Mister, I Don’t Sell to Fish

Charlie Munger’s reticence to speak publicly is a grave disappointment because he’s proven adept with wonderfully entertaining and enlightening anecdotes like this:

I think the reason why we got into such idiocy in investment management is best illustrated by a story that I tell about the guy who sold fishing tackle. I asked him, “My God, they’re purple and green. Do fish really take these lures?” And he said, “Mister, I don’t sell to fish.”

The metaphor of investing opportunities as fishing lures works better than its more popular “market as casino” counterpart on a number of levels, most notably with respect to the initial confusion regarding who the fish really are.  The fishing lure salesman is only concerned with whether his product works to the extent that it affects repeat business and investment banks are no different. For the salesman, he would rather his product perform well, but would be perfectly happy with a world where everyone bought tackle, went fishing and nobody caught anything. The corollary for investment banks is that a world in which everyone keeps trading even though they all lose money would be perfectly fine and massively profitable.

In the real world, selling lures that don’t attract fish and selling trade ideas that always lose money would be, at best, a short-term operation. Both cases, however, imply the same subtle manipulation of its clients. The fishing lures are purple to attract fisherman, not fish and “actionable ideas” are designed to attract investors, not necessarily investment returns.  Anyone attempting to deny the finance industry’s success at this should just check the performance of the average IPO, even (and maybe especially) the massively over-subscribed ones.

The extent to which investment banks are exposed to the performance of the products they sell is massively misunderstood. This is highlighted by a commenter responding to the Interloper post “Why Anyone Not at Their Desks by 7:30 is a Nobody” who, objecting (understandably) to the aggressive tone of the piece writes:

You people work all these hours and you and your clients still can’t beat the markets

It’s a completely fair and verifiable observation. Understanding the answer is contingent on the realization that, for the investment bank, the success or failure of trade ideas and research reports is primarily determined by how much trade and commission it generated, not how much the asset appreciated. This is how target prices keep getting published when they are so often wrong. In other words, it is a matter of how many fishing lures were sold, not how may small mouth bass were caught in the end.

For the purposes of explaining the point, I have presented a more cynical depiction than actually exists in practice. The market is involved here, and fishing lures that work best in the river are much more likely to generate the highest sales and profits. Over time, trial and error by fisher, um people, and investors will mitigate the negative effects of the vendors’ partial conflicts of interest. In the financial world, however, we still have experienced investors trampling over each other to participate in deals like the Groupon IPO where history clearly indicated that the chances of short-term success were low, falling for projected growth and profitability levels that were very much analogous to the florescent purple paint on Munger’s lures.

22 thoughts on “Mister, I Don’t Sell to Fish

  1. This would be a frighteningly astute observation, except everyone knows the marketplace will weed those sellers of bad products out, just as everyone knows that bank execs would never blow up their own firms!

    The error in your analysis is failing to recognize the perfection of markets.

    • Interloper says:

      Totally disagree. IPOs have terrible short-term track records, to the point where enormous, largely hidden financial incentives for brokers built in to sell them, at whatever price banking decides. Eventually, the market correctly values assets, but in the short term, it’s a “voting machine”/popularity contest driven by emotion.

    • kris says:

      Dear Barry
      I read you and Chris Whalen all the time. Thx for sharing your knowledge with us. This time Interloper is right.
      Moreover, there’s no such a thing as “perfection of markets”. If all market participants are imperfect, then then market is imperfect. However, I understand, everybody needs by nature to be a little bit religious. You choose to believe in the “perfection of the markets”, the global warming lunatics choose to believe in “global warming”, and I choose to believe in God. Regardless, thank you.

  2. Interloper says:

    You were being facetious, weren’t you. Sigh. In my defense, I was in the middle of a big carton of spicy noodles.

  3. kris says:

    Interloper,
    By the way. Outstanding. Thx a lot for sharing this.

  4. Mike says:

    i’d hope you got the sarcasm, he was laying it on pretty thick

  5. Mario says:

    puts new meaning on the phrase “a fisher of men” eh?!?! Lloyd did say he was “doing God’s work” didn’t he?!?! I guess we just cracked that code….sigh.

  6. […] In addition to the inherent optimism of Wall Street analysts (a big part of their job is to get investors to put their money to work), there were three primary factors leading to the markets’ tepid performance in 2011 and thus the […]

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  8. fresno dan says:

    If Barry Ritzholtz reads you, I will have to add you to my favorites.
    Also, I will start using the quote, “I think the reason why we got into such idiocy in investment management is best illustrated by a story that I tell about the guy who sold fishing tackle. I asked him, “My God, they’re purple and green. Do fish really take these lures?” And he said, “Mister, I don’t sell to fish.”

