Edward Quince’s Wisdom Bites: Are You Intelligent? Chapter 2

In our last two posts we’ve provided an overview of the 3 powerful lessons taught in Graham’s famous work and the 3 key elements of investing.  Interestingly the next place The Intelligent Investor takes us is the topic of inflation.  It seems like an odd turn to jump from a narrative of ‘here’s what it means to be an intelligent investor’, to inflation. It’s kind of like Graham said: ‘oh by the way before we get into the meat of investing lets take a detour through inflation.’ Why?  

Well much like today the topic of inflation was on many people’s minds both when this book was first published but it was really front and center by the 4th edition in 1973. I recommend perusing the site here which chronicles some interesting stats after the USD was fully decoupled from any gold backing to get a sense of why inflation was really on people's minds in 1973.

Nevertheless, we all feel the effects of inflation in our day to day lives but we likely underestimate the potential impact of inflation in our investment portfolios.  Arguably inflation is very harmful, but often in ways we don’t fully grasp.  Famed economist Irving Fisher posited in his classic, 'The Money Illusion', that the harms of unstable money consist of three evils: social injustice, social discontent and social inefficiency. The impact of inflation on business and investments is a factor supporting all three of these evils.

But the central theme of Irving Fisher’s classic and the one that Zweig riffs on is found right in Fisher’s title, it’s the money illusion; that is the failure to perceive that the dollar, or any other unit of money, expands or shrinks in value.

Commenting on Commentary on Chapter 2

Interestingly when Zweig was writing his commentary the U.S. was experiencing a period of low and largely stable inflation. In fact low inflation and deflation became a “fear” of central bankers in the years that followed Zweig’s commentary up until recently.  But the genius of Zweig’s message in this section is that intelligent investors have to stay on guard “against whatever is unexpected and underestimated.”  He goes on to list reasons the investors reading this book in 2003 might want to question the narrative that inflation is “dead”, one of which he cites as: “Completely eradicating inflation runs against the economic self-interest of any government that regularly borrows money.”  Well put indeed and certainly a topic of recent discussion.

Zweig jumps right into the psychology of inflation, how we tend to think of rising nominal investment or wage values as a good thing, without first considering whether the after-inflation (or real) result was positive or negative.  For example, owning an investment that returns 2% when inflation is 4% is not a good result.

He then moves onto addressing what an investor might do to guard against inflation, first addressing the standard answer that investors can buy stocks as an inflation hedge, with a warning that high inflation can often have a depressing effect on economic activity.  If you need some back up for Zweig’s claim, look no further than Fisher who posited: “Business is always injured by uncertainty. Uncertainty paralyzes effort, and uncertainty in the purchasing power of the dollar is the worst of all business uncertainties.”  Paralyzed businesses don’t really sound like great investments to me.

So if it’s not “buy stocks” what does Zweig advise investors to do?  His answer is consider REITs and TIPS.  If I had all day to dive into this recommendation, we could pick through a million nuances as to whether or not this is good advice.  When it comes to REITs, Zweig flat out states his own somewhat skepticism by stating: “While a REIT fund is unlikely to be a foolproof inflation-fighter [in the long run it could provide some defense against lost purchasing power]”  As for TIPS (Treasury Inflation Protected Securities) he notes the “phantom income” for tax purposes as a challenge.  The point is, neither of these are perfect products for addressing.  

The real lesson from this lesson is simple: it is to at least think about the potential risk your investments face due to inflation and to focus on real returns rather than solely nominal returns.

The next Chapter of The Intelligent Investor is focused on “stock-market” history and the dangers of extrapolating the past.

 “Americans are getting stronger. Twenty years ago, it took two people to carry ten dollars’ worth of groceries. Today, a five year old can do it.” - Henry Youngman

Edward Quince's Wisdom Bites: Are You Intelligent? Chapter 1

In our last post we visited Jason Zweig’s commentary on the Introduction chapter of Ben Graham’s The Intelligent Investor where we learned the timeless wisdom that the chief enemy of most successful investors is himself. We often fall victim to the allure of “sure-thing” ideas especially when those ideas are anyone’s but our own. Not only are we capable of suspending our own thinking but we’re even worse, we often forget to consider or even ask “how much does it cost?” when we’re buying the next “sure-thing” investment product.  

If you’re reading this you should be open-minded to the possibility that Graham’s ideas are no longer applicable to the latest investment landscape. As you make that consideration, Zweig reminds us that back in February 2000, the renowned Jim Cramer of Mad Money fame said the following regarding Graham’s investment thinking: “You have to throw out all the matrices and formulas and texts that existed before the Web…If we used any of what Graham and Dodd teach us, we wouldn’t have a dime under management.”  That quote did not age well.

In this post we’ll tackle Zweig’s Commentary on Chapter 1: Investment versus Speculation.

