Supermoney
Summary
George Goodman, writing as Adam Smith, followed The Money Game with this account of the American market between the late 1960s bull market and the 1970 to 1973 collapse. It covers the conglomerate boom, the mutual fund performance cult, the back office crisis that destroyed dozens of brokerage firms, the Penn Central bankruptcy, and the transition to a very different market.
The most quoted section is Goodman's visit to Warren Buffett in Omaha in the early 1970s, which introduced Buffett to a national audience and included Buffett's decision to wind up his partnership because he could not find anything to buy at prices he would pay. Goodman also writes at length about Benjamin Graham's method and about why the institutional performance managers of the period were structurally unable to practise it.
His analytical contribution is the concept of supermoney, meaning capitalised earnings streams rather than income. Goodman argues that the American economy created two classes: people paid in money, meaning salary, and people who converted an income stream into capital by selling equity into a public market, which multiplies it by the market's multiple. He argues this is where large fortunes actually come from and that the tax and market structure of the period was designed around it. The book is a period document and its market detail is fifty years old. It is worth reading for the supermoney concept, the Buffett chapter and the description of what happens to institutional investors when performance measurement becomes short-term.
Key takeaways 7
- Large fortunes come from converting an earnings stream into capitalised equity value in a public market, not from accumulating income.
- Institutional performance managers cannot practise value investing because they are measured over periods shorter than the approach requires.
- The conglomerate boom worked as an accounting device in which a high-multiple acquirer buying low-multiple earnings produced reported growth without any operating improvement.
- Buffett wound up his partnership in 1969 because he could not find securities at prices that met his criteria, which is a decision almost no professional manager can make.
- The brokerage back office crisis of 1969 and 1970 destroyed firms that were profitable, because settlement capacity rather than trading skill was the binding constraint.
- A market's character changes completely between cycles, and the skills that produced results in one regime actively harm results in the next.
- Accounting conventions rather than economic reality determined reported earnings for the conglomerates, and the market priced the reported figure.
Who should read it
Investors who want a period account of a market cycle turning, the origin of the capitalised-earnings argument, and the early public portrait of Buffett.
About Adam Smith
Scottish moral philosopher at the University of Glasgow who founded modern economics with The Wealth of Nations in 1776.
The Wealth of Nations set out how division of labour, self-interest and competitive prices coordinate production without central direction, and it supplies the vocabulary economics still argues in: specialisation, capital accumulation, natural and market price. The Theory of Moral Sentiments supplies the other half, placing exchange inside a system of sympathy and judgement.
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