Edward Quince’s Wisdom Bites: Are You Intelligent? Chapter 8

 Back in August 2024 famed investor Howard Marks wrote a memo titled “Mr. Market Miscalculates”.  The Mr. Market referred to by Marks’ is the one Ben Graham made famous in the Chapter 8 we are discussing today.  Mr. Market is the central character in a parable that I’ll paraphrase here:

“Ben Graham and Warren Buffett have talked about a charming, seductive manic-depressive gentleman named Mr. Market. Every day he shows up on your doorstep offering to do business with you. When he's manic, he'll offer to buy your stocks or sell you his for absurdly inflated prices. When he's depressed, his prices go ridiculously low. The mistake most people make is answering the door just because Mr. Market knocks. You don't have to let him in. Why should you buy just because he's excited? Why should you sell just because he's down in the dumps? A long-term investor shouldn't care about market prices.” - Charles D. Ellis

The parable of Mr. Market is a lesson, not so much to ignore the daily market madness of the ticker, but to only engage with it when you are using it to serve your own interests.  Inherent in that is that you have to know what your interests are and you have to be willing and able to ignore everything else that Mr. Market will bring your way.  Further Graham says that “A serious investor is not likely to believe that the day-to-day or even month-to-month fluctuations of the stock market make him richer or poorer.”

So what did Zweig have to say about this chapter?

Commenting on Commentary on Chapter 8

To Zweig this is somewhat simple, just because Mr. Market shows you prices everyday, “You do not have to trade with him just because he constantly begs you to.”  The goal is to turn Mr. Market into someone who serves your interests, which could simply be buying at fair prices and selling at euphoric prices when offered, and it could be accomplished in ways like automating decisions to buy and rebalance.  Those aren’t necessarily the only ways to make the market serve your interest, but serve as good examples.

It’s a lesson about moving from a mindset of anticipating and predicting the market (the hallmarks of speculation) to one focusing on controlling what you can control.  Zweig lists several things an intelligent investor can control:

• Your brokerage costs

• Your ownership costs, through expense ratios

• Your expectations for future returns

• Your risk, through asset allocation and any associated rebalancing

• Your tax bill, by not churning your account

Zweig reminds us that investing is not a competition, it’s about reaching your goals as it relates to your own financial needs, but cautions that getting caught up in comparison games is human nature. It is easy to say that the daily market fluctuations won’t matter over a 10 or 20 or longer year investment horizon because they won’t, but to actually act accordingly is a different matter.  We crave control and acting gives us a sense of control.

For Zweig the remedy to our biological instincts is to “dollar-cost average, rebalance, and sign an investment contract.” with an end towards reaching your long-term financial goals without getting caught up in the arms of the manic depressive Mr. Market.

“The happiness of those who want to be popular depends on others; the happiness of those who seek pleasure fluctuates with moods outside their control; but the happiness of the wise grows out of their own free acts.” - Marcus Aurelius

Edward Quince’s Wisdom Bites: Are You Intelligent? Chapter 7

 Can you beat the market?  Chapter 7 of The Intelligent Investor is geared towards those “enterprising investors” who believe they can potentially do better than the market. Before proceeding, it is worth a reminder that Graham defines “investing” as very specifically those endeavors that embody thorough analysis, provide protection from serious losses and offer adequate returns for their effort.  Like all eras our current “investing” climate offers many ways to invest that are likely to fail meeting Graham’s definition at the personal level, because most of us are not willing or capable to put in the work.  Nevertheless, Graham believed it was possible to do better than the average investor, while recognizing that to do so you would have to be willing and able to hold a portfolio of investments that was different from most other investors and speculators.  

Graham concludes this chapter with a warning: “..the majority of security owners should elect the defensive classification.  They do not have the time, or the determination, or the mental equipment to embark upon investing as a quasi-business.” and  “..the investor’s choice as between the defensive or aggressive status is of major consequence to him, and should not allow himself to be confused or compromised in this basic decision.”

