inherited wealth.

Another non-red button. Some people can make money by anticipating the swings in interest rates. There is a whole group of stocks which are sensitive to fluctuations in the bond markets and to the course taken by the Federal Reserve, in which you anticipate whether money is getting cheaper or dearer. Nice profits can be made in bank stocks, finance company stocks, savings and loans, and utilities by those whose fingertips are sensitive to this sort of thing. The swings in these stocks are frequently greater than those in the base companies which are so thoroughly a part of the business cycle, but you do have to know not only the anticipated action of interest rates but the degree to which these moves have been discounted.

Still other investors can do well in securities which are basically commodity plays, that is, the investors can determine, let us say, that the demand for copper is going to exceed the supply for several years, that copper production will not increase proportionately, and that the therefore inevitable rise in the price of copper will flow through as profits to certain copper companies, and that this future increase has not yet been discounted.

One of the most riskless forms of investment is the Turnaround, that is, a company whose fortunes have soured and consequently the market has sold it and sold it and sold it. Finally all the sellers who react to the souring fortunes have sold, and the stock finds a level and quietly goes to sleep. Then a new management comes in, and Does Something; it sells off the unprofitable divisions, it acquires new ones, it changes the programs and the point of view. If you buy the Turnaround after a long sleep, there is little risk to it, and if whatever it is that is changing works, you can do well. But somebody does have to do the work of finding this animal and working through enough to make sure that the story is valid. And, of course, that bottom to which the sea sludge has floated has to be a real one and not just a ledge somewhere halfway down. One example of a successful turnaround in this decade is Sperry Rand, whose management pulled a splayed company into control and then got the floundering Univac division going in the right direction. One example of a turnaround that didn’t quite work is Massey-Ferguson, whose management seemed to have everything lined up right for a while. Sperry did very well, but with Massey something was always faltering every six months, and after the grace period of forgiveness ebbed away, Massey lost the interest of the Turnaround buyers.

For all I know, money may be made in the future, even in the near future, by investors who are 100 percent in gold stocks and are betting on monetary chaos, or by the investors who will buy the 12 percent government bonds and leverage them well if indeed that chaos arrives.

All of these examples—and they are by no means complete—do involve a certain amount of economic intelligence and security analysis by someone, somewhere along the line. When I see this job of intelligence and analysis well done, I have a kind of intellectual appreciation for it, and if the yellow- or blue-button proponent has an authentic ring to his conviction, I can follow him. But the approaches themselves do not sing to me. They are not part of my own history, and my heart does not beat faster when I glimpse them across a crowded room.

I happened, in the fifties, to be associated with a Wall Street partner who was one of the pioneers of a concept we can call The Rate of Compounding Earnings. This is, I suppose, “growth,” although that word has been used to describe almost everything in the world at some point. My friend believed in growing earnings and he went out with a missionary zeal and preached this idea in the wilderness of mutual and pension funds, and at his untimely death he had a great following among them and a sizable fortune for himself. And since we had some fun and made a little money, when I see Earnings Compounding nicely I get that warm feeling that the Old Princeton Tigers get when they hear the glee club sing “Back to Nassau Hall.”

When you open your handy stock guide and see the following line under earnings, you know something is going on:

	1964	1965	1966	1967	1968
Solitron	.16	.33	.66	.88	.99

Here is a company whose profits grow every year, and at a staggering clip. The company must be doing something right. (The example given happens to be that of Solitron Devices, which sold as low as 1¼ in 1962 and as high as 275 in 1967. In 1962 the entire market value of Solitron was less than $1 million, and in 1967 the market value was more than $200 million. Solitron’s earnings increased more than tenfold, but the market’s opinion of that earnings increase made the stock appreciate 250-fold. Anyone who bought the stock in 1962 and still has it is happy, and anyone who put $10,000 into it in the dark moments of 1962 and kept it until 1967 could have taken his $10,000 back and still have had about $2.5 million. That is the way the market creates wealth.

