Animal spirits: Finance, investment, speculation

I swung by the library this morning to pick up a book. At the computer catalog, I had the sad, sad reflection that there are too many books to read and I will not get to them all. The trigger for this was somehow looking up Tim Parks’ books. I was interested in a book he’d written about following a soccer team based in Verona, Italy. But in the catalog, I noticed a book of his called Medici Money. The timing was propitious, for this afternoon I’m to attend the opening reception for a photo show that has the interesting title of “Medici Schmedici: Demystifying the Artist/Collector Bond.” I’m not sure what the artist has up her sleeve but I’m very curious.

I’ve been interested in revisiting early modern Italy since I read Jane Gleeson-White’s Double Entry: How the Merchants of Venice Created Modern Finance.  It features Luca Pacioli, who’s commonly credited with recording the accounting techniques that regulated, enabled and empowered the growth of capitalism. I found it interesting enough to teach myself double-entry bookkeeping, which I find rigorous, exacting and, at times, magical. A strange thing to say about bean-counting, but there you go.

So, that wasn’t the book I’d intended to check out (that would be Michael Lewis’ Liar’s Poker, but my hold had expired). I placed holds on both 15th-century Florence and 1980s Wall Street and decided to find a quick adventure story to take home with me. So, I settled on The Perfect Storm by Sebastian Junger, which I’d resolved to read after this phenomenal New York Times Magazine story. Then it will be back to my books on finance.

In other news, I returned yesterday from a week-long residency at the Weymouth Center for the Arts & Humanities in Southern Pines, N.C. It was a tremendous opportunity for me to write a first draft of a magazine story I reported a few months ago. My still-unfinished draft sits at about 6,500 words.

Also, I recently subscribed to The Wall Street Journal. The teaser rate is an unmissable $1 per week for eight weeks, and for that I get digital access and paper editions delivered six days a week. I love it. If I’m a Republican 10 years from now, this might be where it started. (One quick observation about WSJ’s in-house style. In two different stories, I noticed that on first reference, “leverage” was defined as “borrowed money.” It seems like an elementary term, but I guess they’re looking for more pikers like me to read their paper.)

Books I’ve read:

The Great Crash 1929, by John Kenneth Galbraith

A short, fascinating and frequently mordant account of the causes and consequences of the 1929 crash. The investment trusts created by the likes of Goldman, Sachs and others were leveraged-up edifices of holding companies holding holding companies that ultimately held operating companies that invested in securities. Everyone was leveraged to hilt, but if and when the underlying securities went bust, the damage would blow outward, and sky-high.

Investment trusts, in JKG’s telling, sound a bit like mutual funds and a little bit like hedge funds, and in fact, late in the book (which he first published in 1955), he laments the emergence of mutual funds as a disguised reappearance of investment trusts.

Elsewhere, he’s hilarious in describing the hapless academics from the Harvard Economic Society making one fatuously confident assurance of the economy’s health after another. And then there’s Galbraith’s gleeful accounts of the inside dealings of Charles Mitchell and Albert H. Wiggin, respectively the heads of the Chase and National City banks, the two largest in New York.

JKG effectively argues that the Crash was not the cause of the Depression, writing that the crash only was as severe as it was because people were caught up in the speculative fever at exactly the time that the US economy was edging into recession. The depression that followed, he argued, did not have to be as severe as it was. The dogma at the time was to avoid inflation, and to balance the federal budget. Hence, no loosening of credit or increased federal spending occurred during the worst years, 1930-1932. Also, farmers were hit particularly hard because trade policies were changed in a way that denied them access to foreign markets. (This was a shift from a policy in the 1920s that allowed Europe to pay its war debts through trade and gold, somehow. I don’t understand balance-of-trade stuff so I’ll keep it vague.)

Perhaps ominously, JKG singles out inequality as the most important contributor to the crash and depression.

In 1929 the rich were indubitably rich. The futures are not entirely satisfactory, but it seems certain that the 5 percent of the population with the highest incomes in that year received approximately one third of all personal income. The proportion of personal income received in the form of interest, dividends, and rent–the income, broadly speaking, of the well-to-do–was about twice as great as in the years following the Second World War. –JKG, p. 177

Eighty-five years later, we are again approaching this level of inequality.

Also, Galbraith debunks the popular notion of ruined speculators jumping off buildings.

Finance and the Good Society, by Robert J. Shiller.

Shiller, the Nobel Prize-winning economist who correctly foresaw both the 2000 tech stock bubble and the 2008 subprime mortgage crisis, writes a curious book that aims to defend finance and capitalism in the wake of Occupy Wall Street. The first half of the book is a primer on all the different players in the financial system and why they are important, with chapters devoted to each of the following:

CEOs, investment managers, bankers, investment bankers, mortgage lenders and securitizers, traders and market makers, insurers, market designers and financial engineers, derivatives providers, lawyers and financial advisors, lobbyists (me: LOBBYISTS?!), regulators, accountants and auditors, educators, public goods financiers, policy makers in charge of stabilizing the economy, trustees and nonprofit managers, philanthropists.

Of these, I was especially intrigued by public goods financiers, as well as market designers and financial engineers.)

The second half is a series of musings on topics such as “finance, mathematics and beauty,” and “financiers versus artists and other idealists.” Oh, there’s this chapter title: “Some Unfortunate Incentive to Sleaziness Inherent in Finance.”

He also muses a bit about efficient markets theory.

Shiller is a pretty wooden writer–even his efforts to lighten up take us into strange detours, such as his relating public goods financiers to Joni Mitchell’s “Yellow Taxi.”

Some of his policy prescriptions were pretty novel, too: the idea of indexing taxation to inequality, rather than income. I have to return this book to the library, but I might like to return to it in the future.

The Ultimate Dividend Playbook: Income, Insight, and Independence for Today’s Investor, Josh Peters, CFA

A book I borrowed from my father.  It’s written by a Morningstar analyst who edits the Dividend Investor newsletter and manages two small portfolios.  These investing strategies are based on hunting for healthy companies that pay dividends, and are currently trading at a discount to fair value. I read it once, reviewed chapters, will keep at the ready.

I’m a little bothered by some of the fudging, at the end of a series of mathematical operations, where he’ll acknowledge that there was an estimate here, an arbitrary constant there, etc. But then, if there were reliable formulas, no one would lose money on the stock market. Or make money, either.

All the same, I recently took a few modest stock positions, and working through the analytical process outlined in his book helped me feel reasonably confident about my choices.

Interestingly, Shiller in The Good Society writes tolerantly of the “animal spirits” approach to investing, which originated with John Maynard Keynes.

The success of our financial markets in producing prosperity has much to do with the way in which they guide animal spirits–our inner stimulus to action, something John Maynard Keynes described as “a spontaneous urge to action” rather than careful and deliberate calculation. He believed that real business decisions are emotional, not “the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities… Thus if the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die,–though fears of loss may have a basis no more reasonable than hopes of profit had before.”

Shiller was so taken with this idea that he co-wrote a book called Animal Spirits.

Another book to add to the long list, then.

Books read this year: 4

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