A short post for a short holiday week. So here are two excerpts from a short article where Ben Graham describes the game of investing.
The first is Graham’s definition of value investing and how he views the future. The second is a reference I see often comparing Wall Street to a tournament of bridge players.
“In our business, ” he commented, “we try to avoid any decisions as to what the stock market is going to do. I’m sure that other people can that much better than we can. I mean it. If you were to ask me today — as good a time as any — what the stock market was going to do, my opinion would have no more value that that of any experienced person you might ask.”
Mr. Graham has defined his value theory as “The practice of buying securities at prices substantially under the value you feel you can establish by analysis.”
“This sounds simple enough,” he points out. “One imagines the layman, in fact, observing that anyone could do it. The perculiar thing is that people don’t do it. They look to the future. The future as I see it, is something to be protected against rather than to exploit.”
Pretty obviously this kind of application and foresight is not easy to sustain. Hence Mr. Graham’s extreme caution about raising false hope. “It seems to me almost axiom,” he stated, “that there can never be a state of affairs where the average member of the general public could become a successful Wall Street operator. If you ask me how far the more than average man could get, I think my answer is still pretty skeptical. The situation is self-defeating. What you’ve got is the tournament of bridge experts I mentioned in The Intelligent Investor. Everybody tends to know the other person’s hand.”
This does not mean, of course, that Mr. Graham thinks investment in stocks and bonds for yield is a bad way to dispose of one’s money. It is a very good way. It does mean that to make more than the next fellow in the Street is just as hard as it ever was and there is no royal road to fortune. Mr. Grahan is the great exponent of this simple truth and for all his occasional desire to get away from the business altogether and cultivate his other interests, there seems little likelihood of his doing so. The price of success in the market is eternal vigilence.
And his quote from The Intelligent Investor about the tournament of bridge players referenced above:
We once likened the activities of the host of stock market analysts to a tournament of bridge experts. Everyone is very brilliant indeed, but scarcely anyone is so superior to the rest as to be certain of winning a prize. An added quirk in Wall Street is that the prominent market analysts freely communicate and exchange their views almost from day to day. The result is somewhat as if all the participants in a bridge tournament, while each hand was being played out, gathered around and argued about the proper strategy.
Modem stock market movements, in fine, are the result of a concentration of tremendous skill in a limited area, where profits can be made by smart people only at the expense of other people who are almost equally smart.
Investing gets compared to sports and games quite often, to which I’d add this. The natural response when someone sees a bunch smart people playing the same game the same way is to think that’s how it’s done. So they fall in line and do the same thing. But in situations like that, it becomes really hard to consistently win.
That leaves you with two alternatives: you can play an entirely different game or just not play at all.
You can take a more passive approach and accept average market returns. Or you can fully understand the game Wall Street is playing. It’s one based on high fees, high turnover, and fast quick wins.
Now play a different game. Low fees, low turnover, and slow long-term wins.
Beowulf in Wall Street – Barron’s Sept. 15, 1952
- Some Things I’ve Learned Over The Last 30 Years – Broadsword Capital
- What I Believe Most – M. Housel
- The Rationality Paradox – S. Godin
- Small Companies are Gone, But Should They be Forgotten – J. Zweig
- Investors Fight Strange Winds – Bloomberg Gadfly
- Some Markets are More Passive Than Other – Barron’s
- I Do Believe the US Market Will Revert Toward Its Old Means, Just Very Slowly – J. Grantham
- The Values of Value Investing – V. Katsenelson
- Impossibly Hungry Judges – Nautilus
- Human Misjudgment and the American Revolution – Farnam Street
- The Electric Car Revolution Is Accelerating – Businessweek