Below are my reflections and answers to the discussion questions, posted at Modern Graham, regarding the introduction of the Intelligent Investor written by Ben Graham.
1. Please introduce yourself, giving particular emphasis on your background in investing.
I live in Stockholm, Sweden. Moved to Stockholm when I began to study at the School of Business at the university.The first investing book I ever bought was a used copy of Peter Lynch’s One Up on Wall Street, which became my starting point for getting to know the names of other great investors of which Warren Buffett was the first one. I then started to read and learn more about Buffett which got me introduced to Ben Graham, Charlie Munger, Phil Fischer, Irving Kahn, Walter Schloss, Joel Greenblatt and many other great investors.I read the Intelligent Investor pretty early, much because I read somewhere that Buffett had said that the Intelligent Investor was the greatest investing book ever written.
I don’t work in the area of investing, but I spend most of my spare time reading about different companies, industries, investors, investing principles, how to value a business and also how to think about market prices. I am also interested in human psychology and enjoy reading about different kinds of heuristics and human biases.
I use to say that I have read about investing for ten years and been investing for five years.
2. What do you expect to get out of reading The Intelligent Investor? What is your motivation for reading?
I except to revisit the great principles laid out in the book and update my own thinking about them. I have read the Intelligent Investor two times before, so this will be my third and I hopefully it won’t be the last time. It’s really a great book and a great book should be read multiple times.Last time I read the Intelligent Investor I thought that I should read it once every year. I haven’t. But I think the intention was good. When I read about the MG Book Club I thought that it would be a great opportunity to read the Intelligent Investor once again together with other people sharing the same interest. Becoming a better investor is my motivation for reading the Intelligent Investor once again.
3. Did you find anything particularly interesting in the Introduction?Here are some parts I find interesting from reading the introduction:
“The underlying principles of sound investment should not alter from decade to decade, but the application of these principles must be adapted to significant changes in the financial mechanisms and climate.”“Evidently it is not only the tyro who needs to be warned that while enthusiasm may be necessary for great accomplishments elsewhere, on Wall Street it almost invariably leads to disaster.”“We have seen much more money made and kept by “ordinary people” who were temperamentally well suited for the investment process than by those who lacked this quality, even though they had an extensive knowledge of finance, accounting, and stock-market lore.”
“The really dreadful losses of the past few years (and on many similar occasions before) were realized in those common-stock issues where the buyer forgot to as “How much?”.
“…it would seem a comparatively simple matter to “beat the averages”; but as a matter of fact the proportion of smart people who try this and fail is surprisingly large.”
“Allied to the foregoing is the record of the published stock-market predictions of the brokerage houses, for there is strong evidence that their calculated forecasts have been somewhat less reliable than the simple tossing of a coin.”
“Before attempting such a venture the investor should feel sure of himself an
d of his advisers–particularly as to whether they have a clear concept of the differences between investment and speculation and between market-price and underlying value.”
“Through all their vicissitudes and casualties, as earthshaking 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.”
4. Graham said that “the investor’s chief problem – and even his worst enemy – is likely to be himself.” Has this been true in your own investing experience? What do you think you can do to not get in your own way?
Agree. First, it takes time to accumulate knowledge–a never-ending journey, and then it takes time to getting to know how to use it in a proper way. Second, you also need to learn how to handle your own emotions and biases and connect that part to your own decisions about what businesses to invest in based on your own analysis.
It pretty much comes down to what Buffett wrote in the preface to the Fourth Edition; “To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework. This book precisely and clearly prescribes the proper framework. You must supply the emotional discipline.”
5. When Graham wrote the 4th Edition, the investing environment was replete with very high interest rates, which affected at least in part his general outlook on bonds versus equities. Today we are seeing historically low interest rates. How do you think Graham would react to the current market? Would he put a greater emphasis on equities, focusing specifically on strong dividend yields, or would he continue to advocate in general a 50-50 split between bonds and equities? What other things do you think should be taken into consideration when investing?
Ben would probably emphasize the need to find great businesses at reasonable prices compared to value, and to find businesses with a strong history of earning power and dividends. Maybe Ben would put greater emphasis on equities due to the fact that interest rates currently are at a very low level. Low bond yields today, and also the risk, which is more of a certainty, of rising interest rates going forward most certainly implies lower bond values in the future as interest rates rise. Even though the question “When?” is hard to answer, over time it seems likely that interest rates will rise. Also, there is the question of inflation and where the inflation rate will go from here. I think Ben would have gone after equities in sound businesses with a strong history of earning power, dividend yield and financial strength, plus the pricing power to be able to raise prices if inflation kicks in.
6. Why do you think that Graham stresses that anyone can invest?
Graham saw what it was like in Wall Street, a place in which stocks were bought and sold more as pieces of paper than part ownership of a business. A place where activity is valued higher than inactivity.
7. Do you consider yourself to be a Defensive Investor or an Enterprising Investor? (see What Kind of Investor Are You? for more information)
8. Zweig writes in his commentary “…foresight has no real value if most other investors are already expecting the same thing” (p. 16). In a world with instant communication and free access of information, do you think exclusive foresight is possible?
There is also a problem with the flood of information you have free access to. You have to be able to sort out all the noise and find the signal, the things that really matters. I think it’s difficult to get exclusive foresight; one should not count on that. But due to the fact that the information flow is so high, I think having sound proven investment principles and being able to keep them in mind when evaluating the information thrown at you; these principles will give you an opportunity to invest in a way that hopefully will save you from permanent loss of capital.