Fast forward to today, many investors have heeded Graham’s advice, so much so in fact that a current market debate is whether there is so much passive, index investing that markets are no longer efficient in providing price discovery.  I don’t have the answers to this question, but a recent research article by Owen Lamont (behind a paywall) posits the following:
“Has the rise of passive investing broken the stock market? Is the level of passive ownership too high? No. There is no strong reason to believe that higher indexing degrades market efficiency. What matters are the non-passive investors: Are there enough of them, do they have the right incentives, are they able to express their views via trading? What does not matter are the passive investors: They are like the audience in a play; they just watch the activity on stage. There is no level of passive ownership, other than 100%, that obviously causes the market to be dysfunctional.”

Anyway, what does Zweig have to say about trying to beat the market?

Commenting on Commentary on Chapter 7

While the chapter was focused on “positive” things investors could do to try to do better than average, Zweig focuses again on things investors should generally not do: 

• Don’t try to time the market. Calling market timing a “practical and emotional impossibility.” 

• Don’t pay too much for a growth stock.  He reminds investors of a cardinal rule, that no company is a great investment at “any price”, you’re always investing against what’s already priced in.  Meaning even if a company is going to grow gangbusters if that growth is already priced in, you probably don’t have the upside you think in terms of investment gains.

• Don’t put all your eggs in one basket. While acknowledging that really big fortunes are made from concentrated holdings of common stock, Zweig looks at the negatives of concentrated positions, noting that “concentration also makes most of the great failures of life.”

• Don’t think all cheap, “cigar butt” companies are great investments just because they’re cheap.  Some items are on sale for a reason.

• Don’t keep all your money invested at home.  Learn the lessons of Japan’s lost decade and at least own something that diversifies away home country risk. Many multinational companies likely meet this criteria.

So there you have it, Zweig offers us no concrete ways to beat the market, it seems like a theme here, but why? 

We start to get some answers in the next Chapter, which is one of the greatest chapters in investing literature, as we introduce market volatility to the discussion.

As Morgan Housel says, volatility in the price of admission to investing and earning returns.

“It requires a great deal of boldness and a great deal of caution to make a great fortune; and when you have got it, it requires ten times as much wit to keep it.” - Nathan Mayer Rothschild

Edward Quince’s Wisdom Bites: Are You Intelligent? Chapter 6

The year is 2026, you as an investor have lived through recent things like memecoins, SPACs, amongst other market phenomena of the recent past and now you’ve witnessed the largest IPO in history with SpaceX’s recent offering.  And while that has all been very exciting, you still have the possibilities of Anthropic and OpenAI IPOs on the horizon, both of which are poised to exceed SpaceX’s record raise. But, assuming an investor can buy these new issuances, should they?

In Chapter 6, Ben Graham shares his thoughts on “new issues” both generally and in common stocks, cautioning: “be wary of new issues…new issues have special salesmanship behind them..[and] most new issues are sold under “favorable market conditions” which means favorable for the seller and consequently less favorable for the buyer.”  

And if that warning wasn’t enough, Graham goes on: “Bull-market periods are usually characterized by the transformation of a large number of privately owned businesses into companies with quoted shares.” and “One fairly dependable sign of the approaching end of a bull swing is the fact that new common stocks of small and nondescript companies are offered at prices somewhat higher than the current level for many medium sized companies with a long market history.”  Time will tell whether 2026 will be a year where Graham can say “told you so.”

The whole chapter is a lesson in via negativa, it’s an ode to knowing what not to do, it’s a list of “don’ts” for more “aggressive” investors.

Commenting on Commentary on Chapter 6

After discourse on how “permanent autopilot” might be the best approach for the building an investment portfolio for the “defensive investor”, in Chapter 6, Zweig, via his commentary on Graham, tackles what Graham calls the “Negative Approach” to portfolio policy.  The attention turns to “Enterprising Investors” but the starting point for general asset allocation remains the same as that of the defensive investor (consider your risk tolerance).  As mentioned above, it’s a list of things that most investors should likely say “no” to when it comes to inclusion in their portfolio. 

