The Intelligent Investor – Aiming to be One?

This is actually the title of the book on investing principles written by Professor Benjamin Graham back in 1949 and investor Warren Buffett calls this book “by far the best book about investing ever written”.

The Intelligent Investor was Graham’s second book, a popularising follow-up to his and Professor David Dodd’s more technical Security Analysis. After the 1949 original, The Intelligent Investor was reissued three more times in Graham’s lifetime, with sedimentary layers of financial lessons from the first three quarters of the 20th century. He was 79 at the publication of his last edition, which can meander and repeat. And now in this year’s 75th anniversary edition, there are footnotes and follow-on commentary that has postscripts to Graham’s advice, wisdom from other market sages, that can be relevant in today’s times.

A bit of history: Mr Buffett took classes from Graham at Columbia Business School and later worked for him for two years, 70 years ago. This led him to become one of the most, if not the most, successful investor to date.

Therefore, for today’s 224th week of our #SundayTimesRecap learning series, based on this article published in yesterday’s Sunday Times Invest section, “The Intelligent Investor is still worth reading 75 years later”, let us learn some snippets from this book and improve our understanding of investing.

1. The book’s core, originating importance. It is an inoculation against bad habits of mind. Graham (born Grossbaum) was an active investor at his own firm in the 1920s through the 1950s. An undergrad polymath at Columbia University (English, maths, philosophy, music, Latin and Greek), he seemed inclined always to also teach, maybe a legacy of being the great-grandson of an unsurpassably named famous Warsaw rabbi Yaakov Gesundheit.

While Graham’s opus is about both intelligence and investing, it is less about how to make money than how not to be an idiot. “To achieve satisfactory investment results is easier than most people realise,” he writes; “to achieve superior results is harder than it looks”. Graham is at his best when laying out the programme for the former: how to be a “defensive” investor, with low expectations.

2. Know you will lose money when you speculate. It is the advice professional investors want to paste to the forehead of every cardiologist brother-in-law asking for stock tips. It’s the advice Graham did so much to codify: Never trade on margin, know you’ll lose money when you speculate, have a diversified portfolio of around half stocks and half bonds, and accept that it’s “virtually impossible to make worthwhile predictions about the price movements of stocks” and “completely impossible” for bonds.

3. How to try to be a market-beating “enterprising” investor. Warily, Graham also writes this part addressed to amateur investors who think they’re professionals and, implicitly, professionals who act like amateurs. In an essay reprinted at the end of the book, Mr Buffett distils the essence of Graham’s teachings: “Buying the business, not buying the stock.” Everything else is just speculating.

Unfortunately, human nature makes it hard to buy the business and not the stock. And so Graham details specific attitudes you need to be a contrarian, to be technically fluent enough to see through hucksters and accounting tricks, to be steadfast enough in your opinions to ignore the constant chattering of “Mr Market”, to more heavily weigh a backwards-looking quantitative “protective” approach to analysing securities over a qualitative “predictive” approach, and to always calculate formulaically your “margin of safety” – “the central concept of investment”.

4. Read the company’s last three annual reports and proxy statement. If you think as a lay person that you are set up to do the above in point 3, then just this advice alone will drive you straight back to index funds. No one likes reading boring annual reports. Eventually – you can almost hear Graham sigh – The Intelligent Investor provides specific strategies. Graham never describes himself as a “value investor”. but his advice all comes back to that: a suspicion of technology and growth stocks; a cheer for “bargain issues;” a “solution” in dividend-paying “light and power” shares; a caution against “new issues” (aka initial public offerings).

“Even if one or two can be found that can pass severe tests of quality and value,” he writes, “it is probably bad policy to get mixed up in this sort of business.”

5. Graham’s last piece of grandfatherly advice – it is about “value”. It is still good in today’s era even though the best we can say is that it worked in Graham’s day. According to the most basic Fama-French model and growth indexes, which compare the cheapest one-third of the market (on a price-to-book-value basis) to the mostly highly valued third, value beat growth three out of every four years from 1940 to 1970.

For the past 30 years, however, growth has beat value two out of every three years. Even Berkshire Hathaway now owns more than US$90 billion (S$119.2 billion) of Apple shares. Why this has happened is one of the great debates of modern finance. There are many suspects: in how tech companies have swallowed our minds, economy and markets; in how software scalability, globalisation and “natural” monopolies have allowed giant enterprises to still grow fast.

American hedge fund manager Cliff Asness recently wrote a thoughtful (and funny) paper in which he proposes other hypotheses: the rise of index investing; the zero-interest environment that drove everyone (in his words) “cray-cray”; and another impact of technology, in enabling an enormous volume of goof ball amateur investing and coordinating it to act in unison.

A contemporary reading of The Intelligent Investor provides us one with more suspect. Graham doesn’t call himself a value investor, but the book – maybe with a nod to Great Grandpa Gesundheit – is centrally about values. And the values in Graham’s original book are clearly of a 1950s sensibility: rational, decorous, quantitative, suspicious of flash. Some rewards may follow very hard work.

We now live in an age where adults wear pyjamas on planes and get their news from TikTok. This doesn’t mean people are worse now or were great then. But it makes it hard to cite rooted, eternal values from which to judge movies or art or religious practice. Wall Street by now knows that it’s not more rational than other industries, so why should securities valuations be more immune to a cultural trend than any other aspect of our lives?

6. Humility. But there is an optimism in The Intelligent Investor – in its calls for humility, in its reminder that markets always surprise and turn. Value investing and investing values may become profitable again, without warning, long after we declared that era done.

In the meantime, we can all be defensive investors. That path is easy, and in the book. Are you willing to be one, and make wiser investment decisions?

Then, join my teammates and I at our next webinar, “The Lifetime Income Streams”, tonight Mon 4th Nov 2024 at 8pm.

We will share simple investing tips to help you create monthly income that can last you for the rest of your life without constantly having to worry about money. You will feel more confident in managing your money matters as most of our attendees can testify.

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