The “intelligent investor” is one who knows what type of investor they are.
With world equity markets swooning once again, I thought it would be an apt time to review my key takeaway from one of the best investment books ever written.
I recently re-read The Intelligent Investor by Benjamin Graham, who is known as the father of value investing, as well as the teacher and mentor of Warren Buffett. The publishers of all recent editions (there are many) have added the following to the cover of each book: “The classic text on value investing.” I think a more apt addition to each cover would simply be: “The classic guide on choosing what type of investor you are.” While this may not sound as exciting as reading the formative guide on how to succeed at a particular style of investing, I do think my title better encapsulates Graham’s intention with this book. I am not convinced that Graham was trying to teach investors how to value companies. I think he was trying to teach investors how to value themselves.
First, a little history… the book was written in 1949 at a time when, according to Graham, common stock ownership was not actually common in portfolios of institutions nor individuals. In fact, it was written at a time when security analysis was just becoming something of a profession. Graham writes “the various societies of analysts […] have well over fifteen hundred members.” Today, 25,000+ firms employ more than 160,000 CFA charterholders. Graham had experienced The Crash of 1929 as an investor, managed through it arduously, and then effectively dedicated his life to managing his investment partnership and educating future security analysts through his perch at Columbia University.
The book is 250 pages long and it is important to note that before there is serious discussion of security analysis, there are 108 pages laying the groundwork for readers to make the following key decision: Are you going to manage your investments yourself and strive for high returns (Graham called this person “The Aggressive Investor”)? Or are you going to either let an advisor manage for you or strive for generally good results (Graham called this person “The Defensive Investor”)?
“The investor’s choice as between the defensive or the aggressive status is of major consequence to him, and he should not allow himself to be confused or compromised in this basic decision. The aggressive investor must have a considerable knowledge of security values—enough, in fact, to warrant viewing his security operations as equivalent to a business enterprise. The majority of security owners should elect the defensive classification. They do not have the time, or the determination, or the mental equipment to embark upon investing as a quasi business.”
I found it interesting that the phrase “margin of safety” – the rallying cry of value investors for decades – is only mentioned for the first time on page 241 of 250:
“Confronted with a like challenge to distill the secret of sound investment into three words, we venture the motto, margin of safety.”
I also found it amazing that most of Graham’s comments on investing, markets, forecasters, and risk could have been written yesterday rather than over 70 years ago. I guess the more things change, the more they stay the same:
“Through all its vicissitudes and casualties, as earth-shaking as they were unforeseen, it remained true that sound investment principles produced generally sound results. We must act on the assumption that they will continue to do so.
In the old legend the wise men finally boiled down the history of mortal affairs into the single phrase, ‘This too will pass.’”
The final sentence of the book reads:
“To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.”
I worry that this phrase may be misunderstood by some readers. Satisfactory seems to take on a derogatory meaning when in reality, for almost all investors, Graham was encouraging satisfactory investment results. He believed the pursuit of satisfactory investment results is the prudent, conservative way to grow one’s assets. For those to whom satisfactory returns are actually not the goal, Graham’s guide warns that one will have to put significant “study, effort, and businesslike resources to bear to achieve – with no guarantees – superior results.”
Ultimately, Graham’s “intelligent investor” is one who understands what she is striving for, and what she is equipped to achieve herself, or not.
That conclusion should not be surprising. It’s the title of the book.
Postscript:
Graham details very clearly in his book the role of the advisor:
“[To…] use his superior training and experience to protect his clients against mistakes and to make sure that they obtain the results to which their money is entitled.
The leading investment counsel firms make no claim to being brilliant; they do pride themselves on being careful, conservative, and competent.”
Sounds like an apt summary of my firm, Ginsler Wealth. For the “intelligent investor” who appreciates that they need help managing their wealth, we are here.
Note: this article should not be considered investment advice.
