Leithner Letter – The Power Of Stoic Thinking: Why Investors Welcome Panics, Crises And Bear Markets [Part I]

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Chris Leithner’s Letter No. 192-193 titled, “The Power Of Stoic Thinking: Why Investors Welcome Panics, Crises And Bear Markets [Part I]”

Man is troubled not by events, but by the meaning he gives them. … What, then, is to be done? To make the best of what is in our power, and take the rest as it naturally happens.

Discourses 1.1.17

Stocks are crashing, so you turn on the television to catch the latest market news. But instead of CNBC or CNN, imagine that you can tune in to the Ben-jamin Graham Financial Network. … The anchorman announces brightly: “stocks became more attractive yet again today, as the Dow dropped another 2.5% on heavy volume – the fourth day in a row that stocks have [become] cheaper. Tech investors fared even better, as leading companies like Microsoft lost nearly 5% on the day, making them even more affordable. That comes on top of the good news of the past year, in which stocks have already lost 50%, putting them at bargain levels not seen in years. And some prominent ana-lysts are optimistic that prices may drop still further in the weeks and months to come.”
The news cuts over to market strategist Ignatz Anderson of the Wall Street firm Ketchum & Skinner, who says, “My forecast is for stocks to lose another 15% by June. I’m cautiously optimistic that if everything goes well, stocks could lose another 25%, maybe more.” “Let’s hope Ignatz Anderson is right,” the anchor says cheerfully. “Falling stock prices would be fabulous news for any investor with a very long [time] horizon.”

Jason Zweig
“Commentary on Chapter 8”
The Intelligent Investor: A Book of Practical Counsel
by Benjamin Graham (2006)

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The Power of Stoic Thinking: Why Investors Welcome Panics, Crises and Bear Markets (Part I)

What mindset underlies successful investment? How does an investor worthy of the name respond to sudden and sharp falls, as well as extended contractions, of individual stocks’ prices and overall markets’ levels? I ask these questions in order to make a vital point: investment – and particularly successful investment – is primarily a matter of character and only secondarily of cleverness. In his Pref-ace to The Intelligent Investor, Warren Buffett wrote:

To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework. This book precisely and clearly prescribes the proper framework. You must supply the emotional discipline.

Benjamin Graham elaborated this point: an investor’s results presuppose a particular temperament. Graham recalled William Shakespeare’s Julius Caesar:

The investor’s chief problem – and even his worst enemy – is likely to be himself. (“The fault, dear investor, is not in our stars – and not in our stocks – but in ourselves” …) [Hence] by arguments, examples and exhortation … we hope to aid our readers to establish the proper mental and emotional attitudes toward their investment decisions. We have seen much more money made and kept by “ordinary people” who were temperamentally well suited for the investment process than by those who lacked this quality, even though they lacked an extensive knowledge of finance, accounting, and stock-market lore (The Intelligent Investor, p. 8; see also pp. 120-121).

In an interview with Hartman Butler in the early 1970s (“An Hour with Mr Graham,” reprinted in Janet Lowe, The Rediscovered Benjamin Graham: Selected Writings of the Wall Street Legend, John Wiley & Sons, 1999), Graham added:

The main point is to have the right general principles and the character to stick to them. … There are two requirements for success in Wall Street. One, you have to think correctly; and secondly, you have to think independently.

Perhaps because neither The Intelligent Investor nor Security Analysis (1934 and subsequent editions) used the term, and these days few people would properly understand it if they had, investors don’t recognize how much Stoicism influenced Graham. This ancient philosophy mitigates the influence of passion upon thought and action. (As we’ll see, Stoics’ definition of “passion,” among other things, differs greatly from the contemporary one.) Stoicism encourages the self-control that reasonable decisions –as well as responses to unexpected developments such as panics, crises and bear markets – presuppose. By embracing reason and reducing emotion’s scope to overwhelm it, a Stoical approach increases the likelihood (assuming that the investor also adopts Graham’s and Buffett’s framework) that over time the investor will think and act sensibly. “Individuals who cannot master their emotions,” goes one insight commonly attributed to Graham, “are ill-suited to profit from the investment process.” In investment as well as theology, Gnosticism is nonsense. In other words, there simply is no secret; nor is there an easy path or shortcut. Discounting and ignoring others’ opinions (unless you’ve carefully assessed them and no matter the confidence with which prominent and influential people express them), conducting your own analyses and drawing your own conclusions – these habits of mind underpin both Stoic temperament and Graham’s conception of sensible investing.

Stoicism has spiritual underpinnings: indeed, it and atheism are incompatible. Some of its foundations are in some respects similar to Christianity’s (and, for that matter, Islam’s and Judaism’s). Hence Christianity and Stoicism overlap in some significant respects.2 Accordingly, throughout the centuries influential Christians ranging from St Ambrose to St Thomas Aquinas to Pope John Paul II have praised Stoic writings such as the Meditations of Marcus Aurelius. Be they Christians (or Jews, Hindus, Muslims, etc.) or even agnostics, an appreciation of Stoicism can greatly benefit investors – indeed, all people in many aspects of their everyday lives. Stoics understood that if negative emotions such as anger, envy, greed, fear and grief plague your life, then soundness and peace of mind will elude you. Serenity in the midst of adversity – which is hardly the same thing as the modern, Western and secular notion of “happiness” – is a necessary condition of a well-lived life. Hence many of us should consider Stoics’ practical techniques to reconsider negative thoughts and abate disruptive emotions.

Stoics don’t attempt – as extreme Calvinists once did and “positive thinkers” now do – somehow to block or extinguish certain thoughts and emotions. Stoics recognise that damaging thoughts and upsetting emotions reflect our flawed human nature: hence they affect all people (albeit some more than others). Stoics harmful emotions (including fear of bear markets and recessions, the panic that occurs during financial crises, etc.) stem from illogical thinking. Once you under-stand that these emotions are unfounded, you’ll cease to think so unfavorably about the events that prompt them – and these happenings will less frequently and deeply disturb your equanimity.

Unlike today’s “positive thinkers,” Stoics don’t reject negative thoughts. Indeed, the modern stereotype of Stoicism is diametrically incorrect: Stoics DON’T try to sup-press particular emotions. Instead, through dispassionate analysis they reassess from negative to neutral, neutral to positive – and sometimes negative to positive – their reactions to events. In his Meditations, Marcus Aurelius counseled: “Re-member too on every occasion which leads thee to vexation to apply this principle: not that this is a misfortune, but that to bear it nobly is good fortune.” In one of The Intelligent Investor’s numerous Stoic passages, Graham advised (p. 203):

The true investor … is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits [him], and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines … is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if … stocks had no market quotation after all, for he would then be spared the mental anguish caused him by other persons’ mistakes of judgment [second set of italics in the original].

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