Commentary on The Intelligent Investor
I believe money if it’s to be seen as a tool and opportunity for the individual, should serve two purposes: either it’s making you more money or, more importantly, it serves to bring you happiness. I’m writing under the assumption that happiness is derived from other sources than just figures in a bank account, although I also think having sound and reliable finances for the future can improve your state of mind and your lifestyle today. With this in mind, I set out to improve my investor IQ and finally decided to pick up what is seen as the definitive holy grail of investment books, The Intelligent Investor by Benjamin Graham.
Though originally published in 1949, and released again over the years with up to date examples, it still reads as an investment book from the 80s. Still, we’re privileged now to have received the analysis of a century of investing that shows that it’s less the innovations that have changed but more of the same mistakes that have prevailed in the long run. The commentary at the end of each chapter also provides some much-needed relief from the simple yet suffocating glut of figures that are used to demonstrate what should be basic points.
If I was to take away only two lessons from the book, it would be first, to not lose, and second to pick your investment goals and consequent mindset correctly. The first can be summed up the aphorism “Buy low, sell high”, which in practice is an exercise in luck and patience. I particularly enjoyed the mention of Pascale’s infamous wager at the end of the book which I found a fitting summary of the book's lessons.
The French mathematician’s question asks an agnostic whether it is more advantageous to believe in God or not, and whether to live one’s life accordingly. Obviously, there are now four possibilities: live a life of righteousness and be rewarded, or be disappointed by God’s absence and all the fun, sinful things he missed out on during his time on Earth. Or he could do the opposite and either suffer the consequences of his sins for eternity or get away scot-free. Considering all this, it’s clear that the worst option is an eternity of punishment versus missing out on a few moments of lost fun.
From an investment perspective, the lesson to be learned is to think less about what little you can gain, but how much you can lose, and minimize these losses as much as possible. A gambler may make double his winnings a few nights in a row, but eventually, the house always wins, and he will be left with nothing but a desire to gamble more. The easiest way to make money is to not lose it. FOMO is a huge part of the stock market, and Graham’s example of Mr Market, a figure that appears willing to buy and sell your holdings every morning, is perfectly apt to represent how people can get swept up in hype only to regret it later.
Thus big speculative bets will be harder to earn back in case of a downturn. In investing terms, this means if you lose 10% of your investment you need to gain 11% to get it back. This figure increases the more you put in, so losing 90% would mean you’d need to gain 900% just to get it back. If it’s hard to understand consider you lose 1 dollar off a 10 dollar deposit (10 percent). You need to gain one dollar to get back to your initial amount of 10 dollars but this is 11 percent of 9 dollars (what you’re currently at). So a 90 percent loss brings us down to 1 dollar, and getting back to 10 means you need 9 times 1 dollar or 900 percent.
This ties into the next point of knowing my goals, what I want my wealth to do for me, and how my approach to money and investing will reflect that. Though I enjoy having the satisfaction and stability of having enough money on hand, these past months I’ve had to remind myself that it has no value until actually spent. Whatever my goals are, travel or independence, or even mundane things that bring me happiness like camping or good food, money is just the easiest tool to bring them to me. Once I’ve achieved my investment objectives, I have to make sure to actually spend it on the goals that I really want instead of thinking I’ll do it when I have more.
After reading this, I would consider myself a defensive investor, someone who trusts in passive investment strategies without actively to beat the market. I check my finances semi-regularly, and I try my best not to panic. I’d rather it be automatic. I don’t want it to control my life. Although I enjoy the excitement of picking stocks and prognosticating about emerging companies I want to stop myself before it becomes an obsession, and an unprofitable one at that. I think Graham understood FOMO years before it became a social-media term, even looking back a year ago it’s impossible not to think about the possibilities of having invested in Shopify or Tesla at the onset of the pandemic. Hindsight is kicking yourself on these missed gambles.
Still, if the combined power of the financial institutions of Wall Street has trouble predicting the future of the market, it would be arrogant to assume an amateur individual could do better. Luckily there are now more options for low effort investing with respectable returns, such as low-cost ETFs to spread your risk, robo-advisors with lower fees, and now the confidence that speculation about the future is not investing.
My issue with the book however is not in how effective it can prove to be as an investment strategy, but as a life strategy. Certainly, a defensive/passive investor subjects themselves to much less stress and effort, allowing them to concentrate elsewhere in their life. But to take a real-life incarnation of Graham’s philosophy, and certainly, his most successful student, Warren Buffet, the results are not necessarily where I want to see myself in the future. Although the last time I checked, he had a net worth nearly 89$ billion, 90% of it was made after the age of 65. We can only assume that this is the payoff from his notoriously frugal living and conservative investing. But what will he do with it? It seems that he just keeps investing it, making money towards no sensible goal other than the creation of more money. I don’t want that.
To be clear, there is nothing wrong with a conservative strategy, and it is in fact the recommended one. However, you can’t hold forever. Making more money is all well and good, but I don’t want to die rich, I want to die with nothing, having spent my entire life. I believe the term ‘dying penniless’ is needlessly vilified. After all, money is a purely human concept, and what good will that money do you after? So invest intelligently, but don’t forget to enjoy the results.
Edited Jan. 31, 2021
