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
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