I think it is likely that most “investors” have never considered what it actually means to be an “investor”, in other words if you asked your investor friend to define “investing” my gut says you’ll get a half-baked answer.  Graham, on the other hand, is clear-sighted in defining investing, giving us the clarity of the 3 necessary and equal elements required: 1) you must thoroughly analyze a company, and the soundness of the underlying businesses, before you buy its stock; 2) you must deliberately protect yourself against serious losses; 3) you must aspire to “adequate”, not extraordinary, performance.  When it comes to stocks Zweig summarizes Graham’s elements as: “An investor calculates what a stock is worth, based on the value of its businesses. A speculator gambles that a stock will go up in price because somebody will pay even more for it.”

Three elements which Graham views as equally important, endless ways in which we can completely miss any or all of them and many combinations of ways to deviate from this recipe.  If we’re being honest, how often do we actually analyze a company or fund before investing and I’m not even talking about CFA level financial statement analysis, just a baseline review and understanding of the business, its capitalization, some basis of forming an opinion on valuation?  Strike 1.  I would like to think that many of us are fairly solid when it comes to the second element of protecting against serious losses, at least at a total portfolio level, but I’d venture to guess many of us have approached that topic haphazardly and we only get worse at using that element when we move from the portfolio level down to the individual investment level. Strike 2.  And as for the aspiration of adequate returns, it seems like human nature to want to reach for extraordinary returns, especially when you hear of someone else who has done better than you. I think we all want the most return with no risk and no effort, but I’ve found very few, if any, examples of that being on offer in my personal experience. Strike 3. 

It is so tempting to fall for the quick dopamine hits, the trading systems or gurus who promise utopia in the market. As Zweig analogizes these gimmicks are like hearing from the driver who successfully traveled 130 miles in 1 hour while you were driving the 65 mph speed limit and believing that because he survived that journey it is the right thing to do and you should do it too, “Flashy gimmicks for beating the market in short streaks is much the same: In short streaks, so long as your luck holds out, they work. Over time, they will get you killed.”

Investing is really all about getting the odds of your success to be on your side where speculation is a sure-fire way of making sure the financial market intermediaries profit.  As early as this 2003 writing Zweig identified the dangers of what he titled “The Financial Video Game”, little did he know how much gamification would pervade markets over the next two decades.  If he thought early day trading was bad, and stock trading had become merely blips moving across the screen, today’s markets are probably have more in common with the speed of protons being accelerated in a large hadron collider (which honestly I have no idea if that analogy makes any sense, knowing nothing about that process).  Today’s markets feature apps that have UX and design experiences that copy much of what makes video game experiences addictive, many platforms have also taken cues from social media apps with the appearance of “community”, not to mention the overall role social media has played in marketing “investing” techniques and the rise of “finfluencers”.  

While the monikers are new, the underlying human condition, which all of the things under the gamification umbrella are designed to exploit, remains much unchanged.  I recently read a novel detailing a fictitious quest in medieval France, in which the author offered up the following quote via one of the characters: “Mankind does not much change. On the surface, we seem different. We evolve, we develop new rules, new stands of living. Each generation asserts modern values and dismisses the old, priding itself on its sophistication, its wisdom. We appear to have little in common with those that have gone before us.  But within [the human] flesh, the human heart beats the same as it ever did. Greed, desire for power, fear of death, these emotions do not change.”  Financial author Morgan Housel wrote his book Same as Ever identifying the various ways in which this manifest itself in financial markets.

But if we  fail to properly evaluate businesses that underlie our investments, or to recognize when a platform is purposely attempting to negatively modify our behavior for its own interest, it’s certainly not because we are lacking in data, it’s because of our own lack of knowledge or the frail desperation of our human condition.

Which is why Zweig includes his commentary summarily with a warning on the dangers of speculating (any activity which violates the three elements of investing above) reminding us that when speculating: 1) Never delude yourself into thinking that you are investing when you are speculating; 2) Speculating becomes mortally dangerous the moment you begin to take it seriously; 3) You must put strict limits on the amount you are willing to wager.

As you read the above you might reach the conclusion that it can be very difficult to actually engage in investing and that you lack the necessary time or education to be an investor and if that’s the case, what do Graham and Zweig say you should do?  Don’t worry, they eventually get there, but not yet.

We’ll next turn our attention to a topic near and dear to our 2020’s heart, inflation.

But before we get there, remember:

“All of human unhappiness comes from one simple thing: not knowing how to remain at rest in a room.” - Blaise Pascal

 

Edward Quince's Wisdom Bites: Are You Intelligent? An Introduction

One of my favorite books on investing is Benjamin Graham’s class, The Intelligent Investor. More specifically my go-to is the 2003 Revised Edition (I believe the 4th edition) which features commentary by Jason Zweig.  If you’re not familiar with Ben Graham, suffice to know that Buffett refers to him as the man who:  “More than any other man except my father, [sic] influenced my life.”  Relative to Graham and Buffett, few people are likely familiar with Jason Zweig, though for those of us who were curious about investing during a certain era, Jason’s financial columns, first in Money then in Forbes, and later in the WSJ, provided some of the most accessible and in my mind logical writing about investing.

