The Money Game - 'Adam Smith' (Random House, 1967)

A witty exploration of the psychology of Wall Street - why people play the game and how they do it.  This is not another investment guide; it is brilliant sociology.  [332.678]

How is the investment world of 50 years ago different from today?  Maybe there are fewer brokers that the client calls to see how the market is doing.  There are fewer old-line investment houses functioning as banks for wealthy clients.  Along with that, the old fixed commission system is gone that supported so many of those old houses.  There are more investment products available, even as some industries (e.g., aluminum) offer fewer companies to choose among.  Certainly, there is more information about prices and markets within easy reach.  The author would argue, however, that one thing has not changed: the underlying motivation for many participants in the market.  Taking a comment from Lord Keynes, the author argues that it is the game aspect itself of speculative investment that draws many players.  Yes, money is useful for keeping score, but it may not be the end in itself that is being pursued.   

George J. W. Goodman, writing under the pseudonym Adam Smith, draws a series of portraits of the players and in sketching them highlights their inner workings.  The cast includes Odd-Lot Robert who is the small investor who always thinks the "Big Boys" are planning something; Charley and Poor Grenville, and the Kids, all fund managers; the professional gang hanging around Oscar's who could have walked off the set for Mad Men; several investors who are patients of Harold the Psychiatrist who reveal all the ways in which money and the market fit into their lives and it usually isn't in the ways economists assume money fits into a rational individual.  They are Chartists, analysts, small investors (in odd lots), irredeemable speculators, and guys who just like to trade information.   One key that the author finds is how many players just want to be in on the game; they want to be where there is action.

For a light diversion, there is a chapter on The Cocoa Game to warn against the very different world of commodity trading.  For a darker chapter, the Gnome of Zurich appears to present speculations about the dollar and trade and gold that a dozen years later would all prove true. 

The writing is bright and clever.  The humor is subtle yet rich like the clubs that Goodman describes.  This is a book to read when one wants to be reminded that the world continues in a great cycle of rising markets, hot prospects, disillusionment, and gloom...and that it always has been that way.

This book is highly recommended.   

Military Misfortunes: The Anatomy of Failure in War - Eliot A Cohen and John Gooch (Vintage Books, 1991)

An insightful analysis of the sources of failure in wars, although the approach holds promise for more general application to management in business.  [355.480904]

Forget for the moment all the business literature that tried to appear deep and subtle by applying writings of Sun Tzu or Alexander the Great to business management.  Their focus on the enemy - that is, the competition - and exploiting his weaknesses to gain victory seemed to appeal to business fantasy  rather than the mundane challenges of keeping everything running smoothly.  Is military strategy even appropriate to apply to business?  It is clear that war and military management present great challenges because the risk of failure involves much more than simply the financial health of the enterprise itself.  At the same time, military management can, or should be able to, rely on tighter chains of command and an ability to marshal resources if they are needed.

Yet, business does present questions that need some innovative answers.  How, for example, could the Edsel be explained? or New Coke? why did money center banks allow themselves to be stuck in the collapse of the market for CDOs? why did the domestic auto industry nearly die?  Not all of these can be explained by costs structures or market forces.  At times, it is necessary to look at the decision-making style of the people leading the organization.  

The authors analyze military collapses form the last 75 years.  After first rejecting analyses based on the psychological or temperamental profile of the man in charge (a variation of the Great Man approach), analysis of the institutional culture, or even the society that failed, they present three principal sources of failure.  These are:

 - Failure to learn.  This is the refusal to look at lessons learned in analogous situations.  Their example is American antisubmarine warfare in 1942.  The horrific losses within the U.S. Merchant Marine fleet in the Battle for the Atlantic were costly in lives and materiel.  The British had developed an effective strategy for convoys and for antisubmarine warfare during their years in the war.  Their success, the authors contend, was not the result of new technology, but of developing an organizational structure that allowed the RAF to make use of all intelligence available and to disseminate it immediately to units that needed it.  It would take some months before the U.S. could do the same with its antisubmarine air patrols.

 - Failure to anticipate.  This is not failure to foresee an unknown future, but the failure to take reasonable precautions against a known hazard.  The authors analyze the failure of Israeli forces to anticipate the Yom Kippur War.  This was not a failure alone of intelligence, that is, a misreading of the facts at hand and a lack of curiosity among Israeli senior officers concerning the data available, but also a failure to comprehend the strategic views of the adversaries.  It could be summarized as overconfidence in understanding the situation confronting the IDF.

