“The market, like the Lord, helps those who help themselves. But unlike the Lord the market does not forgive those who know not what they do.” – Warren E. Buffett
The Intelligent Investor
Every Valuewalk reader knows “The Intelligent Investor,” the timeless tome by Benjamin Graham, teacher, mentor and erstwhile employer of the world’s greatest investor, Warren E. Buffett, espousing a rational approach to the art and science of investment.
“The Intelligent Investor” teaches:
- A share of stock is a partnership in a business with an intrinsic value determinable by rational analysis;
- The price of a share of stock fluctuates with the whims of an often irrational market driven by crowd psychology;
- When the price of a share of stock drops below intrinsic value it grants the buyer a “margin of safety” in investment;
- Long-term investment in durably competitive corporations purchased below intrinsic value leads to wealth accumulation;
- All else is, at best, speculation and, at worst, gambling.
Why do we need “The Intelligent Investor?”
For the same reason we need “The Ten Commandments!”
Because left to undisciplined instinct people do irrational and foolish things.
Absent The Ten Commandments people lie, steal, kill, dishonor their parents, cheat on their spouses and run amok.
Absent intelligent investment people gamble, guess, play hunches, follow crowds, neighbors or coworkers. They trust in lucky days or lucky charms. They ask someone more attractive than themselves to blow on dice and blindly “roll ‘em,” cast their fate to the wind and expect that, like heroes on movie screens and television, their long shots will pay off and shower them with riches.
To quote Warren Buffett’s sage partner, Charlie Munger, untutored and naive investors are often “foolish gamblers.”
With so many foolish gamblers there must be a common characteristic that defines them.
There is.
Narcissism!
Inflated regard for one’s self.
The Narcissistic Investor
Narcissism is named for Narcissus, the beautiful youth of Greek myth who fell in love with his own reflection in a pool and remained there, enraptured, until he perished.
We are all drawn to narcissism.
We delight in the narcissism of movie stars, athletes, beauties, nobles, leaders, heroes, performers.
The narcissism of our children, our animals and, truth be told, ourselves.
And we all need a little narcissism.
We need to bathe, dress and groom, optimize our appearance and presentation.
We need to take pride, in ourselves and our accomplishments.
“If I am not for myself, who will be for me?” – Hillel
But unbridled narcissism breeds recklessness: gambling, cheating, overspending, risk-taking, hedonism and, like Narcissus of Greek legend, early death.
Narcissism, borne of beauty, talent and work, delights us.
Just watch Elvis Presley, Frank Sinatra, or Marilyn Monroe, who all delighted in themselves as we delighted in them. Two died young and the third was shocked he hadn’t.
But the failed narcissist is an embarrassment, a joke, a fool.
Hands-down best comedic portrait of a failed narcissist is comedian Brian Regan’s portrayal of a lottery addict:
We laugh at Regan’s lottery addict but he is no less sad than any addict. Like numerologists of old he has “solved” the mystery of the lottery by selecting his own magical numbers; that illusion is merely another barb in the trap in which he writhes.
But does a similar illusion ensnare the average stock market investor in picking his or her own stocks?
Can most investors faithfully apply Graham’s principles?
Can most athletes grab a glove and play ball in the Major Leagues?
“It’s not supposed to be easy. Anybody who finds it easy is stupid.” – Charlie Munger
The Humble Investor
“Markets taught me humility.” – Ray Dalio
“It’s when you’re not humble that you end up doing things that will make you humble.” – Francois Rochon
“Pride goeth before a fall.” – Proverbs 16:18
The New York Times recently reported the number of mutual funds that consistently beat S&P 500 index funds.
Zero!
None!
“What does that tell you?” – Lee Strasberg as Hyman Roth in “The Godfather II”
Humility and The Index Fund
When “The Intelligent Investor” was published in 1949 there were no index funds. Every investor mapped his or her own course among individual stocks.
Today, thanks to the late, great Jack Bogle, low-cost S&P 500 Index Funds representing some 80% of all major public corporations in the United States eliminate the need for the individual investors to buy and sell individual stocks.
Yet we still do, hopefully applying Graham’s rules, but more likely our own best guesses and hopes and the recommendations of ostensibly seasoned advisors.
Even though S&P 500 Index Funds regularly beat managed funds and most individual investors buying individual stocks.
Full disclosure: me, too.
Warren Buffett, author of the preface to the latest edition of “The Intelligent Investor,” recommends not Graham’s formula but low-cost S&P 500 Index Funds as the most efficient, effective and reliable mechanism to invest and build wealth over a lifetime:
And for those who are driven to “play the market” Jack Bogle made this suggestion: put 95% in an index fund and “play”with just 5%. Track and compare: see if you beat the index.
If you are honest in your accounting, odds are you won’t.
“Acknowledging what you don’t know is the dawning of wisdom.” – Charlie Munger