Here are the compounding earnings of three of the great Senior Sisters of Growth—IBM, Polaroid, and Xerox:

	1964	1965	1966	1967	1968
IBM	4.10	4.52	4.83	5.81	7.71
Polaroid	.58	.93	1.51	1.81	1.86
Xerox	1.91	2.78	3.75	4.48	5.18

With a little bit of arithmetic, you can figure the rate at which earnings growth is compounding. The higher the rate, the more the market will pay for it in terms of a price; that is, the multiplier placed by the market on the earnings increases not only with the earnings growth but with the rate of earnings growth. Given a number of other assumptions—which we won’t go into at the moment—the market will pay more for earnings growing at a 30-percent rate than at a 15-percent rate, and more for a 50-percent rate than a 30-percent rate. When the market finds a 100-percent rate of growth, it flips, and the rules go out the window.

Now let us try a little bit of elemental Programed Instruction. Fill in the missing words:

To get rich, you find a stock whose ________ have been compounding at a very fat _______ and then the stock zooms and there you are.

If you filled in “earnings” and “rate” you may have a great future at taking Programed Instruction, but actually you are in trouble because it is a catch question and what you should have done was to mark the whole question False. Now, in twenty-five words or less, write an essay on why the statement was false. Write here:

If you wrote “because records show the past, and the market cares about the future,” or something similar, you get to come back in the class.

Here is another example.*

	1954	1955	1956	1957	1958	1959	1960	1961
Brunswick	.11	.25	.68	.79	1.19	1.83	2.20	2.56

* Source: Standard & Poor

Look pretty good? But look what would happen if you kept going.

	1962	1963	1964	1965
Brunswick	1.36	.27	.03	d4.21

The stepladder is upside down; that little “d” is for deficit. Brunswick did have a pretty good lock on the pinspotter business, but the bowling boom contained within it the seeds of its own destruction, like all booms. Bowling alleys proliferated like gerbils, and a location that can support one bowling alley supports none when a second one moves in and they divide the business. Brunswick’s pinspotters had been sold on credit, and when many of their customers failed, Brunswick had a lot of slightly used pinspotters, an enormous loss, and that compounded growth rate was at an end; Brunswick managed to make it from 74 to 8 in one of the steepest dives of recorded history. You can look through and find other examples of companies which seemed to be unique, and seemed to have found the golden path of stepladder earnings, only to falter. Semiconductor stocks in the early sixties looked just like that.

So you may or may not want, say, Solitron after its record of compounding earnings is already established. What you want is the company which is about to do that over the next couple of years. And to do that, you not only have to know that the company is doing something right, but what it is doing right, and why these earnings are compounding. Earnings do not grow automatically, even when business is good and markets are increasing. The copying business has been growing frenetically for most of this decade, and yet one could have been severely mauled in a number of copying stocks. Sometimes earnings can grow for a couple of years because business is so good that none of the competitors have gotten around to cutting prices, stealing salesmen, and in general creating the competitive fester that is good for the consumers but bad for the profit margins.

Any company whose earnings are growing consistently—or more important, are likely to grow consistently—has something unique about it. The competition can read these earnings records too, and fat earnings records are an invitation to come in and sample the cream. So a company that has something unique about it has something the competition cannot latch on to right away. Whatever it is that is unique is a glass wall around those profit margins.

Take a look at those three Senior Sisters of Growth: Xerox, Polaroid, and IBM. A lot of people make copiers but only Xerox makes copiers that copy on any kind of paper. Xerography has a ring of 500-odd patents woven around it, and there are plenty of executives with a Bruning or a Dennison copier who hand something to a secretary and say, “Here, xerox this.” Xerox has become a verb, and it dominates the field. When other people can xerox as well as Xerox, Xerox had better be ready to pull the next wonder from its laboratories.

