|The Mind of Wall Street
The author states that he has two loves in his life: the stock market and psychology. Combing the two gives his central message: The stock market is not perfectly efficient, but is pretty efficient. It has moods and emotions which naturally stems from human psychology. Rational analysis along is not sufficient.
History tends to repeat with a generational cycle where those who have experienced the Great Depression were overly pessimistic; those in the 60’s were confident, while us in the 90’s were foolishly optimistic. There is no single strategy to consistently beat the market in the long run as evident by the fact that many money manager in one market mood does not usually perform well in another.
Drawing on the Internet Bubble, accounting scandals and poor governmental policies, the author reminds us of an age-old theme: “Good times breed laxity, laxity breeds unreliable numbers, and ultimately, unreliable numbers bring about bad times.”
Chapter 1: Reason Does Not Prevail
The author stresses the role of basic psychology in the financial markets over rational behavior. He attributes part of his career and investment success to his ability to think “in a different time and mood.”
Chapter 2: Jerome’s Legacy
The author begins an autobiographical account of his childhood and early non-investment career (U.S. Army, non-combat duty in Germany post-WWII) with emphasis on his Dad’s interest in economic theories.
Although Leon’s Dad was not a professionally trained economist, Jerome Levy was an ardent student of economics and began to develop his own set of “unifying” economic theories. He was able to foresee the Great Depression, thereby greatly insolating his family’s financial wellbeing from the disaster.
Leon’s brother Jay took on their Dad’s legacy to become an economist, while Leon himself benefited greatly from his Dad’s influence and teachings during his own investment career.
Chapter 3: The Right Time
In 1948, the author got his first Wall Street job in Hirsch and Company as a junior research analyst. He noted how the general mood in the stock market was overly bearish and stocks were greatly undervalued. After feeling neglected by Hirsch, Leon joined Oppenheimer and Co., set up by another ex-Hirsch employee call Max Oppenheimer.
As the single member of the new company’s research department, Levy focused on finding companies that are priced below its “breakup value”. He also studied insider trading from public records to discover the long-term strategies employed by other investors. Two such investors were J. Paul Getty and SyScheuer
Chapter 4: A Galaxy of Financial Talent
Levy describes some of the bright people whom he hired in the early days of Oppenheimer. Among them are Rodney White, Sanford Bernstein and Eugene Fenton. Fenton was also a believer in the power of psychology in the markets and developed his own set of market theories:
“Put simply, at major turning points in markets, market prognosticators are generally wrong. Times of universal pessimism usually represent remarkable buying opportunities, and times of buoyant optimism are often a clarion call to sell.”
Chapter 5: A Fresh Look at the Familiar
Levy starts the chapter by offering this view of a typical investor:
“Most people are extremely uncomfortable when investing in unconventional ways. Although economic theorists offer an idealized image of investors as rational beings who calmly assess opportunities, the typical investor I’ve met is idiosyncratic, superstitious, and, perhaps most important, prey to fears of the unknown. In short, he or she likes company. But the unconventional is what often creates opportunity. Investing probably is not played best as a group sport.”
The author attributed the initial negative reaction toward Oppenheimer Fund’s ability to short stocks and play on the defensive to this type of skepticism of the unfamiliar. He also chronicled the role psychology played in choosing the famous Oppenheimer logo (four hands holding onto each other’s wrist).
Chapter 6: Beware Overreachers
Levy describes how overreachers may introduce beneficial innovations, such as adjustable-rate mortgage as conceived by Oppenheimer’s own Gene Fenton and later perfected by Marion Sandler. Overreachers may also be overcome by greed and get into all sorts of illegal or unethical shenanigans.
Chapter 7: Beauty and the Beast
The 70’s were not a good time for markets. A dollar invested in 1964 would be worth about the same by the end of 1981. Oppenheimer therefore looked into other opportunities such as buying bankrupt or otherwise grossly undervalued companies. One such opportunity was the Milwaukee Railroad which carried coal.
Levy first spotted potential value play when the US was about to deregulate the railroad business to facilitate coal transportation in response to the oil crisis. The management carried the railroad at a token $1 and sees it purely as a loss generator. The investment took many turns but eventually paid off.
Chapter 8: Unlocking Value
As the merger mania of 60-70s ended, the conglomerates are starting to enter a phase of disaggregation. With the help of Ira Heckler, Oppenheimer saw the opportunity to take advantage of tax laws and started to get into LBOs (leveraged buy outs), by borrowing against the assets of the company that is to be bought. Simple in concept but difficult in execution, an LBO can take as long as a decade to fully realize its value.
Oppenheimer itself was sold in 1982 to London’s Mercantile House. After which Levy was able to focus more on deal making rather than management. He chronicles the attempted acquisition of TWC.
Chapter 9: The Pretty Efficient Market
Levy used this chapter to explain his view on the rise and fall of LCTM (Long Term Capital Management), the most publicized hedge fund of the 90’s. A heavily leveraged fund that invests in bonds and derivatives which seemingly generates risk-free profits in the billions. Levy captures the essence of the operation by describing it as a balancing act of a dozen Chinese acrobats riding on a bicycle. He blames its downfall on the naïve thinking that markets are efficient and people make rational decisions. The guys behind LCTM essentially underestimated the power of human psychology.
Chapter 10: False Profits
The dotcom bubble, its burst and the accompanying financial scams were retold in Levy’s words. He criticized the mania that took blind faith in the “new economy” and contrasted the bubble to previous crashes. Levy brings to life an imaginary dotcom company and its life through the bubble to exemplify how companies may have perpetuated the self-delusions in the late 90s.
Chapter 11: Investing Under the Influence
The author points out some of the common mistakes an investor makes, such as stubborn holding onto losers and remembering past prices. He offers some psychological evidence for our tendency to believe in these fallacies.
Chapter 12: Betting on Economies Rather Than Stocks
In this chapter, Levy shifted the focus from the role of psychology to macro economics. He detailed his own investments with Eurodollar (US dollars in foreign financial systems) by predicting general interest rates. He also told the story of how George Soros “broke” the British pound by short selling it, betting that the British government cannot maintain an artificially overvalued currency.
Chapter 13: Honor Thy Father
Levy pays final tribute to his father for his insight into economics and finance. He offers a generally pessimistic view of the US stock market but notes that opportunities will come eventually to those who search carefully.