Inquiring after the customers' boats is still laughable

Fred Schwed Jr had an unerring eye that saw how most of the practices on Wall Street are wrong. And his insights from the 1920s remain true today.

Back in the roaring twenties, that exuberant decade of boom and bust that ended with the Wall Street crash, an out-of-town visitor was being shown the wonders of New York City.

When they arrived at the Battery, the guide who was conducting the tour pointed out the handsome yachts in the harbour. "Those are the yachts of the brokers and bankers," he said. "But where are the customers' yachts?" came the innocent reply. Cue raucous laughter. Of course there were no customers' yachts; their money had helped pay for the bankers' vessels.

This tale is told in Fred Schwed Jr's entertaining book, Where Are the Customers' Yachts: A good Hard Look at Wall Street. Fred Jr worked on Wall Street at the end of the 1920s before retiring prematurely and penniless. He took to a life of golf, Martinis and writing, although mainly children's books. This is his only financial tome, a slim volume but packed with wry wisdom.

He describes his love of buying stocks: "When they show a profit I sell them, exultantly. (But never within six months, of course. I'm no anarchist.) It seems to me at those moments that I have achieved life's loveliest guerdon - making some money without doing any work."

Even so, his investments seem never to have made him much money, and he doesn't even have a Cadillac to his name.

What he does possess though is an unerring eye that sees that most of the practices on Wall Street are wrong, immoral or downright delusional. Wall Street was created under a buttonwood tree where buyers and sellers used to meet. Soon they moved to a coffee house - doubtless trading in the New York winter under the tree was a tad uncomfortable - and quickly developed the exchange that is now so familiar to us.

Of course there is nothing wrong with buying or selling, but it is all the paraphernalia that surrounds it that appals Fred. For example, he realises that people suddenly develop a Cassandra-type vision of the future, even if the future is generally much less gloomy, particularly if they are trying to unload some stocks.

"The average male likes to sit at breakfast and tell his wife and children what Adolf Hitler is going to do month after next. This is a harmless vanity. But from this it is an easy step for him to go downtown and start telling people what United States Steel is going to do month after next. That is liable to lose someone's life savings for him," he wrote.

Of course, get the wrong side of a bust and you're never going to like any exchange. Some customers clearly have bought yachts, while the most successful investor of his generation, Warren Buffett, not only owns a good slice of Goldman Sachs but even has his own airline business, NetJets. But the days of being able to lose, or win a fortune on any stock exchange may be numbered.

Felix Salmon, a Reuters blogger, wrote an interesting piece in The New York Times the other day titled "Wall Street's Dead End". He pointed out that in the week that Deutsche Boerse wanted to buy the New York Stock Exchange - and indeed the London Stock Exchange had announced its own bid for Canada's TMX - physical exchanges were becoming increasingly irrelevant.

"As the number of initial public offerings steadily declines, the stock market is becoming little more than a place for speculators and algorithms to compete over who can trade his way to the most money," he wrote. "What the market is not doing so well is its core public function: allocating capital efficiently. Apple, for instance, is hugely profitable and sits on an enormous pile of cash; it is thus very unlikely to use its highly rated stock to pay for any acquisitions. It hasn't used the stock market to raise money since 1981, and there's a good bet it never will again."

This is stirring stuff, and it certainly prompted a few reactions in New York. Check out the response by Chuck Schumer, the senior senator from New York. "The New York Stock Exchange is the cradle of American capitalism. It is a national treasure. In America, we start each day in our Congress and in our classrooms with the Pledge of Allegiance, and we also start it with the ringing of the bell on the floor of the stock exchange," he said, without an ounce of irony. The "national treasure" is the giveaway; once something has been called that, it is normally obsolete or consigned to a museum.

By a happy coincidence, this week I met Rashed al Baloushi, the deputy chief executive of the Abu Dhabi Securities Exchange. He was full of the news that the exchange was about to have its first initial public offering (IPO) in two years. Insurance House, which is being spun off by Finance House, an investment bank, is seeking to raise Dh58.7 million (US$16m) in an offer available only to UAE nationals.

By global standards - in fact even by Dubai standards - this is chicken feed. There were probably houses in Emirates Hills selling for more in the peak of the boom in 2008. The exchange is due to move to new offices on Sowwah Island in the summer, and Mr al Baloushi is planning to take advantage of the slowdown in business during Ramadan to introduce trading in the new location.

On the subject of whether the UAE's exchanges should link up, he would not be drawn, saying it was a "political matter". Political or not, exchanges everywhere may be heading for extinction unless they can attract liquidity and foreign investors - and even then it may be too late. The ADX hopes to start introducing the trading of either corporate or government bonds. The sooner the better, I'd say.