Why selling books is tougher than buying stocks

He’s an addict. He needs it just like how he once needed cocaine and beer to function. “Writing is just this great big conduit, this outflow pipe that keeps the pressure nice and even”, he once said to the New York Times.

Yet back then, Stephen King had a problem. In the 1970s, authors were told they should not publish more than one book a year because it diluted brand value. But Stephen King needed to write. His health depended on it and he had broken this rule by writing two books a year.

His solution was to create a new author called Richard Bachmann and it did the trick. He had the therapeutic release he needed. In the years that followed, however, every book he wrote under his name Stephen King sold millions, while Richard Bachmann sold poorly and was largely unheard off.

The book market can be brutal, crushing the dreams of aspiring authors. But what lessons can it offer investors? I’m going to have a brief look.

The book market is inefficient

It’s informationally inefficient when it comes to noticing talent. Some of history’s best authors became famous only after they were dead, like Herman Melville who wrote Moby Dick or Edgar Allan Poe who wrote The Raven. Other authors, who are arguably brilliant, never get noticed at all.

Great companies can also get missed by the market. In the short term it’s informationally inefficient. There is, however, a difference. Unlike the book market where an author’s name can disappear forever, a good business eventually gets noticed if it consistently delivers results.

Fidelity portfolio manager Peter Lynch loved searching for these companies. He once said, “I get even more excited when a company with a boring name also does something boring”.

For instance, he once invested in Masco, a dull home improvement manufacturer, which rose more than 1,300 times in value from 1958 to 1987. So, unlike the book market, good companies do eventually get noticed.

The book market can undervalue

The book market completely ignored Richard Bachmann, yet his books were brilliant because they were written by Steven King.

Richard Bachmann was undervalued.

The book market can also overvalue. Tonnes of rubbish books are written every year and sold in vast quantities because sometimes a good author just decides to fart-out a book to make money.  

The stock market has the same problem in the short run but many investors don’t understand this. When their stock goes down, they feel poorer and may sell, even if the business is great. And, when they see their stock go up, they feel richer and hold on, even if the stock is overvalued.

It’s one of Warren Buffet’s gripes. Investors mistakenly assume the price of a stock is the value of a stock. But, often there is a huge difference between the two, which can persist for a long time. Eventually, value is priced in, which means these price fluctuations make investors neither richer or poorer.

However, at least value is eventually recognised in the stock market, which is not always the case in the book market.

 Momentum helps authors just like stocks

Steven King’s books sold well compared to Richard Bachmann’s because his brand name had momentum. Everyone has heard of Steven King, while very few people knew Richard Bachmann. With every book released, Steven King became more popular and sold more books.

There was also an element of luck though. For whatever reason, Steven King rose to fame, but Richard Bachmann stayed where he was.

This also happens in the stock market. The difference is that it can also get out of hand, especially when stock market bubbles form. Nevertheless, these situations do eventually correct themselves. Furthermore, the luck of being noticed is not so important in the stock market over the long run. Good businesses eventually get priced in.

 In 1986 a book clerk in Washington DC called Steven Brown, confronted Stephen King with evidence that he was Richard Bachmann. The books were subsequently re-release under Stephen King’s name and sales instantly shot up the bestsellers’ lists.

That clerk had done his research and there was an immense pay-off for Steven King. Apply this idea to investing, then you can see why it’s worth actively investing. The long-term odds are actually in your favour, unlike in the book market.