Lessons from The Money Game by Adam Smith

Timeless Lessons of Human Psychology Applied to Markets

This book is written under the pseudonym Adam Smith. The real author is widely believed to be George J. W. Goodman. A successful stock market trader. His book has been described as a "must read" because of its unique style and insight. It's definitely worth reading if you want to understand the inner workings of the financial world.

The Money Game is an essential book for people to get an understanding of the intricacies of money and how human nature plays into the markets. George Goodman uses a delightful sense of humor to rely these lessons in a way that's easy to read... And that will stick with you for years to come.

When published in 1968, Paul A. Samuelson declared the book a modern-day classic.

But in this book he extolls many lessons he's learned from his long career as an institutional investor. None more important than the first...

You Better Love "The Game"

He explains that there are two types of people: those who care about the market, and those who don’t. And he says that the price paid by each type of person differs.

"The investment game is intolerably boring save to those with a gambling instinct, while those with the instinct must pay to it 'the appropriate toll.' This really does say it all. We have more than 26 million direct investors in this country, i.e., people who have actually bought stocks. Not all of the 26 million are fiercely active, but the number grows all the time, making the stock market a great national pastime...Sometimes 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 'pay to this propensity the appropriate toll' and proceed with reality."

Gamblers must be a toll. That involves things like the time spent looking at charts, fees for making trades, and likely missing out on large moves. And to be successful, you better like following the markets... Because you're going up against people that do. 

"If you are a successful Game player, it can be a fascinating, consuming, totally absorbing experience, in fact it has to be. If it is not totally absorbing, you are not likely to be among the most successful, because you are competing with those who do find it so absorbing."

And you will need to spend the time to do this... An individual investor can't half-heartedly scroll through charts for a few minutes a night and expect their stock market investing to be successful.

The Cyclical Nature of Bull and Bear Markets

 Goodman says the two strongest emotions in the stock market are greed and fear. I'd go on to say these emotions rule crowd mentality in all walks of life. But we can see this played out, in real-time, in the stock markets. 

"In rising markets, you can almost feel the greed tide begin. Usually it takes from six months to a year after the last market bottom even to get started. The greed itch begins when you see stocks move that you don't own. Then friends of yours have a stock that has doubled; or, if you have one that has doubled, they have one that has tripled. This is what produces bull market tops. Obviously no one rationally would want to buy at the top, and yet enough people do to produce a top."

And that's when the market tops... Then the fear kicks in...

"When stocks start down, the tendency is to wait until they come back a little before lightening up. They head down further, and the idea that you have made a mistake, that you have been betrayed by your own judgment, can be so paralyzing that you wait a little longer. Finally faith evaporates entirely.

If stocks were down 10 percent yesterday, they may be down 20 percent today. One day, when all the news is bad, you have to get rid of the filthy things which have treated you so cruelly. Again, it all ends in a kind of paroxysm that is not fun unless you have anticipated it."

 The bear market will end when things look the worst... And no one logically wants to buy. But that's exactly when the successful portfolio managers will dip their toes into the water. And that's why professionals tend to outperform individuals.

Concluding Thoughts

Goodman also says that the same thing will not always work in the markets. So don't get attached to any one method or metric. And don't get your identity tangled up in your trades. That will make it harder to objectively get out of a trade. 

Here at barbellalpha.com we take calculated risks. But we should have a defined exit plan before placing any investment. And if that stop out event hits, we hit the sell button. 

The Money Game is a great book about mass psychology in the markets. And it holds true just as much today as it did 60 years ago. Human nature doesn't change after all. 

To buy this book, and support this blog, click here.