A number of companies make cameras, and a number of others make film, but only one company—Polaroid—makes a film that produces a print for you in ten seconds, and once again there is a ring of patents all around the process. IBM dominates the computer field, which itself has had a spectacular growth. It was not the first company to make a computer by a long shot, nor is each computer necessarily the best technically in its area. What is unique about IBM is the breadth of its marketing competence. Customers do not want a particular piece of machinery, they want their inventories tallied or their problems solved, or what have you; and IBM’s salesmen have a vast and sophisticated array of goods to tailor to problems, and its servicemen are right around the corner.

What is unique about a company is not patents or products. Polaroid’s original patents have expired, and anybody who wants to turn out a 1948-type Polaroid picture, brown and fading, can do so. What is unique is always the same thing: it is people, the brains and talents of people. Sometimes these people produce patents, sometimes they produce a reputation for service; but always they produce something that cannot be easily duplicated by anyone else. In Avon Products, for example, what cannot be easily duplicated is its army of women selling Avon’s cosmetics door to door.

There is a paragraph in the prospectus of any new issue that will tell you that the company’s edge is fragile. A prospectus is a legal document written by Wall Street lawyers, and its purpose is to cry so poor that no investor can claim at some time in the future that he was misled. The paragraph of this truism will say—translated from the legalese—something like this:

“The Company has obtained 244 patents on its Digital Datawhack equipment. However, the Company has Competitors which are far larger and have far greater financial resources than the Company. The Company’s abilities to maintain its profits and to stay in business depend on the ability of its people to stay ahead of these Greedy Giants, to create new goods and services, and the Company isn’t at all sure that it can do this in the future, but it will sure as hell try.”

Obviously, the day IBM comes out with a cheaper, faster machine than the Digital Datawhack 600, and one that fits into the IBM line, that day Digital Datawhack can just sit there counting its patents; unless it has something else to innovate, its compounding earnings have had it.

Even if, by some magic, you knew the future growth rate of the little darling you just discovered, you do not really know how the market will capitalize that growth. Sometimes the market will pay twenty times earnings for a company growing at an annual compounded rate of 30 percent; sometimes it will pay sixty times earnings for the same company. Sometimes the market goes on a growth binge, especially when bonds and the more traditional securities do not seem to offer intriguing alternatives. At other times the alternatives are enticing enough to draw away some of the money that goes into pursuing growth. It all depends on the psychological climate of the time. Obviously you are safer buying compounded earnings cheap than dear, because if you have a stock at eighteen or fourteen or eleven times earnings, and it takes a very damp climate indeed to suppress a record at those ratios. But since you will never be first on the scene, there will always be something to make your little darling seem expensive: Competition is lurking imminently, the stock has already run up, or the market is going to hell in a handbasket.

If IBM, Xerox, and Polaroid have that required Something Unique, could we not just buy them and lock them away? Certainly, in the past, one would have prospered by buying them either in times of general market disenchantment or in times when there are so many alternatives to growth that the market is indifferent to it—in short, at the low end of the price-earnings pendulum. But Brunswick, our example above, had something unique or fairly unique: a mechanical pinspotter. However marvelous the product is, no company is immune to mistakes by its management. A corporation by legal definition may be bloodless and immortal, but everything is born to die even in spite of legal definitions. Companies which have had something unique do not always run head-on into disaster; more frequently they are simply debutantes who had a rosy glow of beauty for a time and have become respectable middle-aged matrons much like the matrons who were never belles at all. For a time, the market will continue to keep them at a premium; the memory of beauty will still be so strong that the gentlemen who were struck first by the beauty cannot see the lines and sags creeping in. As new gentlemen come in, though, there are new beauties to greet them, and memory is not enough to keep the matrons popular. Then they are vulnerable, because the multiples will come down. Chemicals, for example, sold at growth premiums to the market in the 1950s. Currently not only has their premium vanished but they actually sell at a discount to the Dow-Jones average.

