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By Adam Smith 

This book was a fascinating and enjoyable read, and one of the best investing books I have ever read. No wonder why Warren Buffett recommended this book in his partnership letter of 1968. 


Adam Smith was the pen name for Harvard and Oxford-trained,  George Goodman. You can read about George Goodman here


Chapter 1  

Why did the Master say “Game”?


The Master he is referring to is John Maynard Keynes. Keynes was a British economist whose ideas fundamentally changed the theory and practice of macroeconomics and the economic policies of the government. His ideas are the basis for the school of thought known as Keynesian economics, and its various offshoots. 

This chapter makes a case that the world is not the way you have been told it is. While we think a lot of people enter the stock market with an intention to make money, but eighty percent of investors are not really out to make money. 

In the Long-term expectation of Keynes’ General Theory, Keynes writes:

“The game of professional investment is intolerably boring and over‐exacting to anyone who is entirely exempt from the gambling instinct; of course, he who has this instinct must pay the proper toll for possessing this propensity.”

If it is a game, the only objective of playing is to win (make money). For that, we need to

“relieve ourselves of some of the heavy and possibly crippling emotions that individuals carry into investing because in a game the winning of the stake is clearly defined. Anything else becomes irrelevant.'' 

The irony is that most people are interested in playing the game rather than winning the game. 

Chapter 2

Mister Johnson’s Reading List 

“... the dominant note of our time is unreality.”


The field of rational study is becoming very well worked and any true student of Graham and Dodd’s security analysis can spot undervalued security. But knowing economics, business cycles, and even security analysis judgment don’t guarantee success. If you don’t have a clue about them, you still have hope for success.

There is no set mechanical formula that you can use to make money; many times you are operating in an area of intuition (or judgment). For that, it is important that you know yourself. 

If you don’t know who you are, markets can be an expensive place to find out. We human beings are a bunch of emotions, prejudices, and twitches and that makes it hard for us to understand the market. You will never know how it’s going to behave when. What is more important is how you’ll react when markets don’t react in your favor.  


As Gerald Loeb, author of The Battle for Investment Survival said: 

“There is no such thing as a final answer to security values. A dozen experts will arrive at 12 different conclusions.”

“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.”


As Mister Johnson  said: 

“What is it the good managers have? It’s a kind of locked-in concentration, an intuition, a feel, nothing that can’t be schooled. 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”

“Now we have computers and all sorts of statistics, but the market is still the same and understanding the market is still no easier.”

“You can’t just graduate an analyst into managing funds. What is it the good managers have? It’s a kind of locked-in concentration, intuition, a feel, neither that can be schooled. The first thing you have to know is yourself.” 

Reading list of Mister Johnson discussed in the chapter is: 


  1. Alan Watts’ The Wisdom of Insecurity 

  2. Norman O. Brown’s Life Against Death

  3. Walter Gutman market letter and up and down 

  4. The Witch 

  5. Gustave Le Bon’s The Crowd

Chapter 3  

Can Ink Blots Tell You Whether You Are The Type Who Will Make a Lot of Money in the Market?

Dr. Charles McArthur worked as a consultant for one of the Boston fund managing companies to help them scout out prospective security analysts. He did inkblot tests. In the test, participants who think they can manage a hundred million dollars, are shown a series of ten inkblot cards and directed to respond to each with what the inkblot looks like. It’s not what they saw in the blot, but their response pattern.

The test helps to understand the personality traits of an analyst and fund manager. For e.g. the aggressive portfolio manager won’t bother looking at the details and responds quickly or perhaps over-response. They don’t care about being right in every decision, they care about being more right than wrong so that the bottom line looks great. Whereas an analyst group would want to be right in every situation and therefore will take longer to look at the details and respond. 

The psychological tests can’t really tell who is going to do well, but they might be useful in knowing who they are. 

There is one requirement that is absolute in money managing, and you have already learned it with the first Irregular Rule: If you don’t know who you are, this is an expensive place to find out. The requirement is emotional maturity.


As Dr. McArthur said:

“You have to use your emotions in a useful way. Your emotions must support the goal you’re after. You can’t have any conflict about what you’re after, and your emotional needs must be gratified by succeeding at what you’re doing. In short, you have to be able to handle any situation without losing your cool or letting your emotions take over. You must operate without anxiety.”  


Chapter 4 

Is the Market Really a Crowd?

