Notes to the excellent book, "The Money Game" by Adam Smith.

I recently read 1976 edition of "The Money Game," by Adam Smith. For me, this
was a fantastic book and a very enjoyable read. Adam Smith was the pen name
for Harvard and Oxford trained, George J. W. Goodman. You can read about
George Goodman at this link http://en.wikipedia.org:80/wiki/George_Goodman . I
forget which of Warren Buffett's letters suggested reading this book. Buffett's old
letters can be accessed here
http://rbcpa.com/WEB_letters/WEB_Letters_pre_berkshire.html Very often I write
these notes as a future reminder to me for what I found interesting, or perhaps
items I would like to save for future reference. These notes could be error filled,
and I apologize for any inadvertent errors. Although George Goodman allegedly
wrote this book, I refer to him as "Smith" in my notes. Throughout this paper you
will see a slew of quotes from the book. Please keep in mind that all of the
plagiarisms from the book, are indicated as such with "quote marks."

1. "The market motion is more violent, not really conducive to serenity, and yet,
as one wise investment counselor says, the end object of investment ought to be
serenity."

2. "The first thing you have to know is yourself. A man who knows himself can
step outside himself and watch his own reactions like an observer."

3.
This quote appears in Chapter 2, "Mister Johnson's reading list." I am not
certain if Smith was a believer of this concept or not. Perhaps it is total sarcasm,
but I did enjoy the quote. "The market is a crowd, and if you've read Gustave Le
Bon's "The Crowd" you know a crowd is a composite personality. In fact, a crowd
of men acts like a single woman. The mind of a crowd is like a woman's mind.
Then if you observed her for a long time, you begin to see little tricks little
nervous movements of the hands when she is being false."

4. "What is it the good managers have? It's a kind of locked-in concentration,

an intuition, a feel, nothing that can't be schooled. The first thing you have to
know is yourself."

5. Throughout the book he sarcastically refers to the term "Australopithecus."

According to Wikipedia, Australopithecus, "are a group of extinct hominids that

are closely related to humans." "The brains of most species of Australopithecus

were roughly 35% of the size of that of a modern human brain."
http://en.wikipedia.org/wiki/Australopithecus I think he is relating to human
behavior patterns that were inherited from our former human ancestors. I
believe that Smith finds it important to observe and try to understand various
behavior patterns. Once again referring to knowing yourself. Here is a section I
previously wrote on this and how knowing ones self relates to my life.
http://www.rbcpa.com/2006_09_14.html "I have studied Marty Whitman, Martin
Zweig, James Rogers and countless others over the years. They have a common
theme of always being concerned. Marty calls it, always run scared. As I get
older, I need to never lose sight of that. Anyone who knows me, understands that
I am always concerned or contingency planning. I am like that in sports,
entertainment and business. That is my make-up. I mention that because, as I
was preparing for this conference, I realized, I do not want my constant concern
to ever be numbed because of things usually working out. Things have worked
out because of my concern. Hence, I find it important to stay focused,
unbiased, alert and open minded. I will always verify and exercise doubt. That is I.
I know thyself. Of course, my family, friends and such often will get insulted,
when they hear my often repeated phrase, Are you sure?

6. "Generally - but not always - a real sleuth of an analyst who doesn't have to
spend time answering his own phone, talking to customers, selling stock to
pension funds, and attending meetings, can crack an income statement and
balance sheet in a couple of days. This means real donkey work, digging out
notes, making comparisons, finding the tunnels, and in general unpainting the
carefully painted picture. But most analysts do have to answer their own phones,
sell stocks, attend meetings and still cover all the developments in their areas.
So there are not many analysts who can do their job." I enjoyed that quote, as I
spend most of my days researching and digging. I realize that if I was out selling
and generating business, our firm would have higher current revenues. Yet, if I
were to canvas for new clients with any frequency, my investment analysis skills
would certainly suffer.

7. In Chapter 13, "But What Do the Numbers Mean,?" Smith discusses his
"lingering skepticism of reported numbers." He discusses, "A leading Wall Street
publication says the letters CPA do not stand for Certified Public Accountant but
Certified Public Assassin." He then discusses an issue which I find quite
interesting. He discusses a "conglomerate."

