'Priceless Pooch'

Schatz: What was that?

Klein: Well, of course, it was the fact that it inspired me to write a book. I noticed, in my days in Silicon Valley, that the financial industry as a whole -- and by this, I mean the venture-capital industry, Wall Street, investment banks -- is structured in such a way as to be exactly like a gigantic con.

Schatz: How so?

Klein: Do you know the con of the priceless pooch? A guy walks into a bar. He's a poorly dressed guy. He looks very sad. He has a little dog on a leash. He says to the bartender, "Bartender, do me a favor, will you? I'm very troubled. I have to go across the street to have a job interview. Will you watch my dog for me for a few minutes? The bartender says, "OK."

A few minutes later, another man walks into the bar. He's dressed with a Hermes tie, a big Rolex watch; he reeks of money. And he says, "My God, barkeep, that dog, it's fabulous. That looks like Miffy, my childhood dog. I simply must buy it from you for $1,000. The bartender says, "I'm sorry, sir, I can't sell you this dog."

"$2,000, then."

"No, I'm sorry, I can't sell someone else's dog to you." The guy says, "All right, here's my business card." He hands him the business card. He says, "If you change your mind, I'll buy that dog from you for $3,000." And he walks out of the bar.

`Like Wall Street'

Schatz: What happens next?

Klein: Well, the poor guy walks back in after his job interview. Now he's very glum. He says, "I didn't get the job. What am I going to do? I can't pay my rent. Bartender, do me favor, will you? I certainly can't afford to keep this dog. Will you buy the dog from me? Give a guy a break; give me $300 for the dog. And the bartender, being a typical human being -- slightly greedy, slightly altruistic -- says, "Sure, Mac, I'll give you $300 for the dog." He hands him $300. The guy walks away. Quickly, the bartender takes the business card out, and he calls the rich guy. The phone's been disconnected.

Schatz: How is this con like Wall Street?

Klein: It's exactly like Wall Street. Everything you do in the investment world is structured to convince people to pay too much money for something that they think they can resell to the next sucker.

Wall Street isn’t anything like that. Or, maybe it is to people who would consider puppy trading. If Wall Street were like that, it sure wouldn’t last long. Last time I checked, the Street’s been around for 200 years.

The key point to understand is that every trade doesn’t boil down to a winner and a loser. Very often, both sides of a trade win. That’s how the system works.

In fact, you can even make money without selling “to the next sucker.” I was looking at Medtronic’s (MDT) stock recently. If you had bought it in 1985, you’d currently be taking in dividends of 100%, based on your entry price. Sure, you’d have to wait a bit, but your gain isn’t dependent on any sucker, or even anyone, on the receiving end.