Below are my reflections and answers to the discussion questions posted at Modern Graham for chapter 1 of the Intelligent Investor written by Ben Graham.
- How can we summarize Graham’s definition of the difference between a speculator and investor?
In the beginning of chapter one Graham asks the question “What do we mean by “investor”?” and goes on to explain the difference between an investor and a speculator by going back to the 1934 edition of Security Analysis and the quote: “An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”
- Graham mentions on page 19 that in the 1940s most people would consider stocks too speculative. How do you think the average person feels about stocks today? How should an intelligent investor feel about stocks?
To start with, the average person probably has an insufficient understand of what a stock really is. In general I think that most people considers stocks too speculative. At the same time the intelligent investor should probably not feel too exited, about either the general market or most common stocks, due to the levels they are trading at right now. The number of bargains has fallen as the market has risen.
- Graham states that some amount of speculation is necessary. What amount of speculation do you feel comfortable with?
I like to buy stocks without paying for growth, though I’m willing to accept some amount of speculation, first in the form of a conservative estimate of expected future growth that is deemed reasonable compared to the facts and circumstances known today.
- What was your favorite quote from Graham in this chapter?
“An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”
“Outright speculation is neither illegal, immoral, nor (for most people) fattening to the pocketbook.”
- Have you ever speculated? If so, what were your results?
Yes, by buying shares in a business without having the proper knowledge of the fundamentals. The result… disaster.
- Despite continued examples of the success of those who follow Graham’s methods, they remain unpopular on Wall Street. Why do you think that is?
Wall Street is all about activity, which implies transaction fees. If everyone followed Graham’s methods the amount of transactions would go down drastically and many brokers would go… broke. To quote Warren Buffett: “One of the ironies of the stock market is the emphasis on activity. Brokers, using terms such as “marketability” and “liquidity,” using the praises of companies with high share turnover… but investors should understand that what is good for the croupier is not good for the customer. A hyperactive stock market is the pick pocket of enterprise.”
- In his commentary to this chapter (found in the newer published edition), Jason Zweig pointed out in the “investing” craze that happened during the late 1990s, and how many people did not follow Graham’s suggested requirements for investing. How do you think the principles Graham taught in this chapter would apply to the market today?
If you look at how fast the consensus can change and prices go up and down, it seems like Graham’s principles are not that widely practiced. If they were, stock prices would be more stable. From looking at the market today, it seems like too many people are willing to pay too much to own stocks. It is easily forgotten that higher stock prices as of today, implies lower returns going forward.