George Goodman, also known as Adam Smith, produced some of the finest Wall Street commentary of the 1960s, 70s and 80s. His insights into the behavior of the stock market of the era, and into the psychology of market participants, continue to hold tremendous relevance today.
Goodman codified his best insights into a series of best-selling books, including the classicĂ "The Money Game" and the equally entertaining, if not as well known, "Super Money." Today, we take a few of Goodmanâs keenest insights and see how they continue to apply today.
No bull market lasts forever
We have been in one of the longest bull markets in history, one that has seen asset prices rise to new highs in virtually every tradable asset class. Goodman reminds us that the music always stops eventually, no matter how good the tune:
âWe are at a wonderful ball where the champagne sparkles in every glass and soft laughter falls upon the summer air. We know at some moment the black horsemen will come shattering through the terrace doors wreaking vengeance and scattering the survivors. Those who leave early are saved, but the ball is so splendid no one wants to leave while there is still time. So everybody keeps asking â what time is it? But none of the clocks have hands.â
It is sometimes easy to fall into the trap of thinking that âthis time is differentâ and the big corrections of the past will not be revisited in the future. But as Goodman so eloquently described the roaring stock market of the 1960s, so too must the market of 2018 be viewed through a historical lens. We can already see the cracks starting to form, with fears over trade wars and tariffs throwing cold water on a still-ebullient stock market.
To know the market, you must first know yourself
Investors are human beings, driven by human urges, desires, passions and irrationalities. That goes even for the investing greats like Warren Buffett (Trades, Portfolio). The failure to come to grips with who you are will cost you dearly, as Goodman describes:
âYou are â face it â a bunch of emotions, prejudices and twitches, and this is all very well as long as you know itâŚIf you donât know who you are, [the stock market] is an expensive place to find out.â
This is a classic insight into investor psychology. It is not enough to come to a correct conclusion about a stock or market movement, an investor needs to have the fortitude to see their conviction through. But investors can panic or lose their nerve; they can become venal, impatient and erratic. When psychology trumps reason, investors lose. Developing meaningful self-knowledge is an essential prerequisite to thriving in the market.
Investing is a game and all investors have the gambling instinct
Goodman makes frequent reference to the theories and opinions of John Maynard Keynes, especially in "The Money Game." Referring frequently to Keynes as âthe Masterâ, âOur Lord Keynesâ or âthe illumine,â Goodman draws on many of the economistâs insights throughout his own writings. Perhaps most important among these references is his discussion of Keynesâ observation that, âThe game of professional investment is intolerably boring and overexacting to anyone who is entirely exempt from the gambling instinct; whilst he who has it must pay to this propensity the appropriate toll.â
Goodman addresses this notion of investing as a game in detail (unsurprising, since it forms the thesis and through-line of "The Money Game"):
âLet us go back to the illumine, that the investment game is intolerably boring save to those with a gambling instinct, while those with the instinct must pay to it âthe appropriate tollâ. This really does say it allâŚSometimes illusions are more comfortable than reality, but there is no reason to be discomfited by facing the gambling instinct that saves the stock market from being a bore. Once it is acknowledged, rather than buried, we can âpay the appropriate tollâ and proceed with reality.â
While Keynesian theory is no longer the only game in town when it comes to economic policy (as it was in Goodmanâs heyday), the observations of Keynes the man into the behavior of public markets retains great significance. Goodmanâs insight is that investors of all stripes must have some gambling instinct, insofar as they are willing to play a game of imperfect information in which there are significant risks.
Yes, of course, there are ways to limit risk and make more rational, calculated decisions (that is the whole point of hunting for investment alpha, after all). But the fundamental realities of the stock market mean no one can prosper in it without some capacity for risk-taking. Even the most fundamentalist of value investors will acknowledge this when pushed. Just look at Buffett: he is a master bridge player as well as investor and has made numerous references to the similarity between the two pursuits. They are both games of imperfect information and require a kind of betting to participate, but skill is the final determinant of long-term success.
Winning the stock market money game requires skill, patience, fortitude and wisdom. These are talents that can be acquired through experience and perseverance, but are often neglected by the short-sighted.