There is one footnote to this business of looking at past and current success, and it is an arithmetic one. Again, our Senior Sisters may serve as illustration. The point of the footnote is that the more you grow, the harder it is to keep the percentage of growth constant or increasing, because the base gets so big. A company with $10 million of sales and something unique can double its profits in a year; a company with $1 billion in sales is simply too big to double its profits in a year; it takes time and energy and capital for each incremental increase, and none of these factors is infinite, ever. IBM has 56 million shares outstanding and its market value at this writing is more than $30 billion—thirty billion dollars. For IBM to double its market value—and hence for your own IBM to double—would take a national and international enthusiasm on the part of both professional and nonprofessional investors alike, because it takes a lot of buying power to move something up $30 billion. On the other hand, one or two or a handful of professional investors with institutional buying power can move a company which has less than a million shares and a market value of only $15 or $30 million. So I confess to a weakness for smaller companies. When a company has a million shares outstanding or less, its market is thinner and the stock is more volatile, but this gives me only slight pause. The excitement of volatility is enough to make up for the risks. A nice safe Turnaround in a big company may offer satisfactory gains, but recognition may be slow and you can get bored meanwhile. Then you must have another Game, or at least something else going on at the same time. A thin market can be treacherous in selling squalls, so one doesn’t want to be in the thin-market stocks at all in some markets. You do have to know what time of market it is. Markets go in cycles like all the other rhythms of life.

If you are going to go the red-button route, which is the only one that comforts me, there is one other rule you ought to keep in mind, and that is to concentrate, and not only in the Zen sense. Sweet are the uses of diversity, but only if you want to end up in the middle of an average. By concentrate I mean in a few issues only. There are, at any one moment, only a few stocks that have a maximum potential, and I, for one, am not smart enough to be able to follow more than a handful of stocks at a time. (Sometimes, when the whole thinly traded side of the market is moving, you end up with more simply because little stocks can run away in thin markets and you can’t buy enough of any one of them. The last few years have been just one of these periods. The popular stocks have been very thin, quite risky, and hard to trade.) The University of Rochester, which has one of the most brilliant records of any endowment fund, had only twenty-seven stocks in its $400 million fund the last time I looked, and if you counted the utilities as a utility package it had only twenty stocks.

The most famous proponent of concentration is Gerald Loeb, a partner of E.F. Hutton, who wrote The Battle for Investment Survival. While Loeb’s book was written many years ago as a series of newspaper articles, it still contains some of the best-articulated observations on what the market is rather than what it should be. “The greatest safety,” Loeb says, “lies in putting all your eggs in one basket and watching the basket.” Loeb did not mean literally one basket, but merely close to it. Winthrop Knowlton, the former White, Weld partner who wrote Growth Opportunities in Common Stocks, suggests five or six issues up to $100,000, and ten to twelve stocks for counts up to $1 million. This may be even a bit high for a red-button approach. If you are concentrated in only a few stocks, you are forced to measure each of them in terms of potential against each new idea that comes along, and this in turn makes you bump the bottom stocks off—the worst-performing ones—to take aboard something more promising. Sometimes you may be in only one stock. Not for widows and orphans, this red-button approach, I suppose, but this is a recital of a bias, not a handbook, and I am neither widow nor orphan. (I am going to add a special amendment here for this paperback edition. There is nothing wrong at all with the theory you have just been reading. But one thing that can blitz a really nice game procedure is to have everybody pile into it, and that is just what has happened in the case here. These simple ideas seemed innocuous enough when I typed them out. Now we have four hundred fifty-two hungry hedge funds, the top eighty professional gunslingers, and about three million amateur gunslingers all chasing small thin stocks with supposedly rapidly growing earnings.

