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If you’re reading this you should be open-minded to the possibility that Graham’s ideas are no longer applicable to the latest investment landscape.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
No comments:
Post a Comment