What Can Investors Learn From Where Are the Customers' Yachts?
A funny book, but a serious message
In the 1920s, a fellow named Fred Schwed spent a few years as a broker on Wall Street—just long enough to write a book, Where Are the Customers' Yachts?, where he chronicled what he saw.
“...the notion of selecting the ‘best’ securities still deserves a close scrutiny. Those classes of investments considered ‘best’ change from period to period...what are thought to be the best are in truth only the most popular—the most active, the most talked of, the most boosted, and consequently, the highest in price at that time. It's very much a matter of fashion, like Eugenie hats or waxed moustaches.”
Schwed's book is funny, but his observations are timeless. The phenomenon that he is describing here—that popular stocks end up becoming overpriced—is one of the reasons why popular growth stocks have, on average, underperformed boring value stocks.