From time to time I re-read excerpts from the works of Benjamin Graham, Warren Buffet, John Bogle, and the like. My most recent reading was of Benjamin Graham’s The Intelligent Investor, and many of his timeless words of wisdom struck a particular chord this time around. Benjamin Graham, of course, was the father of value investing, and mentor to legendary investor Warren Buffet. Below, I will share some of these insights in relation to the recent volatility and relative chaos markets have experienced.
Over the past year and a half we’ve seen unprecedented moves in oil, and dramatic increases in the dollar. We’ve seen healthcare, tech, and general small-cap stocks shoot to the moon and come right back. China has teetered on the edge and Russia has threatened European stability. Japan and some European nations have seen interest rates fall into negative territory. The news headlines have been too many to list. In times like these investors can do but one thing – shut out the noise, batten down the hatches, and adhere only to the most fundamentally sound investment principles.
Volatility is a given, and world events will never churn out utopian outcomes. Of prudent, intelligent investing through the most uncertain of times, Benjamin Graham states the following:
Through all its vicissitudes and casualties, as earth-shaking as they were unforeseen, it remained true that sound investment principles produced generally sound results. We must act on the assumption that they will continue to do so.
And on the irrational expectation that one can beat the results of these intelligent principles:
But is it not the part of intelligence to run the small risk of being wrong by sticking to the old principles, rather than run the big risk of being wrong by breaking away from past experience?
Through all the chaos that has been the past century – wars, famine, drought, communism, socialism, terrorism – none has derailed these fundamental, intelligent investing principles.
Those that do not adhere to these principles often become mere speculators. The distinction between investing and speculating is a recurring theme in The Intelligent Investor. Investing, simply defined according to Graham’s philosophy, is characterized by an emphasis on cash, income, a margin of safety, and a high probability of the return of your capital. Speculating deviates from these core tenets to pursue more immediate increases in principal at much greater risk (and a lower probability of success). Many modern developments, such as 24-hour financial news, inexpensive trading, and ease of access to information (accurate or otherwise), has been an unfortunate “boon” for would-be market speculators. Of speculation, Graham states the following:
The investor can scarcely take seriously the innumerable predictions which appear almost daily and are his for the asking. Yet in many cases he pays attention to them and even acts upon them. Why? Because he has been persuaded that it is important for him to form some opinion of the future course of the stock market, and because he feels that the brokerage or service forecast is at least more dependable than his own. This attitude will bring the typical investor nothing but regrets… Thus he begins by studying market movements as a “common-sense investment precaution” or a “desirable supplement to his study of security values”; he ends as a stock-market speculator, indistinguishable from all the rest.
It is important today more than ever to keep a sound mental state facing an onslaught of investment “advice” from financial salesmen and the financial press. Of avoiding these pitfalls Graham writes:
It is becoming increasingly difficult to attain that peculiar combination of alertness and detachment which characterizes the successful investor as distinguished from the speculator. Intelligent investment is more a matter of investment approach than it is of technique. A sound mental approach toward stock fluctuations is the touchstone of all successful investment under present-day conditions.
That peculiar combination of alertness and detachment – alertness to sound principles and useful information; detachment from the noise and chaos attempting to permeate the porous barriers of rationality. If one can achieve this particular combination of alertness and detachment, along with no small amount of patience and courage, they stand to persevere through the most tumultuous of market cycles and earn the title of Intelligent Investor.