I find it most interesting because as I read the following paragraphs, I wonder if

Buffett knew he was in the process of developing a conglomerate when he wrote
his book recommendation of "The Money Game." Notice how the paragraph
mentions an Ice-Cream freezer company, and merge it with a valve company. "If
the profit numbers on income statements are treated with such reverence, it was

obviously only a question of time before some smart fellows would start building
companies not around the logical progression of a business but around what
would beef up the numbers."

"Such a corporation is called a "conglomerate" or a "free-form" company, very

popular when the market gets to tulip-time. A conglomerate is a company that
grows by acquiring other companies, and other companies can be in wildly
different businesses. Conglomerate managers are supposed to be a new breed of
brilliant wheeler-dealers, and the idea of the whole game is to take an ice-cream
freezer company and merge it into a valve company and merge with a flour mill.
The valves and the flour and the ice cream never get together except on a
balance sheet and an income statement, but Wall Street does look for growing
earnings, and with the right accountant this whole process can make the earnings
grow like crazy. Capitalism enters a new stage."

Any reader of our site knows how much I admire and study Warren Buffett.
http://rbcpa.com/WEB.html I take the advice of Charles Munger
http://rbcpa.com/Munger.html (Warren's life long business partner and the
reincarnated Ben Franklin) and use his advice of "invert, always invert." How do I
invert with Warren? That is so difficult. I trust him a great deal, I do my best to
live by his words, and I think he is such a fantastic role model for me. Yet, I am
always reminded of the quotes I have heard Bruce Springsteen say. One being,
"trust the art, not the artist." and the other, "never have blind faith." As an
analyzer of financial statements, I realize that Berkshire Hathaway is not
transparent in her operations. We know the alleged Stockholder's Equity, the
cash balances, etc. We do not know the inner workings of the wholly owned
companies. We don't know the inventory turns of the retailers. We don't know
the quality of earnings and cash flows of the manufacturers. We have to trust
them, and hope that the unblemished record of Warren's 70+ years, remains
intact. I am often reminded of the Wizard behind the curtain in "The Wizard of
Oz." Here is one interesting question I had this year in regards to Berkshire.
During 2007, I believe that potential Buffett replacement, Tony Nicely said
referring to Wholly owned Berkshire subsidiary, Clayton Homes, "The company
built 125,000 homes throughout the country in 2006, Nicely said, with Tennessee
ranking among the top 10 for sales." It is my understanding that the entire
industry shipped 117,510 homes in 2006. I wonder and have never found out,
how did Clayton produce more homes than the entire industry built. There are
many possible responses to that question. One could be, that Nicely is from
Geico and was either misquoted, or he himself erred in the quote. Another
possibility is that Clayton is experiencing excess inventory. Anyway, that is just
some of the thoughts that I have as I review Berkshire.

As of this writing Berkshire remains one of our largest holdings. I was

immediately reminded of Berkshire when I read the paragraphs in the book. This

entire summary is becoming longer than I originally expected, please feel free to
take a Kool-Aid break.

8. I loved the following section as Smith discusses a salesperson for the

"Tadpole Fund." He writes, "Now I know full well that this salesman was dressed
in a nice Brooks Brothers suit, with a vest, but such is the power of memory and
experience that when I think of him now I see him as Professor Harold Hill, the
Music Man ( http://www.imdb.com/title/tt0056262/ ) , dressed in a striped blazer
and a straw hat and white spats. If you are sitting behind the desk, you do not
have to ask the salesman, "Well, what are you hawking today?" You say, "What is
the concept?" and you make a little teepee with your fingers to show you are not
easily impressed. If you really want to make the salesperson uneasy you keep
making your big toe go in a square while he talks. But Harold Hill was
undaunted."

Smith goes onto describe that he totally fell for the sales pitch, was taken in, and
eventually that error ended up haunting him. Hence, I remind myself to avoid
blind faith, and to constantly invert.

