The world has changed a lot since Benjamin Graham, the “father of value investing,” left us in 1976.
It would be fascinating to get his take on negative interest rates, crypto-currencies, passive investing through ETFs, the collapse of Lehman Brothers, “quantitative easing,” algorithm-powered “flash crashes,” and so much more in today’s financial wonderland.
That’s if he’d even speak with me, a self-described speculator. His dismissal of speculators as emotional momentum followers makes me doubt it.
Before I get into that, however, let me say that I’m not here to slay a giant.
I have the greatest respect for Benjamin Graham’s work. It’s as important as ever. His seminal book, The Intelligent Investor, is essential reading for all speculators. Markets have changed, but people haven’t. Graham is wise and pertinent. And his so-dry descriptions of market mayhem are very entertaining.
But I do think he might have thrown out the baby with the speculative bathwater.
In the introduction to The Intelligent Investor, Graham wrote of speculators:
Most of these people are guided by charts or other largely mechanical means of determining the right moments to buy and sell. The one principle that applies to nearly all these so-called “technical approaches” is that one should buy because a stock or the market has gone up, and one should sell because it has declined. This is the exact opposite of sound business sense everywhere else, and it is most unlikely that it can lead to lasting success on Wall Street. In our own stock-market experience and observation, extending over 50 years, we have not known a single person who has consistently or lastingly made money by thus “following the market.” We do not hesitate to declare that this approach is as fallacious as it is popular.
He also writes:
We shall say quite a bit about the psychology of investors. For indeed, the investor’s chief problem—and even his worst enemy—is likely to be himself… By arguments, examples, and exhortation, we hope to aid our readers to establish the proper mental and emotional attitudes toward their investment decisions.
I agree with both quotes completely.
What I don’t agree with is the implied division of the financial world into two kinds of people: intelligent investors vs. emotional speculators.
To be fair, Graham never said anything as foolish as, “There are two kinds of people in the markets…” He softened his criticism with words like “most” and “nearly all.” And he went as far as to add:
There is intelligent speculation as there is intelligent investing. But there are many ways in which speculation may be unintelligent. Of these, the foremost are: (1) speculating when you think you are investing; (2) speculating seriously instead of as a pastime, when you lack proper knowledge and skill for it; and (3) risking more money in speculation than you can afford to lose.
I again find myself in complete agreement. In fact, in saying this, Graham sounds just like my former mentor, Doug Casey. That’s no surprise, since The Intelligent Investor was one of the first books Doug suggested I read.
That said, it seems to me that Graham never met a serially successful speculator like Doug.
If Graham’s experience didn’t include any thorough, rational, data-driven, contrarian speculators, I could understand his view. If the speculators I met were all emotional momentum-chasers spouting delusional theories, I’d probably come to the same conclusion.
But I have met successful speculators.
And I should say that there have been successful momentum strategies. They tended to not involve either emotional decision-making nor herd mentality, however, so Graham’s and my points stand.
Granted, my 14 years of due diligence around the world pale in comparison to Graham’s 62 years on Wall Street. And yet, I have seen speculators with nerves of steel place bets backed by exhaustive research. They did so precisely because something of value was unpopular in the market, and hence of greater value than its price. I know rational speculators who have beat the market for decades. And I know how they did it.
Graham says his are not “how to make a million” type books. In contrast, that’s exactly what Doug taught me.
I intend to share that learning with my readers going forward.