When presented with statements such as: “I want to start investing.”, or “I want to learn about investing” or the derivations of “I want to trade stocks and make a lot of money.” my first inclination is to respond in a way that attempts to define “Investing” vis a vis “Speculating” and that brings me right to this book. And since public curiosity in using financial markets as a means to make money is an enduring trend, I thought I would run a series of posts on the wisdom contained in The Intelligent Investor, however, to spice things up a bit I’m going to solely focus on the wisdom contained in Jason Zweig’s commentary on Graham’s seminal work.  

This post and those that follow will essentially be commentary on commentary on The Intelligent Investor.

Commentary on Commentary On The Introduction

If anyone picked up Graham’s book in hopes it was a guide to beating the market, their hopes are severely dashed right out of the gates. Instead this book offers 3 powerful lessons: 1) how you can minimize the odds of suffering irreversible losses; 2) how you can maximize the chances of achieving sustainable gains; 3) how you can control the self-defeating behavior that keeps most investors from reaching their full potential.

When this commentary was written in 2003 many investors were still grappling with the fallout of the dot-com bust and an era where many investors had just learned the hard way, that some holes are too deep to easily climb out of and there was a reason that Graham consistently emphasized the importance of of avoiding losses, especially the ones that could prove irreversible. Unfortunately the lessons mostly fell on deaf ears as merely a few years later, in 2008, a global financial crisis ensued.

But of course those investors who so foolishly lost money investing in dot-com and telecom stocks, Enron, flipping houses, synthetic CDO's are just relics of a bygone era. Things have changed, with AI, prediction markets, 0DTE options, this time is different, these “powerful lessons” need not apply, at least that is the refrain you’ll hear from many of today’s leading cheerleaders.  However, there is a reason that there may be merit to the belief that “this time is different” are the four most dangerous words in finance, and Zweig quickly calls attention to some high-profile “intelligent” investors in history who have failed to learn Graham’s lessons to their own detriment.  If Nobel laureates can blow up Long Term Capital Management and if in 1720 Issac Newton can get caught up in the South Sea bubble, surely acting unintelligently in the investing sphere is something that can and does happen to humans throughout history.  Why? Because it is easy to believe we’re smart enough to not make bad decisions and that we can control our emotions and be patient, but the reality is we are often our own worst enemies.

Remember at this point we are just discussing the Introduction to this book, but already Zweig is reminding us that it’s easy to get swept up in the next sure thing and believe in our own or other’s high conviction as to what is sure to be the world’s next best thing.  If being wrong as to what the next sure thing is bad enough, what often ends up being just as bad (and perhaps feels worse) is to be exactly right about the next big thing but to still lose money.  Both Graham and Zweig caution that both obvious growth in a business doesn’t necessarily translate into profits for investors as it is often the cause that by the time everyone decides that some industry is the next sure thing investment, “the prices of its stocks have been bid up so high that the future returns have nowhere to go but down.”

Whether today’s “sure-things” related to industries like AI, Quantum computing, Space, cryptography, predictions, jpegs of monkies, etc. will be proven to have reached the point where no price seems too high to pay for these industries future prospects is a story for a future edition of this book.

In the meantime it’s up to you to decide if you’d be better off heeding what Zweig calls “The Silver Lining”, that “stocks become more risky, not less, as their prices rise - and less risky, not more, as their prices fall.  The intelligent investor dreads a bull market, since it makes stocks more costly to buy.  And conversely (so long as you keep enough cash on hand to meet your spending needs), you would welcome a bear market, since it puts stocks on sale.” The hard part is that this belief is tough to hold when it seems like everyone around you seems to be getting ahead of you by acting in an manner that appears to be the exact opposite.

On the next episode of Wisdom Bites we'll dive into the commentary on Chapter 1 and the distinction between investing and speculating.

“If you have built castles in the air, your work need not be lost; that is where they should be. Now put the foundations under them.” - Thoreau, Walden

 

Edward Quince’s Wisdom Bites: The Architecture of the Precise Con

"...and all the pieces matter." > — Lester Freamon (The Wire, Season 1, Episode 6)

The Financial Translation

The amateur investor treats the market as a collection of isolated, disjointed facts. They spend their days endlessly refreshing terminals, tracking daily market movements, and reacting to macro headlines as if they were arbitrary weather patterns that simply happen to them. They operate under the delusion that access to an abundant stockpile of real-time data equates to actual strategic insight.