  9. taxxee says:

    From 1866 until 1868 Mr. George Hull, of Binghamton, New York studied archeology and paleontology. Over this period of time Hull contemplated how to pull off a hoax. It seems that many an evangelist at the time had been preaching that there were giants in the earth. In June of 1868 Hull traveled back to Fort Dodge, Iowa where there was a gypsum quarry he had recalled seeing two years earlier. Even then, he had noticed that the dark blue streaks running through the soft lime rock resembled human veins. Realizing this its appearance was tailor-made for his hoax and it was easy to carve, Hull hired a group of quarry workers to cut off a slab measuring twelve feet long, four feet wide and two feet thick.
    In November, Hull had his gypsum wrapped in canvas and hoisted onto a wagon. Since the nearest railroad was forty miles away, it proved to be a long, difficult job. He then had the slab of gypsum shipped by rail to Chicago where he had hired a stone cutter named Edward Burghardt to carve a giant. Burghardt and his two assistants, were sworn to secrecy and agreed to work on the piece in a secluded barn during their off hours and Sundays. The instructions were to carve the giant as if it had died in great pain, and the final result was an eerie figure, slightly twisted in apparent agony, with his right hand clutching his stomach. All of the details were there; toenails, fingernails, nostrils, sex organs and so forth. Even a needlepoint mallet was used to add authentic-looking skin pores. When the carving was done, sulfuric acid and ink were used, possibly smudged like printer ink, to make the figure look aged.
    The giant finished, Hull then had the figure shipped by rail to the farm of William Newell, his cousin, located near the town of Cardiff, New York. In the dead of night, Hull, Newell and his oldest son buried the giant between the barn and house. They were instructed to say nothing about it and that Hull would let them know in about a year of what the next stage was.
    Luckily, about six months later, on another farm near the Newell’s, some million year-old fossil bones were dug up. Newspapers around the country reported the finding. Hull was filled with glee in reading the accounts.
    True to his word, one year after burying the giant, Hull sent word to his cousin on October 15, 1869, to start the next stage of the hoax. Newell hired two laborers to dig a new well near his home. Newell directed them to the exact spot he wanted the well dug and went back into the house to wait — anxiously. Sure enough, well into the day, the two laborers rushed up to the house to announce their discovery: a giant turned to stone! The laborers and both Newells carefully excavated the area surrounding the giant.
    News of this amazing discovery spread throughout the valley and soon wagon loads of neighbors streamed into Newell’s farm to see the giant. By mid-afternoon, Newell erected a tent around the “grave” and started charging 25 cent admission. Two days later, the Syracuse Journal (New York) printed an article about the discovery. Being greedy, Newell raised the price to 50 cents, and a stage coach company made four round trips a day from Syracuse to the Newell farm. Thousands came every day. Among the visitors were clergymen, college professors and distinguished scientists. Before long, the expert’s opinions split into two theories; one side claimed it was a true fossilized human giant and the other side pronounced it an authentic ancient statue. No one asserted that it was a fake!
    About ten days after the discovery, and about the time the Cardiff Giant, as the papers had named it, started receiving national attention, Hull sold two-thirds interest in the giant for $30,000 to a five-man syndicate in Syracuse, the head of which was a banker named David Hannum. The syndicate moved the giant to an exhibition hall in Syracuse and raised the admission price to a dollar a head. Unknown to them, P. T. Barnum sent an agent to see the giant and make an assessment. The particular Sunday the representative saw the giant, the crowds were abnormally large — about 3,000 people. The agent wired the news back to Barnum and Barnum instructed him to make an offer of $50,000 to buy it. Hannum turned his offer down.
    The Cardiff Giant was the most talked about exhibit in the nation. Barnum wanted the giant to display himself while the attraction was still a hot topic of the day. Rather than upping his offer, Barnum hired a crew of workers to carve a giant of his own. Within a short time, Barnum unveiled HIS giant and proclaimed that Hannum had sold Barnum the original giant and that Hannum was now displaying a fake! Thousands of people flocked to see Barnum’s giant. Many newspapers carried the version that Barnum had given them; that is, Hannum’s giant was a fake and Barnum’s was authentic. It is at this point that Hannum — NOT BARNUM — was quoted as saying “There’s a sucker born every minute.” Hannum, still under the impression that HIS giant was authentic, was referring to the thousands of “fools” that paid money to see Barnum’s fake and not his authentic one.
    Hannum brought a lawsuit against Barnum for calling his giant a fake. When it came to trial, Hull stepped forward and confessed that the Cardiff Giant was a hoax and the entire story. The judge ruled that Barnum could not be sued for calling Hannum’s giant a fake since it was a fake after all. Thereafter, Hannum’s name was lost to history while Barnum was left with the misplaced stigma of being the one to say “There’s a sucker born every minute.”

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