As part of my induction about the world of investing, which is necessary since I want to make the most of my money, I’ve just finished Benjamin Graham‘s The Intelligent Investor, a how-to guide that’s been so influential since its first edition was published in 1949 that he revised and put out three further editions, and a yet more recent rendition of its fourth edition was published, with comments to bring the decades-old text up to date from Jason Zweig, who is a senior writer at Money magazine.
At the risk of oversimplifying it, although a lot of the book was beyond me, I think I understood enough to take away three things:
- There is a difference between investing and speculating. One of the differences: Investing is a long-term prospect; speculating is altogether more ad-hoc. Another difference: Investing is based on the concept that, in the long run, the value of what you invest in will appreciate*; speculating is more about the feeling that, “Mmm… everyone seems to be buying this… I probably should too”. Investing, realistically, is about managing risk, making as sure as you can that out of the different things you buy into, more will appreciate than not; speculating is about hoping that a bet will pay off, without hedging it.
- There is a difference between an aggressive investor and a defensive investor. Aggressive investors actively scour the market, scan through annual reports for good investments and continually adjust their portfolios to reflect their research; defensive investors choose good investments and sit tight and let their money grow. Graham’s warning that people just aren’t wired to be good investors – aggressive investors need to put in so much work; defensive investors need to be so disciplined – is one of the most accurate observations in the book.
- Because the market is efficient, there is very little one can do to accurately choose investments that will grow without fail over a short-term – certainly not accurately enough to toss in all one’s capital. If you want to invest, but are too lazy to do the required work, you may want to buy into an index-linked fund with the money you can safely spare, every month. And let it grow. For at least 10 years.
Graham had a great device for illustrating how ridiculous it is to be swayed to and fro by the market, like many speculators are. Two paragraphs from the book about the schizophrenic, passive-aggressive Mr Market:
Let us close this section with something in the nature of a parable. Imagine that in some private business you own a small share that cost you $1,000. One of your partners, named Mr Market, is very obliging indeed. Every day he tells you what he thinks your interest is worth and furthermore offer either to buy you out or to sell you an additional interest on that basis. Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them. Often, on the other hand, Mr Market lets his enthusiasm or his fears run away from him, and the value he proposes seems to you a little short of silly.
If you are a prudent investor or a sensible businessman, will you let Mr Market’s daily communication determine your view of the value of a $1,000 interest in the enterprise? Only in case you agree with him, or in case you want to trade with him. You may be happy to sell out to him when he quotes you a ridiculously high price, and equally happy to buy from him when his price is low. But the rest of the time you will be wiser to form your own ideas of the value of your holdings, based on full reports from the company about its operations and financial position.
*The implications of this statement are wide and deep. It means that you should probably not look at buying stocks that are already highly valued, but should first look at those that are, for some reason, undervalued. It means you should be aware that stocks are representations of market expectations, which may be inaccurate and uninformed, and misled and overweaningly cultish at worst, and look at the annual reports of the these companies to come to a conclusion about how much they should be valued. It means the stocks issued by well-run, responsible, winning companies may not be the stocks you should buy, unless, for some reason, the companies’ stocks are undervalued – e.g. Coca-Cola’s stock after it rolled out “New Coke”.