9. Very Important section for me!!!! "It is a sobering experience to read

through - as I once did - all the Wall Street Journals and Barron's from 1929 to
1933." Why is that so important for me? Because I spend a bit of time in the
Library doing the same thing. I search to see if I could find similarities in today's
environment of deemed prosperity and clues of how that could end. Please try to
read and remember the next sections of this paragraph. "Quarterly reports came
out saying, "the outlook is favorable, a sustained recovery is on its way," and so
on. But nobody is listening. Those on margin had been sold out in 1929 and
1930. But from 1930 to 1933, a real blight of the spirit took place. The Prudent
Men, not on margin, believing in the Long-Term Growth of the American Economy,
saw their unmargined holdings in the bluest of American blue chips drop by 80 to
90 percent." "It was the psychology of panic." "It was mob psychology, and it
was not, primarily, that the price level of the market was unsoundly high....the
fall in the market was very largely due to the psychology by which it went down
because it went down."

10. I like the way he described the lack of logic in short term investing. "Logic,
to an outsider, would say that you have a company selling at 10 and you go and
do a lot of research on it and figure out the sales and the profits and you figure if
they can earn one dollar it will sell for 20. So you buy it and wait, and the story
gets that they earn the one dollar and it goes to 20."

"But the market does not follow logic, it follows some mysterious tides of mass
psychology. Thus earnings projections get marked up and down as the prices go
up and down, just because Wall Streeters hate the insecurity of anarchy. If the
stock is going down, the earnings must be falling apart. If it is going up, the
earnings must be better than we thought. Somebody must know something that
we don't know."

I am reminded of this section http://www.rbcpa.com/2006_09_14.html , where I

wrote, "Arnold Van Den Berg said in the most recent issue of Outstanding
Investors Digest (8/30/06) the following about buying value stocks. "You never
feel good about buying a great bargain. When you buy a great bargain, you're
doing it with sweaty palms, youre leaning against the crowd, engaging in
contrary thinking, and you're pretty much alone."

Crowds are a frequent discussion of mine. Here are a few examples:

A. "Fight the crowd." I think what Klarman is saying is that it is warm and fuzzy
in the middle of crowds. You do not need to be warm and fuzzy with investing."
That was in reference to Seth Klarman discussing crowds in "Margin of Safety."
http://rbcpa.com/2006_05_03.html

B. John Templeton mentioned, "My job was being paid by wealthy families to help
them choose stocks and bonds. And my results were much better when I was
working from here than from Manhattan, Radio City and Rockefeller Center. I had
good results in New York. But when I came here, I had better results. The secret, I
think, is that in order to buy stocks at a bargain price, you have to do the
opposite of the crowd. When you're going to the same meetings with the other
people in Manhattan, it's hard to be different."

C. Marty Zweig notes,

( http://www.rbcpa.com/Notes_to_Winning_On_WallStreet.html ) Zweig discusses
when to part company with the crowd. He states, "The crowd tends to follow the
wrong signs near the market tops and bottoms." He discusses that at the
greatest depths of a bear market, the economy is generally in recession and
business profits are tumbling. Investors are punch drunk from suffering huge
losses for a year or two of falling prices. Bad news dominates the headlines. Most
people only see the downtrend continuing. This is the gloom and doom that bear
markets bottom and bull markets begin. Watch for loosening credit and interest
rate decreases. I guess one could argue that as of this date (1/11/05), that we are
seeing the opposite.

D. Buffett discussed avoiding the crowd at this link

http://www.rbcpa.com/WEB20050606.html "There is no doubt that there are far
more "investment professionals" and way more IQ in the field, as it didn't use to
look that promising. Investment data are available more conveniently and faster
today. But the behavior of investors will not be more intelligent than in the past,
despite all this. How people react will not change their psychological makeup
stays constant. You need to divorce your mind from the crowd. The herd
mentality causes all these IQ's to become paralyzed. I don't think investors are
now acting more intelligently, despite the intelligence. Smart doesn't always
equal rational. To be a successful investor you must divorce yourself from the
fears and greed of the people around you, although it is almost impossible."

E. Phil Fisher discussed crowds at this link

http://www.rbcpa.com/What_we_can_learn.html "Nor will I buy market-favored
stocks. I particularly notice it when I attend meetings for technology stocks and
see all the people crowding into the room and so on. If there's standing room
only, that's usually a pretty fair sign it's not a good time to buy the stock."

11. I found it interesting to see Smith discuss Gold in Chapter 19, "My Friend
the Gnome of Zurich Says a Major Money Crisis is on its Way." He writes, "The
gold-bugs have been around forever. The market still has gas. Who understands
gold, anyway? And how can you worry about something you can't understand.?"
I eliminated our 13 year precious metals position during 2005. It bothered me,
that I couldn't figure out the reason it was a "safe haven" or "money substitute".
I think Buffett said he grew up with gold, his dad loved gold, but he never
understood it.