So here we go:

• Junk Bonds - while largely a flat no for Graham given very high expenses of buying these bonds at the time. Zweig gives this a moderate no, citing some benefits of junk bonds for certain investors, but ultimately concluding that these are “only a minor option” for the intelligent investor
  
  

• Foreign Bonds - again Graham was largely a flat no, while Zweig cites some benefits of EM Bonds as a diversification tool while stating “no sane investor would put more than 10% of a total bond portfolio in spicy holdings like these."
  
  

• Day Trading - a no as “the cost of trading wear away your returns like so many swipes of sandpaper…and taxes”
  
  

• IPOs - while picking the right IPO can be a bonanza, we likely overestimate the frequency with which IPOs actually work out for investors.  For every Microsoft there are countless Pets.com….it really to say most IPOs tend to be overpriced.  The intelligent investor might characterize IPO as meaning: “It’s probably overpriced”, “Imaginary profits only.”, “Insiders Private Opportunity.”, or “Idiotic, Preposterous, and Outrageous.”

If you’ve been following along the list above should really come as no surprise given Graham’s definition of intelligent investing…feel free to read the previous post for a refresher.

Now that Zweig has told you what not to do with your portfolio, the next chapter moves to what types of investments an enterprising investor should consider if they want a chance of doing better than “run of the mill investment results.”

Until then:

“The punches you miss are the ones that wear you out.” - Boxing trainer Angelo Dundee

 

Edward Quince’s Wisdom Bites: Are You Intelligent? Chapter 5

 As we continue to explore Jason Zweig’s commentary on Ben Graham’s class book The Intelligent Investor, let us recap what we covered last week (Introduction through Chapter 4).  Here are what I see as the key points:

• Being an intelligent investor is all about getting the odds of success on your side

• Investing is fundamentally different from speculating

• Investors should focus on real not nominal returns

• What you pay for an investment matters

• Beware of extrapolating the past into the future

• Know how much risk you can take, not just financially but emotionally

Chapter 5 builds off the concept of the “Defensive Investor” (the investor who owns portfolios of funds that largely can run on autopilot) and further explores asset allocation, specifically how equity securities should be considered in a portfolio for such an investor.

Commenting on Commentary on Chapter 5

Zweig reminds the reader that understanding risk tolerance is necessary before determining portfolio construction and the allocation of funds between fixed income and equities.  Again, Zweig focuses on the psychology of owning equities.  Earlier we discussed the risk of buying equities at “any price”, that no price is seemingly too high, but now Zweig cautions against another common psychological factor that investors seemingly find no price is too low following a stock market rout.  

At the time I am writing this the stock market has been on a largely one-way trip higher with the S&P 500 up ~70% over the last 5 years, so it can be easy for investors to forget about how they felt and reacted when stocks were falling. Even recent tariff related drawdowns can feel like ancient history.  Zweig is reminding us that we can be what I call bipolar when it comes to the stock market, believing most strongly about buying when the market is euphoric and feeling incredibly pessimistic and fearful of buying following a market downturn.  Zweig’s advice is to consider that “..paradoxically, the very act of crashing has taken much of the risk out of the stock market…the decision whether to own stocks today has nothing to do with how much money you might have lost by owning them a few years ago.”  This is no different from the earlier theme that price matters.

Zweig reminds us that buying stocks when they are offering a solid risk premium relative to bonds is a sensible strategy, meaning that the defensive investor should consider what return they can earn in the relative safety of fixed income investments when considering the appropriateness of buying equities.

Once a decision is made to own some equity (stock market) exposure, the investor has to decide what to buy.  Again, revisiting earlier themes, Zweig cautions the defensive investor against blindly following the crowd, spending a few paragraphs warning the average “investor” against trying their hand at picking individual stocks and also of the risk of allocating with “home bias”.

To me all of the above is just fodder to set up the true message of this chapter, which is that the defensive investor should consider building a permanent autopilot portfolio.  What exactly does this mean, well Zweig says it starts with adopting a mindset that you can’t predict the future, when it comes to trying to address whether bonds will outperform stocks, you simply say “I don’t know and I don’t care.”  Once this mantra is adopted the next step in building an autopilot portfolio is to dollar-cost average into a portfolio of index funds. Zweig views dollar cost averaging as a way to “prevent yourself from either flinging money at the market just when it seems most alluring (and is actually most dangerous) or refusing to buy more after a market crash has made investments truly cheaper (buy seemingly more “risky”).  Zweig also favors index funds for the defensive investor as it removes the necessity of trying to pick needles in the stock market haystack, as the index allows you to own the whole haystack.

