The Second Gresham’s Law

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Every ValueWalk reader knows Gresham’s Law:

Bad money drives out good.

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Named for Sir Thomas Gresham (1519 – 1579), English financier, who observed, when debased coinage becomes legal tender, pure coinage is hoarded or melted down, driving “good money” out of circulation.

Sir Thomas’ namesake, author William Lindsay Gresham (1909 – 1962), whose “Nightmare Alley,” the grim 1946 novel and 1947 film noir of carnival deception,

was recently remade by Guillermo del Toro,

promulgated his own Gresham’s Law in the 1953 classic expose of carnival life, “Monster Midway.”

Never reissued and, like Seth Klarman’s “Margin of Safety," a precious and rare fount of financial wisdom selling for four figures on the used market, “Monster Midway” is a journalist’s tour of the carnival world, including sideshow tricksters and the pious frauds of clairvoyance and fortune telling.

Amidst the risks and benefits of the internet, bootleg versions of both books have appeared online: the seminal Chapter 7 of Gresham’s work, “The Romany Trade,” can be found here.

Gresham---an alcoholic diagnosed with tongue cancer who met his tragic end in a hotel-room suicide---was fascinated and intrigued by human gullibility and its exploitation by practitioners of these most intimate of crimes.

Contrary to the popular maxim, “a fool and his money are soon parted,” William Lindsay Gresham’s Law is:

“Anyone—Even You…”

can be separated from precious earnings through such dark and deceptive arts.

Charlie Munger’s teaching---“Take a simple idea and take it seriously!”---applies not only to honest ventures but scams, cons and frauds as well.

At the pinnacle of these, known among the Romany as “hokkani boro,” is

“The Great Trick”

said to be “old when the pyramids were new.”

Also known as “hakk ‘ni panki,” from which the slang “hanky-panky” arose, “The Great Trick” is predicated upon two great principles of learning:

“Seeing is believing!”

and “The Fundamental Algorithm:”

Repeat what works!

For these two wondrous tools can be turned to nefarious ends.

Gresham details “The Great Trick” as follows:

After gaining the confidence of a victim through fortune-telling or fabricated insight, the “mark” or “mug” is initiated into “the magic of making money double itself when the proper spell is chanted over it.”

The trickster carefully wraps cash or valuables and places them under the victim’s pillow where, after a secret incantation, they must be “dreamed upon.”

When the trickster revisits the next day, through sleight of hand, a substituted wrapping is unfolded and—“lo and behold”---the treasure is doubled, the victim delighted and the cardinal rule of successful theater engaged: the willing suspension of disbelief.

For never does the victim question why, if the trickster can perform magic, they are nonetheless poor.

Or why the trickster would freely share mindbending superpowers with a new and casual acquaintance.

Any questions or doubts are swamped by the lure and excitement of easy money.

With the next performance, employing all or most of the victim’s worldly wealth, the trickster cautions it must be “slept upon” for no less than three weeks---due, obviously, to the greater sum involved---time enough for the trickster to abscond to parts unknown.

When, with great anticipation, the wrapping is unfolded, the victim discovers mere paper, cut in the shape of currency and bound together, popularly and sadly known as “the gypsy switch,” though such frauds know no ethnic boundaries.

For as we know “The Great Trick” has a stock market analog: the venerable “pump & dump” scheme and financial “bubbles” of every age.

No matter how improbable, rapid play paying big-time is always more enticing than sober investment paying on-time.

And if you don’t understand compounding---“the big money is,” as Charlie Munger teaches, “in the waiting”---then you can easily become a mark or a mug, ripe for the taking.

Which raises the question, have the greatest investors of all time, Warren E. Buffett and Charles T. Munger, of Berkshire Hathaway fame, possessed of perhaps the most acute and seasoned fraud detectors of all time, ever been defrauded?

Listen to the famed duo on that very topic:

The pearls and takeaways:

  • Even the best fraud detector will produce false positives: you can misperceive a “Great Trick” where a “Great Opportunity” resides;
  • Even the best fraud detector might miss the most insidious fraudster: a wolf in sheep’s clothing who, like a dear little lamb, steals your heart away;
  • Even Warren and Charlie lay no claim to exemption from The Second Gresham’s Law.

Indeed, at his legendary Harvard talk, “The Psychology of Human Misjudgment,” linked here:

transcribed and updated here.

Charlie gratefully championed the enlightening work of psychologist Robert Cialdini and his seminal book, “Influence: The Psychology of Persuasion,” generously gifting copies to attendees and, incredibly, an A share of Berkshire Hathaway stock to the author himself.

Aus der Kriegschule des Lebens (Out of Life’s School of War)

War is a powerful teacher, for how could stakes be higher than in wartime?

Perhaps the most fateful false positive fraud detection in history occurred in neutral Turkey, in 1943, where both Britain and Germany maintained consular offices.

The valet to the British ambassador in Ankara was, in reality, a German spy, code name Cicero.

In return for plentiful British pound notes Cicero photographed secret documents and passed copies to Franz von Papen, once Chancellor of Germany and now German Ambassador to Turkey.

Among these photos were, amazingly, the actual plans for Operation Overlord, the D-Day invasion.

Incredibly, the German Foreign Office, exquisitely sensitized to Allied deceptions, deemed these secret plans a clever forgery and a mere ruse.

It was arguably the greatest missed chance of World War II, indeed, of any war.

Perhaps the purloined plans would have been granted more credence had they been purchased with genuine coin of the realm.

For as Cicero discovered upon arrest, his precious pound notes were, in fact, near-perfect replicas, manufactured by professional counterfeiters, slave laborers in the notorious Mauthausen concentration camp in Upper Austria.

Cicero’s story is the subject of a book and a Hollywood movie, “The Five Fingers,” starring James Mason and Danielle Darrieux, dramatized but largely true, save for a bittersweet romance between these two great stars.

You can view it, complete, on YouTube, at

and ponder the all but limitless human potential for deceit and deception, financial and otherwise.