Elnora H. and William B. Quarton Professor of Business Administration and Economics, Coe College, Iowa
American Rascal, 7/11/2023
The 19th-century Wall Street was a vastly different animal compared to what we know today. Practices such as stock manipulation and insider trading were commonplace. As a matter of fact, Daniel Drew, one of the first stock speculators in the U.S., compared buying stocks without insider knowledge to "buying a cow in the moonlight. You only knew what you bought after the sun came up." He refused to trade stocks if he wasn't privy to insider information.
Given this context, Jay Gould's life story may initially seem to offer little to modern-day investors. But I found Greg Steinmetz's American Rascal to be a fascinating read. Jay Gould (1836-1892) ascended from humble beginnings to become one of the wealthiest individuals in history. He was known for dishonesty and manipulation, and he schemed to exploit others. Even so, Thomas Edison, who briefly worked for Gould, observed, "His conscience seemed to be atrophied, but that may be due to the fact that he was contending with men who never had any to be atrophied." Certainly, my fascination with Gould is not rooted in his moral standard, but that is beside the point.
Moreover, I believe that the concept of "all men are created equal" from the Declaration of Independence has gradually transformed the landscape of stock trading, making it a much fairer game. It is simply unacceptable in America for the powerful and the privileged to constantly exploit ordinary people.
What I gleaned most from Jay Gould's story is actually a confirmation of my belief in the right way to invest in stocks. In my book, Successful Stock Market Strategies, I detail six strategies that could potentially help people amass a fortune. However, I also believe that only passive indexing and growth stock investing can lead to a fulfilling investing life. All other strategies inevitably result in misery for stock traders. Despite his unique brilliance, Gould encountered several challenging periods that could have obliterated his fortune. His survival of the 1884 financial crisis, with some of his wealth intact, was largely a matter of luck. After this episode, he vowed to focus on being an industrialist. Trading stocks can be thrilling, especially when you're winning. But it's also incredibly stressful. When you win, the desire to win more grows. When you lose, it's hard to let go. Constant uncertainty and worry become a norm. The problem exacerbates when you use leverage.
Gould managed to recognize these psychological issues just in time to secure a fortune for his children and establish a legacy. Not many traders are that fortunate. I am certain that when Charlie Munger and Warren Buffett were young, they too sought quick ways to generate wealth. They must have read stories similar to Gould's and thus decided to play the long game, investing in bargain or promising growth stocks for the long run. They rightly concluded, as I did, that this was the only path to peace of mind.
Thus, the true lesson from American Rascal is clear — don't speculate in stocks. Embracing growth is the way to go. Jay Gould said this himself, “We should consider the future more. That’s the way I’ve made my money.”
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