“Human felicity is produc’d not so much by great Pieces of good Fortune that seldom happen, as by little Advantages that occur every day.” - Benjamin Franklin

Edward Quince’s Wisdom Bites: Are You Intelligent? Chapter 4

 Today we continue our exploration of Jason Zweig’s commentary on The Intelligent Investor.  In Chapter 4 the theme of portfolio construction and asset allocation begins to be covered.

Studies show that portfolio policy and more specifically how an investor allocates their portfolio across stocks, bonds, and cash can be responsible for up to 90% of the volatility experienced and returns earned by an investor relative to things like individual stock selection and market timing.  The big picture point is that investors should be thinking about why they own certain investment assets at all and how they fit together to support reaching their goals.  As Bogleheads investment philosophy would posit, when preparing to invest, one should never bear too much or too little risk. Given, as we just said, a majority of the risk an investor can experience is tied to how they allocate their assets across stocks and bonds, this concept of portfolio construction becomes crucial to investing intelligently.  Security selection sits downstream from the asset allocation decision.

Commenting on Commentary on Chapter 4

As Zweig reminds us, portfolio construction / asset allocation policies are not solely about the investments, it is very much about you, the investor. There is a financial mantra that is a riff on Socrates, that says ‘investor, know thyself’, hitting straight to the heart of one of the most overlooked areas of building an investment portfolio, you first have to understand what kind of investor you are, to better understand your own ability to stick to a plan when financial conditions and markets get difficult.

Before digging into thoughts on how an investor should determine the proportion of stocks, bonds, and cash they hold, Zweig via Graham detour slightly into what they see as the two main types of investors based more on personality traits than prowess.  They offer up two ways to be an intelligent investor based on who you are, the first is what is called ‘enterprising’, this is the investor who does his own research, selection, monitoring to build up a portfolio, while the second he calls ‘defensive’, the investor who owns portfolios of funds that largely can run on autopilot. In short the distinction is about effort and emotion.

The rest of the chapter focuses on the concept of ‘defensive’ or ‘passive’ investing, beginning with the decision of how much you should invest in stocks. If you were hoping for a quick answer to this question, you won’t get it.  Instead of providing an answer Zweig reviews several leading heuristics commonly discussed in investing circles, one being that investors should invest a percentage of their portfolio in stocks equal to 100 minus their age.  Overall Zweig cautions that relying on factors like age misses the bigger picture Graham is trying to discuss, which is it’s about your financial and emotional ability to bear risk, to survive volatility, and the unexpected based on your needs.

Graham had suggested that an investor should never hold more than 75% of their portfolio in stocks and never less than 25% in stocks, with the driver being factors specific to your ability to control yourself during the inevitable vagaries of the market, or as Bogleheads would say: “Aim to select an asset allocation that lets you sleep at night, and avoid the destructive urge to sell out in a panic the next time the market plummets, then having to worry over when is the time to get back in. This leads to selling low and buying high, the exact opposite of prudent investing.”  The more risk you can tolerate, the higher percentage of your portfolio can be allocated to stocks.

The rest of Zweig’s commentary on the chapter is devoted to providing the reader with an overview of some fixed-income securities, which I won’t cover here as I feel like it takes away from the central point of this chapter.  The real wisdom Zweig leaves us with in this chapter is that “Graham’s distinction between active and passive investors is another of his reminders that financial risk lies not only where most of us look for it - in the economy or in our investments - but also within ourselves.”

When we return we turn to how the defensive or passive investors should think about filling up the equity/stock portion of their portfolio.

