WS: INTELLIGENT INVESTOR I

INTELLIGENT INVESTOR I

In his pivotal book, The Intelligent Investor, Ben Graham never promises that he can help the reader / investor to 'beat the market', but rather promises to teach three valuable lessons...

- how to minimize the odds of suffering irreversible losses;
- how to maximize the odds of achieving sustainable gains; and
- how to control self-defeating behavior that keeps most from reaching their full potential.

Are You An Intelligent Investor?

What does Ben Graham mean by an "intelligent" investor? In the first edition of his book he makes it clear that what he is describing as intelligent does not refer to IQ, but rather to being patient, disciplined, and eager to learn; you must also be able to harness your emotions and think for yourself. This kind of intelligence, explains Graham, "is a trait more of the character than of the brain."

There's proof that high IQ and higher education are not enough to make an investor intelligent. In 1998, Long-Term Capital Management L.P., a hedge fund run by a battalion of mathematicians, computer scientists, and two Nobel Prize-winning economists, lost more than US$2 billion in a matter of weeks on a huge bet that the bond market would return to "normal." But the bond market kept right on becoming more and more abnormal--and LTCM had borrowed so much money that its collapse nearly capsized the global financial system.

And back in the spring of 1720, Sir Isaac Newton owned shares in the South Sea Company, the hottest stock in England. Sensing that the market was getting out of hand, the great physicist muttered that he "could calculate the motions of the heavenly bodies, but not the madness of the people." Newton dumped his South Sea shares, pocketing a 100% profit totaling 7,000 pounds. But just months later, swept up in the wild enthusiasm of the market, Newton jumped back in at a much higher price--and lost 20,000 pounds (or more than US$3 million in today's money). For the rest of his life, he forbade anyone to speak the words "South Sea" in his presence.

Sir Isaac Newton was one of the most intelligent people who ever lived, as most of us would define intelligence. But, in Graham's terms, Newton was far from an intelligent investor. By letting the roar of the crowd override his own judgment, the world's greatest scientist acted like a fool.

In short, if you've failed at investing so far, it's not because you're stupid. It's because, like Sir Isaac Newton, you haven't developed the emotional discipline that successful investing requires. Graham helps us understand that you must master his lesson that being an intelligent investor is more a matter of "character" than "brain."

To use Graham's own words...

"The purpose of this book is to supply, in a form suitable for laymen, guidance in the adoption and execution of an investment policy. Comparatively little will be said here about the technique of analyzing securities; attention will be paid chiefly to investment principles and investors' attitudes..."

"Our text is directed to investors as distinguished from speculators, and our first task will be to clarify and emphasize this now all but forgotten distinction. We may say at the outset that this is not a 'how to make a million' book. There are no sure and easy paths to riches on Wall Street or anywhere else..."

"Since our book is not addressed to speculators, it is not meant for those who trade in the market. Most of these people are guided by charts or other largely mechanical means of determining the right moments to buy and sell. The one principle that applies to nearly all these so-called 'technical approaches' is that one should buy because a stock or the market has gone up and one should sell because it has declined. This is the exact opposite of sound business sense everywhere else, and it is most unlikely that it can lead to lasting success on Wall Street. In our own stock-market experience and observation, extending over 50 years, we have not know a single person who has consistently or lastingly made money by thus 'following the market.' ..."

"What we will aim to accomplish in this book? Our main objective will be to guide the reader against the areas of possible substantial error and to develop policies with which he will be comfortable. We shall say quite a bit about the psychology of investors. For indeed, the investor's chief problem--and even his worst enemy--is likely to be himself..."

"Additionally, we hope to implant in the reader a tendency to measure or quantify. For 99 issues out of 100 we could say that at some price they are cheap enough to buy and at some other price they would be so dear that they should be sold. The habit of relating what is paid to what is being offered is an invaluable trait in investment..."

"The art of investment has one characteristic that is not generally appreciated. A creditable, if unspectacular, result can be achieved by the lay investor with a minimum of effort and capability; but to improve this easily attainable standard requires much application and more than a trace of wisdom. If you merely try to bring just a little extra knowledge and cleverness to bear upon your investment program, instead of realizing a little better than normal results, you may well find that you have done worse..."


Credits: Much of this article is extracted from The Intelligent Investor, by Benjamin Graham, updated with new commentary by Jason Zweig, 2003.

POSTED :02 Jun 2006