 - Failure to adapt.  As events unfold, little can be expected to continue as planned; opportunities present themselves or new information becomes available.  The authors analyze the British generals' failure to adjust their plans in the terrible Gallipoli campaign of 1915.  In the landings on Suvla Bay on April 25, British command failed to recognize a critical opportunity of light resistance on one of the three beaches in comparison to that on the other two.  There was no command to press forward in the area of no resistance.  Troops eventually drifted back to the beach.  The British forces on "Y" beach at Suvla Bay failed to exploit the situation and became part of the forces pinned down in their trenches above the beach.  A similar opportunity would not come again.  Compare this with the landing on Utah beach in 1944, when it became clear that U.S. forces had landed at the wrong place on a lightly defended area.  To quote their commanding officer, BG Theodore Roosevelt, Jr., the opportunity meant that they would "start the war from right here."

There is nothing to prevent combinations of these three failures and the authors examine two cases of such catastrophic failure: the rout of the Eighth Army in Korea in 1950 and the fall of France in 1940.

The analysis is greatly enhanced by the inclusion of an accountability matrix for each discussion.  The matrix cells are defined by columns such as control and coordination, identification of goals, supply or means and rows are defined by levels within the organization from high command to units.  Cell entries list errors or weaknesses with critical or serious failures marked.  The tool itself should be adopted by others tasked with post hoc analyses of events.    

This book will carry additional interest for anyone interested in military history, but it is recommended as an innovative approach to nonmilitary matters. 

The Gold Ring: Jim Fisk, Jay Gould, and Black Friday, 1869 - Kenneth D Ackerman (Harper & Row, 1988)

An account of the attempt to corner the gold market in the early Grant Administration.  The book's portraits of dishonor and double cross are staggering.  Taken as historic evidence, the story contains valuable warnings about markets and regulation.  [332.645]

"A fellow can't have a little innocent fun without everybody raising a halloo and going wild"  - Jim Fisk

It is difficult to conceive of how financial markets operated in an era of no regulation.  The picture drawn in this book is one of stunningly corrupt institutions dominated by wholesale fraud; in fact, perhaps either the term "markets" or "operated' is the wrong word to describe these money exchange forums.  The two of note in this book are the New York Stock Exchange and the Gold Exchange. 

The narrative revolves around seven people.  Jay Gould and his sometime business partner Jim Fisk engaged in market manipulation while using the treasury of the Erie Railroad as their personal cash source.  Cornelius Vanderbilt, with his New York Central railroad, was a constant competitor of Gould and Fisk.  William Marcy "Boss" Tweed supported Gould and Fisk with lawyers and pliable judges whose injunctions could be used to limit liability or to award custodianship of disputed assets.  Abel Corbin became a partner with Fisk and Gould because he offered a valuable connection - he was the President's brother-in-law.  President Ulysses Grant had been in office only a few months as he and his Treasury Secretary, George Boutwell, worked to move the country back to hard currency after the issuance of Greenbacks during the Civil War.

The author establishes the characters of several of these persons by describing the "Erie Wars" in which Gould and Fisk struggled with Vanderbilt over control of the Erie railroad and on securing a right-of-way to link with Midwestern railheads.  Although both sides were willing to use gangs of toughs on the rail lines and bribery in Albany to get the rights they sought, a novel scene on the stock exchange is more effective.  Once Vanderbilt decided to simply buy a controlling interest in the Erie, Gould and Fisk set up a printing press and simply kept printing stock shares to sell him.  (No regulations regarding registering shares or provisions against watering stock existed.)  When the Erie Wars became too notorious, Gould and Fisk simply holed up in New Jersey while both sides used the courts to get the outcome they wanted.

The central story, however, involves an attempt to corner the gold market.  Gould and Fisk might be able to lock up all the free gold immediately available in New York, but they could not hold out long if the Treasury decided the action on the Gold Exchange was affecting commerce.  Their answer was to recruit Corbin to introduce them to the President and to convince him that higher gold prices would help farmers as they were selling the crops. This would convince Grant to stop Boutwell from his monthly repurchases of outstanding Treasury debt with gold that would enter the market.  As Gould and Fisk began their bull run (lending out to the bears gold as they bought it), the Treasury stayed out of the way, although this may have been because Grant was on extended vacation.  Grant, however, became suspicious when the schemers tried too hard to keep him in by sending a letter from his brother-in-law to him by special messenger at his vacation spot.  He had his wife write back to her sister, Corbin's wife, warning them to stay out of any market schemes.  (How Gould used this response is even more revealing of character.)

Immediately upon his return to Washington, Grant authorized the sale of gold for bonds.  This broke the ring in the infamous September 24, 1869, "Black Friday" collapse of prices.  The issue then was to untangle accounts from the furious trading and to reach net settlement.  At this point, Gould and Fisk decided to repudiate all their trades or to use Boss Tweed's judges to help them do so.  The settlement process itself became corrupt with brokerages favoring their own accounts and not settling with outside parties.  Money was lost, some houses were ruined, and many reputations went with them.  Reforms would still wait 60 years in the future before markets could actually be counted on to act as markets.

This amusing history of unbelievable corruption and its audacity is highly recommended.