Until then:
“When you leave it to chance, then all of a sudden you don’t have any more luck.” - Pat Riley

Edward Quince's Wisdom Bites: Are You Intelligent? Chapter 3

 We’re now 3 posts deep on exploring Jason Zweig’s commentary on the Ben Graham classic book, The Intelligent Investor.  In our last two posts we learned about the 3 elements that define investing vis a vis speculating and why inflation must be factored into the evaluation of investment returns and goals.

Today, in reviewing Chapter 3 (or more precisely Zweig’s commentary on Chapter 3) we learn of the perils of extrapolating the past, as Zweig puts it: “...the intelligent investor must never forecast the future by extrapolating the past.”

Commenting on Commentary on Chapter 3

Chapter 3 is all about reviewing historical investment performance. At first the cursory reader may be tempted to skip this chapter as it was titled in a manner that it was an exploration of stock market levels up to 1972, but in judging this chapter solely by its title one would miss the genius of the central lessons inherent in it.

As mentioned above one of the wise lessons in this chapter is what I mentioned above to not forecast the future solely based on the past, however, for me the bigger lesson is simply that what you pay for an investment matters - or succinctly price matters.

Zweig dives into the logic of some of the 1990s prominent investment gurus and the argument that effectively says that if you hold stocks long enough, you eliminate all of the risk, that stocks are a “free lunch” if the investor just has enough time.  You may be saying to yourself, but isn't it correct that over a long enough time line history does show stocks in the aggregate have positive returns?  And that would be correct, the nuance is that statement isn’t enough to guarantee that you as an investor actually earn those returns.  Why? Because over that time horizon some/many companies fail, leading to “survivorship bias” in aggregate returns, meaning that the individual investors' portfolio construction would have had to be able to overcome those losers, or maybe more succinctly, not everyone owned the market portfolio.  But all of the aforementioned is just a sidebar to the deeper truth in this chapter which is: “The value of an investment is, and always must be, a function of the price you pay for it.”

So long as profits are finite, the price an investor is willing to pay must also be finite. Reflecting on that for a second, it’s a simple message, for all investments there will be some price at or above which it is simply too high, it is an impossibility the profits will be earned to cover that price.  Graham calls it the “rule of opposites” that the more enthusiastic investors are in stocks for the long run, the more likely they are to be proven wrong in the short run.  Perhaps this is just saying that the more hopium the market prices into stocks the more likely they are to be disappointed.

Too high of prices should lead an investor to ask at this price how can future returns still be higher? Once everything is ‘priced in’ where can the new optimism come from?

Zweig challenges us to think about future returns with cold calculating logic, not with market punditry and ‘noise’ from gurus.  And exactly what is that cold calculating logic of stock returns, well it is 3 factors (Graham seemed to like 3s): 1) real growth (the rise of company earnings), 2) inflationary growth (general rise in prices that companies can pass through ) and 3) speculative growth or decline (the general appetite for investing in stocks).  We’re not going to dive into these factors, but I would like to again highlight the fundamental logic that underlies these which I think was perfectly summed up by Warren Buffett in this quote:

"The absolute most that the owners of a business, in aggregate, can get out of it in the end - between now and Judgment Day - is what that business earns over time." 

Your investments can’t ‘out-earn’ the economy in aggregate. Does that exclude some companies from earning a disproportionate share of economic output, of course not.  Can you or anyone consistently find and buy shares in just those companies at fair prices and then exit them at the right time? Probably also no.

This is where some themes start to converge. Graham defines an element of intelligent investing as aspiring for ‘adequate’ performance. If we use the formula above, one place an investor might find ‘adequate’ performance might simply be what Buffett has called the ‘American tailwind’, simply capturing the real growth of an economy and letting it compound.  

Of course betting on an economic tailwind to continue is not necessarily enough, as Zweig reminds us: “The only thing you can be confident about while forecasting future stock returns is that you will probably turn out to be wrong.”  

As investors, if we’re trying in some way to put the ‘odds on our side’, then for me this chapter is all about realizing that price matters.

Next post we’ll begin to explore Graham’s views on the topic of ‘Portfolio Construction’.

Until then:

“You’ve got to be careful if you don’t know where you’re going, ‘cause you might not get there.’ - Yogi Berra.

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