Selected Quotations from Leon Levy

Yesterday afternoon I read Leon Levy's book, The Mind of Wall Street. Mr. Levy has made around $750 million in the stock market, so what he writes about investing is worth reading. Below are my favorite excerpts:

"... hunger for order in a capricious world causes even sophisticated investors to impute their success to... implausible systems. I've always been suspicious of theories about the nature of markets, and my experience as an investor has only served to harden this bias." p. 11

"We may not have an efficient market, but we do have a pretty efficient market. Or as the legendary value investor Benjamin Graham once put it: In the short term, the market is like a voting machine, reflecting a company's popularity, but over the long term, it more resembles a weighing machine, reflecting a company's true value. This is the aspect of the markets that allows the great investors to outdistance those who are lucky." p. 13

"Accounting is supposed to provide the reality behind the corporate spin. What does it mean if this 'reality' is nothing more than another layer of spin? As we have seen, one result has been a massive rupture of trust." p. 19

"As the great British economist and philosopher John Maynard Keynes noted, markets can remain irrational longer than you can remain solvent." p. 21

"If intelligence is the ability to integrate, creativity is the ability to integrate information from seemingly unconnected sources, and a measure of both abilities is necessary for long-term success in the markets." p. 22

"... prosperity leads to its own decline by ultimately producing speculative excesses. As good times roll along, people lose sight of risk (and often justify the change with talk of a 'new economy'). Eventually, these excesses lead to a point where people can't meet their obligations, and the bad times begin." p. 35

"All we can ever do is look at the past to predict the future, but life is dynamic and constantly changing, so the assumptions governing predictions are bound to be wrong." p. 37

"In some respects, all investing is value investing. Anyone who buys a stock has some picture of what the company might be worth at some future time. The question is whether the expected returns are sufficiently greater than risk-free investments, such as Treasury bonds, to warrant taking some risk. Everybody works this out over time, and the risk premium varies with the mood of the particular period." p. 38

"Wall Street [in the 1950's] was also a good place to dump the dimmer sons of prosperous families. Protected by fixed commissions and long-standing investment banking clients, these princelings had to be true imbeciles to fail as the market continued to recover from the Great Depression in the post-World War II boom." p. 42

"... the factors that create opportunity are emotions such as fear, which can drive prices far below fair value, and changes that create unknowns, which can flummox those players trying to outfox the market." p. 45

"In an uncertain world, governed by probabilities rather than rules, the only constant may be that the more time passes, the more probable it becomes that you will at some point encounter an improbable event." p. 52

"As investors, we deceive ourselves a thousand different ways, both small and large. We attribute gains to acumen when they are the product of luck, and attribute losses to ill fortune when they are often the product of stupidity or inattention." p. 105

"The mid-1970's were not a productive time for the markets, which stagnated between 1964 and 1982; the Dow closed at 874 in 1964 and at 875 in 1981, racking up a magnificent gain of one point in seventeen years." p. 107

"The collective madness that seized investors in the 1990s provides the most persuasive evidence of the role of psychology in markets. After all, this was a period during which even the most sophisticated investors willingly suspended their sense of disbelief and, perhaps more astonishing, dismissed facts and figures staring them in the face." p. 154

"Risks don't disappear from markets or businesses; they are merely transferred or sold." p. 157

"[During the dotcom frenzy]... when a company went public, its initial public offering might be only a small percentage of its authorized shares, with the bulk of the shares reserved for private investors, management, and employee stock-option programs. Typically, insiders were allotted shares under lockup agreements that prohibited selling for periods ranging upward of six months. This temporary stock scarcity created the illusion of demand for a "hot" company." p. 161

"For all of the assurances investors hear about the irrelevance of risk, the only real value of a stock is the estate remaining after a company is liquidated and the secured debt and other more senior obligations have been paid off." p. 163

"We are seeing a profound shift in mood as the investing public veers from a focus on rewards to a preoccupation with risk. Even if the numbers matched up perfectly with some earlier period, the way people perceive those numbers will be different, a change that will play havoc with market forecasts based on past patterns." p. 172

"Good times breed confidence, confidence breeds arrogance, and arrogance makes forecasts overly optimistic as executives begin to inhale their own perfume. Bad times then breed caution that forces better disclosure, until good times return and, along with them, accounting laxity." p. 176

"Success in finance remains an art rather than a science, if only because of the vagaries of human nature." p. 198

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