It doesn’t take long to figure out what happens under this kind of pressure. First, it gets very hard to buy the nubile stock at any kind of price that doesn’t discount 1999 earnings. If it’s a new issue, it comes out at an inflated price. If it’s an old issue, the minute it starts to move it’s picked up by all the computers that track these moves and the top guns are all in it within 24 hours without knowing why. So it gets hard to collect more than 200 shares without attracting a crowd, and remember the nature of crowds. Finally, since the pattern of growing earnings is such an inflammatory device, why, everybody’s earnings grow, even if they don’t. If your profits aren’t growing, you have to sell the kitchen sink, put that in operating earnings, and hope that either the accountants won’t make you asterisk the kitchen sink or that nobody can read the small type that says—in as obfuscating language as you can manage—that the earnings aren’t really growing but everybody wants them to, so we threw in the kitchen sink. In short, the quality of earnings deteriorates. The accountants are all disturbed about this. High time.

Anyway, let’s assume that somehow, someday, reported earnings will be true again, and that you are smart enough to figure out what earnings really are. That makes the theory pretty again; elegant, as we say in mathematics. Now go on with the story.)

All right, you are ravenous for another Solitron. You are going to go for broke. You have stepped outside yourself and you know who you are; that face in the mirror is the face of a riverboat gambler, cool, tough, continuously measuring all the measurable options. How in the world do you go about finding the candidates? You want the next Solitron, the next Xerox, the company that is going to compound profits away consistently, so that the market falls madly in love with it. Where does such a creature dwell, and by what dragons is it guarded?

I can’t tell you. I can give you a lot of guidelines, but they aren’t original. You can find them in Growth Opportunities in Common Stocks and in Philip Fisher’s Common Stocks and Uncommon Profits. You know that a candidate must have something unique about it, something that makes it hard for anybody else to do the same thing. Its markets are growing, it innovates, it creates its own markets by this innovation. It has talented people—financially talented as well as scientifically or design-talented—so the financing is adequate and it has been accomplished well. There is depth to its management, so that the absence of one or two key people does not harm the company. It may get older as a company, but it stays young because of its innovations; a steady or increasing percentage of sales come from products, processes, or ideas that are recent. And it is small enough to be nubile.

That description could be called Have I Got a Girl for You. She’s absolutely beautiful, she has a staggering figure, she’s warm, she’s friendly, she’s bright without being aggressive, she’s intelligent, she’s charming, she’s enthusiastic, she likes all the same things you like, and she’s already told me she’s heard a lot about you.

You know what you’re looking for, but you still don’t know where to find it. Let us listen to Phil Fisher for a moment. He is an investment counselor in San Francisco, and he limits himself to a dozen clients or so, and he won’t take you. Phil Fisher has an outstanding reputation for having found the handful of companies that came into a new area and grew from little companies into big ones.

For years, Phil Fisher espoused what he called “scuttlebutt” as the way to zero in on a new investment. You know a company; you talk to their competitors. You talk to the people who sell them things and to the people who buy things from them. An engineer, for example, might be enthusiastic about a new oscilloscope he was using, and that would lead you to the oscilloscope maker. People like to talk about their work. If you go to visit the plant of, say, the maker of peripheral computer equipment, it has been my experience that the people there will not only tell you all about peripheral computer equipment; they will tell you all the gossip about the major computer makers. And not only that, they will tell you about the components within the computers because their friends, the computer engineers, have told them which components are exciting and every last one of these birds is in the stock market and looking for sexy stocks just like you are. That fellow who has just taken you through the plant will tell you, in the company cafeteria, that he has just exercised his options, hocked his stock in his own company, and loaded up with Pazoomis Computer Machine Tool.

You have only one problem, and that is, if you spend all of your time gossiping with computer engineers, when are you going to do whatever it is that you do? (You would have another problem if you did have the time to pursue all this scuttlebutt, and that is that engineers can be just as fanciful as stockbrokers, and a beautiful piece of equipment does not necessarily come from the most profitable company. And Pazoomis Computer Machine Tool may be just about to get swamped by Kearney and Trecker, and Giddings and Lewis, their competitors.)