In reality, an economy is a complex adaptive system constructed by the aggregate, interconnected choices of millions of human actors. Every legislative act, central bank intervention, and corporate transaction engenders a cascading sequence of effects. The bad analyst relies entirely on the immediate, visible effect that reveals itself simultaneously with the cause. The superior analyst looks deep beneath the surface, recognizing that the most critical, defining structural indicators are hidden multiple layers below the immediate appearance.

[Surface Macro Headlines] ➔ Visible/Lagging Indicators (The "What")
                                       │
                                (Systemic Time Lag)
                                       ▼
[Hidden Footnote Context] ➔ Underlying Credit Plumbing (The "Why")

The true operational risk of an enterprise is rarely highlighted in the promotional text of an annual report. Fund managers deploy complex vocabulary to mask mediocre baseline performance, and executives construct elaborate summaries to hide structural fragility. The real data is pushed away into the margin.

The Tactical Takeaway

Stop trying to out-compute the market through the rapid consumption of superficial headlines. Real baseline advantage belongs to those who develop the patience to look at the entire chessboard, focus on the underlying credit plumbing, and understand that corporate speech is designed for misdirection. Separate the short-term emotion of market risk from the long-term reality of business risk. If you want to identify where the real structural liabilities reside, bypass the billboard on the tape and read the footnotes. All the pieces matter.

"What the wise man does in the beginning, the fool does in the end". 

Edward Quince’s Wisdom Bites: The Architecture of the Precise Con

"The bigger the lie, the more they believe." > — Bunk Moreland (The Wire, Season 5, Episode 1)

The Financial Translation

Human nature possesses a deep-seated, insatiable craving for absolute certainty. We dread the reality that the future is an unmapped, non-linear system governed by odds rather than definitive constants. This psychological vulnerability leaves the public permanently exposed to financial charlatans and product innovators who specialize in supplying the exact illusion of risk-free wealth the crowd desires.

When Wall Street introduces an exotic, complex financial vehicle—whether it is a specialized derivative tranche, a novel SPAC structure, or a hyper-scaled AI projection model—they never describe it vaguely. They drown the allocator in a blizzard of precise, technical jargon and hyper-detailed "back-tested data".

[Anxiety of Uncertainty] ➔ Demand for Certainty ➔ Hyper-Specific Modeling Veneer ➔ Financial Engineering Trap

This hyper-precision is a rhetorical device designed to construct a pseudo-scientific veneer. It tricks the observer into confusing mathematical complexity with actual intelligence. The more intricate, multi-layered, and opaque the flowchart becomes, the more the public suspends its natural skepticism. They assume that an army of quants must have mastered the downside, entirely forgetting that more data often increases the ratio of noise to actual signal.

The Tactical Takeaway

Beware any pitch deck that relies on hyper-specific details about a future that has not happened yet; it is fiction written with numbers. Apply a strict intellectual razor to financial complexity: if you cannot understand the basic mechanics and the precise source of the return immediately, walk away. Complexity is almost always a structural transfer mechanism designed to migrate wealth from the captive client to the manager’s fee pool. Stick exclusively to simple ideas, and take them with absolute seriousness. 

Edward Quince’s Wisdom Bites: The Attrition of the Scoreboard

 "No one wins. One side just loses more slowly." > — Roland "Prez" Pryzbylewski (The Wire, Season 4, Episode 4)

The Financial Translation

Elite professional culture operates as a socially acceptable form of violence. High-achievers systematically optimize within the rigid walls of their own intelligence, grinding through 80-hour workweeks to scale the corporate ladder, score prestige, and chase abstractions of success. They frame their lives as an intense single-player game, allocating zero time to introspection or quiet solitude.

But capitalism detached from humanistic virtue extracts a punitive, hidden invoice. In the relentless pursuit of maximizing economic output, professionals reduce themselves to mere instruments of production, fracturing their health, their peace of mind, and their marriages.

[Grind Culture Optimization] ➔ Mimetic Status Race ➔ Spiritual Atrophy ➔ The Peak of Misery

They fall directly into the "deferred life plan," enduring decades of stressful labor they hate under the false assumption that happiness is a riddle to be solved at some distant destination. They pile up material wealth only to buy luxury indicators to impress people they do not even respect. They have successfully scaled the mountain of mimetic rivalry, only to discover they have reached the absolute peak of human misery.

The Tactical Takeaway

Take a brutal, objective inventory of your current lifestyle and capital priorities. If you already live a comfortable life, choosing to accumulate more paper wealth at the expense of your daily existence is a fundamentally terrible trade. Meaning is not something you stumble across; it is a subjective quality you deliberately build out of your internal loyalties, affections, and values. Shift your orientation from immediate earning to structural owning. Equity is freedom precisely because it allows detachment from the hustle.