An outsider not familiar with Benjamin Graham might see The Intelligent Investor as an investing book past it’s prime.
The book was first written in 1949. The fourth and last edition revised by Graham was printed in 1973. Graham regularly used current stocks and market events to keep examples and case histories fresh. Even the strategies Graham presented where timely. So it’s understandable if some readers label it “outdated.”
But those same readers probably want something tangible. There will always be a supply of people wanting a secret formula or metric, a short cut to easy gains. It’s human nature. And the publishing industry supplies that demand. The investing genre is filled with long-forgotten books like that because the formulas only last an instant.
What matters is Graham’s primary lessons on Mr. Market and margin of safety are still relevant, even though they may be applied different today. And his secondary lessons are too. Here are just a few examples that come to mind.
Principles over Strategies
It’s Graham’s principles that stand the test of time. He makes it clear from the start that investing principles matter most.
The underlying principles of sound investment should not alter from decade to decade, but the application of these principles must be adapted to significant changes in the financial mechanisms and climate.
Investment principles are often abstract. They require thought and effort and acceptance that they may not work 100% of the time, but they work more often than they fail.
But because markets are always changing, strategies go in and out of favor and sometimes die. So solid investment strategies are built from sound investment principles. Not the other way around.
Backed by Data
One thing about Graham, even in his earliest writings, is that he always brought the data. His strategies were backed by data. His case studies…everything was backed by data. He had a constant curiosity and he relied on data for answers.
Graham also understood that investing was a game of probabilities. Investment outcomes, like business outcomes, fall in a range of possibilities. And he knew that emotions can sway investors to expect an improbable outcome.
To avoid that mistake, Graham would figure out the best, worst, and most likely outcome for an investment based on the data. The process wasn’t foolproof, but it forced him to think about the range of outcomes before making a decision.
Know Market History
Graham believed knowing market history could better inform future investment decisions. It’s most useful at the extremes of market cycles. The key is to look deeper than annual returns. For instance, mid-year swings often tell a different story than annual returns.
Another area to look at is changes in the relationship between price, earnings, dividends, and bond yields. Comparing the P/E ratio across multiple years often show extreme sentiment swings that can go unnoticed if you’re only comparing one year to another.
For example, the period from 1949 to 1961 saw the S&P 500’s P/E ratio expand from 6.3 to 22.9. Graham called it “the most remarkable turnabout in the public’s attitude in all stock-market history.”
Management Works for Shareholders
Graham was pro-shareholder, to the point of being an activist. He believed it’s the shareholder’s duty to hold management to account.
Shareholders should question management whenever results are unsatisfactory, worse than the competition, or if the stock price languishes for a long time.
In other words, shareholders should act like the business owners that they are. Yet most still don’t.
Can You Beat the Market?
Probably not. Graham cites the same reason still used today — the poor track record of mutual funds against a benchmark. The fund underperformance drum has been beating since at least 1973 (it actually goes back further):
…to the objective observer the failure of the funds to better the performance of a broad average is a pretty conclusive indication that such an achievement, instead of being easy, is in fact extremely difficult.
Yet, Graham believed average investors were better off owning funds than picking stocks. He even went so far as to recommend the defensive investor use index funds of their own creation (via the Dow since index funds didn’t exist at the time).
He offers two possible reasons why it’s so hard: either the markets are efficient or the pros are biased. Which happens to be the same reasons still argued about today. I won’t rehash it. Just know that Graham was on the behavioral side.
Okay, there’s a caveat with a giant asterisk for the one thing everyone cares about. Graham reiterates how hard it is to invest throughout the book. Except, he spreads out his warnings just far enough apart for the reader to forget about the last one.
For those trying to do something most pros fail to do, Graham offered up this:
But if it is true that a fairly large segment of the stock market is often discriminated against or entirely neglected in the standard analytical selections, then the intelligent investor may be in a position to profit from the resultant undervaluations. But to do so he must follow specific methods that are not generally accepted in Wall Street, since those that are so accepted do not seem to produce the results that everyone would like to achieve. It would be rather strange if — with all the brains at work professionally in the stock market — there could be approaches which are both sound and relatively unpopular. Yet our own career and reputation have been based on this unlikely fact.
So it’s possible…assuming you can find inefficiencies in the market and do things differently than most investors. Invest differently. Think differently. Behave differently.
And you still may not beat the market.
In other words, the godfather of value investing freely admits that most people won’t be able to stick with a strategy built on his philosophy, much less beat the market. Human nature is a huge obstacle to overcome. I’ll give Graham the last word:
The moral seems to be that any approach to money making in the stock market which can be easily described and followed by a lot of people is by its terms too simple and too easy to last. Spinoza’s concluding remark applies to Wall Street as well as to philosophy: “All things excellent are as difficult as they are rare.”
Notes: The Intelligent Investor by Benjamin Graham