This chapter emphasizes that the stock market is a psychological crowd. Gustave Le Bob, a French Physician, at the end of the nineteenth century published a book titled ‘The Crowd’. To Le Bon, the crowd was not merely a number of people assembled in one place, it could be thousands of isolated individuals. These he called a psychological crowd, subject to “the disappearance of conscious personality”, “a sentiment of invincible power which allows him to yield to instincts”, ‘the state of fascination in which the hypnotized individual finds himself in the hands of hypnotizer”. 

Crowd unconsciously accepts the image that a company or a stock present and ignores the rational factors of earning and return on invested capital. Dr. W. McDougall said the chief characteristic of the crowd was “exaltation and intensification of emotion” produced in every member of it. 

The crowd leads by emotions and irrationality. To be a rational and successful investor, one must stay out of the crowd. Books referred to in this chapter are: 

  1. Extraordinary Popular Delusions and the Madness of Crowds by Charles MacKay

  2. The Crowd by Le Bon

  3. Group Psychology and the Analysis of the Ego by Sigmund Freud

  4. The Group Mind by William McDougall


Chapter 5 

You Mean That’s What Money Really Is?

If you work hard to earn money and keep buying things out of greed and competition, the money will eventually vanish and it won’t serve you in the long run. It is important to save up some money to play the game of professional investment; the money you will make playing this game is not ‘work’. 

“It is true that you have to work long enough to acquire a surplus enough to buy some chips for the Game, but the money you make playing the Game isn’t work, it’s play – or are you making it seem like work?” 


Chapter 6 

What are they in it for?

Around 80 to 90% percent of the people in the stock market are not there to make money or win the money game. George’s friend, who was a psychiatrist, allowed him to meet with some of his patients, who were also investors in the stock market. He wanted to learn what intrigues them to be in the stock market.


After meeting with several investors, he found that different investors play different roles in the stock market. Some are in the stock market because they inherited stocks. Some inherited money and didn’t know what to do with it, therefore, they learned to invest. Some invested because their friends or peer groups invest and love talking about the market. For some, the process of buying and selling is fun and time pass. 


Chapter 7 

Identity and Anxiety 


Anxiety is directly related to what identity you are seeking in the money game. If the purpose is making money and nothing else, then the anxiety must always be present. There is always a threat that the money which represents the achievement can melt away. 

The strongest emotions in the marketplace are greed and fear. In a rising market, there is a tendency to become greedy. It’s hard to see your neighbors and friends becoming rich and you are getting behind. The same is true when the market starts going down and people become fearful and start selling. 

“No matter what role investor has started with, in a climax on one side or the other, the role melts into the crowd role of greed or fear. The real protection against all the vagaries of identity-playing, and against the finale role of being part of the crowd when it stampedes, is to have an identity so firm it is not influenced by all the brouhaha in the marketplace” 

Since anxiety is a threat to identify, the first step is to think objectively. Mr. Linhart Stearns, an investment counselor was wise to know that the end object of investment is serenity. To achieve serenity in investment, one must know the following:

  • Emotional detachment: don’t fall in love with stocks - a stock is just a piece of paper and it doesn’t know you own it

  • The market has a way of inducing humility in even its most successful students - even if you have been a brilliant decision-maker, walking around feeling brilliant is a dangerous procedure 

  • Know who you are and what you are doing by stepping outside of yourself and seeing yourself objectively 

  • The strongest emotions in the market are greed and fear. Don’t become a part of the crowd. 


Chapter 8 

Where The Money Is?


It is important for investors to know that it is certainly possible to make ten or twenty times your money given there are enough time intelligence, emotional detachment, and enough luck. It is possible because a lot of people have done it. 

But the really big money is made by insider investors. People who start a company and take it to the public. They make really big money.

Chapter 9

Mr. Smith Admits His Biases 

There are different ways to make money in the market. We all are creatures of some sort of behavior patterns. If a particular strategy worked for us in the past, we continue to follow that until it gives a nasty shock. Nothing works all the time and in all kinds of markets. Everything is born to die. 

One strategy is to make money in the market by anticipating the business. Mature companies do not increase profit every year. When business is good they make a lot of money, when it’s not, they make less money. The strategy requires perspicacity in evaluating economic intelligence (understand and anticipate the outside environment, key competitors, rules, stakes, trends...) to prevent risks, particularly in immaterial fields, and to exert ethical influence.

Another strategy is to make money by anticipating the swings in interest rates. Nice profits can be made in bank stocks finance company stocks, savings and loans, and utilities as they are sensitive to interest rates. One can also make in commodities (oil, gas, gold, lumber, steel, to name a few) by anticipating their demand and supply. 