Well, Phil Fisher is an honest man, and one day he sat down and made a study of where his successful ideas had come from. After many, many years in the business of scouting and evaluating ideas, and after building up an incredible network of acquaintances and contacts throughout a variety of industries, he found that only one sixth of the good ideas had come from the scuttlebutt network. And the other five sixths? “Across the nation I had gradually come to know and respect a small number of men whom I had do outstanding work of their own in selecting common stocks for growth.… since they were trained investment men, I could usually get rather quickly their opinion upon the key matters.… I always try to find the time to listen once to any investment man.…”

In other words, he found some smart people. That is one of the most important of the Irregular Rules, find smart people, because if you can do that, you can forget a lot of the other rules.

My own experience is by many quanta nowhere near as vast as that of Phil Fisher, but tiny as it is, it supports this point. There was a time when I was not only a seeker of scuttlebutt but a conveyor of it. The phone would ring and a voice would say, “I hear Fairchild is having trouble with the yields on its planar interfaced integrated mini-chip that was going into the IBM 360/72; they just called up Alloys Unlimited and told them to hold up on shipping the sandwich material.” Then I would get on the phone and call three people and ask them, “What’s all this about the low yields on the planar interfaced integrated …?” and so on, and it is true that both Fairchild and Alloys would have a sinking spell for at least three hours while these phone calls multiplied geometrically.

But the good ideas? Well, the good ideas came from smart people. It is a tribute to and probably a test of good ideas that I always greeted them with one of the two words of skepticism: either Here? or That?. Here? meant “I recognize the validity of the concept, but good God, man, the stock has just run up twenty-five points.” And That? meant “We turned that old dog over five years ago, how come you’re just getting around to it?” Obviously there has to be something in the story that makes the answer “yes” to Here? or That? And as long as enough people are saying Here? or That? there is skepticism enough to make the story worth listening to. When there is no skepticism, there is almost no one left to sell to.

Professional investment managers may, in the course of their careers, come to know by heart five hundred companies, what their histories have been, what their problems are, who makes up their managements, what their prospects are. But no one can cover everything, and no one can know everything. So most professionals depend on the people—their own analysts, other people’s analysts, other managers, their friends—whom they have come to respect as acute intelligences and as talents at whatever course—red, blue, or yellow—they happen to be talented at. There are really no more brilliant investment men than there are brilliant lawyers or top-flight surgeons.

Finding smart people in this field is no different from finding the best tax lawyer or the best architect. Of course, the reputation that will lead you to the smart people in the first place means that there are heavy demands on their time, and there will also be a lot of people competing for this time who have—unless you are very rich indeed—more to spend in terms of fees and commissions than you have.

If you do manage to find some smart people, and they agree to take on your account, they are not going to want them to waste their time chatting with you about the market, and then you will have to find another Game to play, and another set of psychic satisfactions.

Women have an advantage. The smart people are likely to be men, and sometimes men can be intrigued with more than fees and commissions. The Game women play is Men, and perhaps that leaves them free to be less involved in this one.

Now mind you, it may sound like I have been preaching some system for making money in the market. If I really had a system for making money in the market and it worked all the time, first of all, I wouldn’t tell anybody and second of all, I would soon have just about all the money there is. What I have told you is a set of biases so you can make your own judgments. That seems only fair. I happen to have a low threshold of boredom, and I like young managements because they wear button-down shirts and know people I know; the managements who don’t wear button-down shirts are already too rich to care. (Note for this paperback edition: Button-down shirts used to mean young managements. Now it means middle-aged managements; the young ones are wearing flashy color shirts with French cuffs. The pace of change accelerates and fashions change in clothes, just as they do in stocks.) Go find your own biases and your own colored button. In peace, of course, and work out your salvation with diligence, as the Gautama told his disciples.