In chapter 20, Smith referred to silver. Keep in mind this book was written in
1966 (41 years ago). Yet, the comment sounds so similar to what I have heard
about silver for the last 2 decades. He wrote this in what I interpret as a very
sarcastic fashion. "And in India they don't have bank accounts; they wear three
ounces of silver on each wrist. When the price goes up, off comes the silver.
That's eight hundred million wrists, and I haven't started talking about Mexico."

In one section of the book, he hinted at Gold companies with sarcasm. He

explained how their greatness was evident by the fact several of the companies
were presenters at the New York Society of Security Analysts. I am a member of
NYSSA, and they are a fantastic organization. They have industry conferences
throughout the year, and various companies will present at these conferences. I
don't think that presenting at these conferences lends any credence to the
greatness of a company or an industry, yet some might incorrectly interpret a
presentation at such an event, to be equivalent to a "buy signal" of a company.
Throughout the book Smith discussed how these types of conferences could also

be indicative of "follow the crowd" principles. I attend these conferences fairly

frequently. I do not attend for ideas, but really to get a pulse of the industry. I
have not attended NYSSA's annual Mining Conference.

12. "Markets are only a tiny facet of society, but being made by mass
psychology, they are a good litmus paper for what is going on. Markets only work
when they believe, and this confidence is based on the idea that men can mange
their affairs rationally." Smith discussed that markets in order to survive, must be
based on the belief that leadership knows what they are doing and that they are
rational. "If that belief fades, then so do the markets. They do not merely dive,
they dive and then they disappear. It happened here in the blight of the spirit
from 1930 - 1933, and it happened in other countries." My concern of the
markets, has been the terrible misuse of corporate fiduciary responsibility. This
responsibility extends to shareholders, the environment and the employees of
such corporations. The same fiduciary responsibility is required by our
Government. Anyway, I found Smith's comment to be extremely relevant in our
current environment.

13. He discussed his admiration of John Maynard Keynes

http://en.wikipedia.org/wiki/John_Maynard_Keynes . " He is the master because
he started with nothing, set out to become rich, did so, part time, from his bed,
as a player in the Game, and having become rich, had some thoughts that must
be integral to any study of the Game." He mentioned two of Keynes' works. One
being "General Theory of Employment Interest and Money" the other being
"Essays in Persuasion." As I wrote this, I journeyed to my bookshelf, and saw I
have neither of these books. I hope to remember to read them. I really enjoyed
the mention of his disdain of inside information. Smith discussed an admirer of
Keynes, named Robert Heilbroner http://en.wikipedia.org/wiki/Robert_Heilbroner .

Smith quoted Heilbroner as follows: "He was a pillar of stability in delicate

matters of international diplomacy, but his official correctness did not prevent
him from acquiring knowledge of other European politicians that included their
mistresses, neuroses and financial prejudices. he collected modern art long
before it was fashionable to do so, but at the same time he was a classicist with
the finest private collection of Newton's writings in the world. He ran a theater,
and he came to be a director of the Bank of England. He knew Roosevelt and
Churchill and also Bernard Shaw and Pablo Picasso. He played bridge like a
speculator, preferring a spectacular play to a sound contract, and solitaire like a
statistician, noting how long it took for the game to come out twice running. And
he once claimed that he had but one regret in life - he wished he had drunk more
champagne." I enjoyed the champagne comment a great deal. I often joke with
my kids, telling them one day I might say my biggest regret in life, was spending
too much time with my children. I say that in total jest, and I am so thankful that
I have spent so much time with them as they are now 14, 12 and 8. I know how

fast time goes, and I feel so blessed that I have the good fortune of hanging with
them a great deal, and enjoying these times with great vigor and love. I am also
reminded of my 2006 resolutions on our website, where I mentioned one goal of
mine was to increase my beer intake. I failed that goal in 2006, and was also
politely requested to remove that section from our website. :-)

Thank you for reading my notes of this wonderful book. Please feel free to email
me any comments at rredfield@rbcpa.com

Respectfully submitted,

Ronald R. Redfield CPA,PFS