However, George invests in businesses whose earnings have been growing and likely to grow consistently. To do that, you have to know the company, what it is doing right and what is unique about them that will make their earnings grow at a decent rate over the next few years. 

“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.”

Some points to remember: 

  • It is safer to buy great companies cheap than expensive 

  • The bigger the company, the harder it is to keep the percentage of growth constant or increasing

  • Always concentrate - Invest only in a few stocks that have a maximum potential; you are not smart enough to be able to follow more than a handful of stocks at a time

  • Find smart people whom you can seek stocks ideas from 


Chapter 10 

Can Footprint Predict the Future?

In this chapter, George talks about the self prophecy bias of technical analysts and chartists who make a living by recommending buying and selling decisions of stocks based on past performance including past movements and prices. Their thesis is that past patterns determine future patterns; therefore they must say whether the market or a particular stock is going to go up or down.

A chart can be a handy way of looking at what has happened; it can tell what the price range has been, and what the volume has been. However, it has nothing to do with how the stock will perform in the future, or in other words, how people will behave in the future. 

If they could really predict the future based on price movements, then the market would soon become too efficient, that is, the gap between present and future value would quickly be closed by the predicting device. 


Chapter 11 

What The Hell is a Random Walk?

The random walk people are university professors in business schools and economics departments. They have had a lot of advanced mathematics and they delight in using it, and in fact, most random-walk papers by these academics must be arcane and filled with symbols so that their colleagues will be impressed. 

The first premise of random walk is that the stock market is an efficient market, that is, a market where numbers of rational, profit-maximizing investors are competing, with roughly equal access to information, in trying to predict the future course of prices.  The second premise is that at any time the price of a stock will be a good estimate of its intrinsic value depending on the earning power. 

However, many successful investors have taught us including Lord Keynes, Benjamin Graham, Warren Buffet, to name a few, that if the market was efficient, no investor would earn an abnormal (excess) return. But there is a long list of successful investors who believed a market is an irrational place and no one has ever learned how to put emotions into mathematical equations. Benjamin Graham writes in The Intelligent Investor:

“There is a special paradox in the relationship between mathematics and investment attitudes on common stocks.”

“In 44 years of Wall Street experience and study, I have never seen dependable calculations made about common stock values, or related investment policies, that went beyond simple arithmetic or the most elementary algebra. Whenever calculus is brought in, or higher algebra, you could take it as a warning signal that the operator was trying to substitute theory for the experience.”

In the long-run stock prices reflect the value of a business, and in the short run, the dominant factor is the temper of the crowd. Random walkers and chartmeisters can program numbers, difficult equations, calculations, calculus, etc., but the truth is no has ever learned to program intuition, emotions, greed, and fear. 


Chapter 12 

Computers and Computeers 

Computers revolutionized Wall Street and Investment Management industry in general. People started storing, rearranging and calculating millions of bits of information. The next step for computers was to Screen companies by price to earning, return on invested capital and equity, etc. What computers could do analysts were doing anyway but no analyst could take the time to perform thousands of calculations. 

But the real fun began when people started using for computer-based technical analysis i.e. what everybody else is doing, which stock moved a greater percentage in price and transaction and based on that, they started identifying a pattern. It assumes that past behavior is an indicator of future behavior. However, there is no proof that this strategy has worked better over a longer period of time. 


Chapter 13 

But What Do The Numbers Mean?


Reporting earnings in the financial statement does not always present the true picture of profitability. There is not a company anywhere whose income statement and profits cannot be changed, by the management and the accountant, by counting things one way instead of another. 

Let’s say two airline companies bought the same brand-new airplane for million. At some point in the future, the airplane is going to be worth zero, because it's useful life will be over. So they must expense a fraction of the cost of an airplane in the income statement as depreciation expense. The first company decides it’s useful life to be 10 years, while the second decides to be 12 years. Both companies decide expense (depreciation) the plane in the income statement using the straight-line method (equal payment over useful life). The first company will expense the plane by $100,000 each year for 10 years, but the second will expense by 83,333 over 12 years. As a result of more depreciation expense, the first company’s net income will be reduced by 17,777 compared to the second company in the first ten years.

This was one simple example of how earnings can be manipulated. One must conduct due diligence before investing in any company.


Chapter 14

Why Are the Little People Always Wrong

The little people have small accounts who buy stock in less than a hundred-share lot because that's all the money they have. They are no short of stature and intellectual vanity. They react to the news, brokers’ recommendations and hearsay even when there is nothing wrong with the company and market. One of the best strategies is to do the opposite of what they are doing: buy when they are selling and sell when they are buying. 


