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.