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
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