Chapter 15 

The Cult of Performance 

For years, the mandate of the portfolio was to participate in the long-term growth of businesses and the country. The portfolio manager was instructed to leave the speculation to speculators. Then a new wave of performance fund managers came in who started competing with each other. The success of funds depended on how it performed compared to other funds. They started indulging in the business of speculation. To them, the safest way to preserve capital was to double it and once the tide of performance started, there was no stopping. 

The characteristics of investment performance are concentration and turnover. Concentration means limiting the number of issues. Turnover means how long you hold the stocks. If you buy and put them away, your turnover is 0. But the new aggressive fund managers started turning over at more than 100 performance and the brokers were getting very rich. If the performance fund managers liked a stock, it will go up but if not, it will go down. 

All the other small investors started thinking that ‘THEY’, fund managers, get the information first and based on that they start trading. As a result, the small investor started following them which created mass psychology. Even though the “performance” funds still represent only a tiny fraction of all the managed money, the influence of the trend extends far beyond the actual amounts of money involved. 


Chapter 16 

Lunch At Scarsdale Fats

Robert H. Brimberg, a Wall Street executive who was known for the lunches he held so that major investors could meet each other and talk about their business. Money/Portfolio managers who had billions under their management were welcomed anywhere for high profile lunch, but they gathered at Bob's spartan room on Broad Street. The admission was free but each individual had to say something. Guests could air their ideas in a neutral forum on various investment subjects for comment and criticism by their peers. Bob thought this is perhaps the best way to get the finest research by bright minds. As investors, we need to have a quality source for investment ideas to further explore. 


Chapter 17 

Winners and Losers 

The problem with aggressive and actively managed funds and portfolios is the pressure to perform in the short run. When the fund manager has a lot of cash but everyone wants to get out and the market is going down, it’s hard to find winners in the short term. 

Liquidity is another threat to short-term performance. When no one believes in the stock market, it’s hard to get out at a fair/reasonable price. 

“The market does not follow logic, it follows some mysterious tides of mass psychology.”

Chapter 18

Timing and a Diversion; The Cocoa Game 

For many stock is a piece of paper and the value is not inherent in the stock; value has to be appreciated by others. The objective is to get a piece of paper ahead of the crowd and let the crowd appreciate it later. You can either develop the skill of the timing market which is virtually impossible. Alternatively, you can focus on buying the right thing at any time but it requires a long wait; at least you are better off than coming to the party late. You don’t want to be on the dance floor when the music stops. 


Chapter 19

My Friend The Gnome of Zurich Says a Major Crisis is on its way 


There is always noise in the market, especially about the crisis coming soon. The better strategy is to focus on what you are capable of understanding. 

Under the Bretton Woods System from 1944 to 1971, gold was the basis for the U.S. dollar and other currencies were pegged (fixed exchange rate) to the U.S. dollar’s value. Hence, there was always someone trying to predict the gold crisis when there were more claims on US gold reserves due to trade. 

When  George Goodman called his friend Charley to tell him that the gold crisis is coming soon, "Forget it," Charley said. "The gold-bugs have been around forever. The market still has gas. Who understands gold, anyway? And how can you worry about something you can't understand?"


Chapter 20 

If All the Half Dollars Have Disappeared, Is Something Sinister Gaining On Us?”


Governments are expected to care for their people in order to win votes, resulting in them over-spending even when it’s in the best of the country in the long run. People have to believe in what their governments are doing and how they are spending. If not, the market will simply crash. 

One of the signs of a market crash was silver. Market gurus will predict to load the silver price is going to go higher. George actually listened to one of the chartist/macroeconomists and exchanged his dollars into silver with a hope to benefit from the rise in price.  It never happened and in fact, the government decided to sell its silver reserve through auction.


Chapter 21 

Do You Really Want to Be Rich? 

Why most people chase wealth is in the essence of capitalism; money is the way we keep score. All purposeful money-making impulses come from the thousands of years of economic scarcity.

What does the purposive investor seek? 

"Purposiveness means that we are more concerned with the remote future results of our actions than with their own quality or their immediate effects on our own environment.”

The important questions we need to ask ourselves about money:

  • Is it the end itself or a means to an end? 

  • Do you want to be evaluated by wealth or something else?


“The immortality is spurious because that particular wheel is fixed; you do have to lose in the end.”

“We shall once more value ends above means and prefer the good to the useful. We shall honour those who can teach us how to pluck the hour and the day virtuously and well…”

It is perhaps more important to strive for virtue and sane wisdom than pure money.


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