Ben Graham spent a lifetime teaching about the errors of our ways. He started his career in 1914. 33 years later he would find himself lecturing students on the problems in security analysis.
In his final lecture, he looked back at the entirety of his career, up to that point, to highlight the many improvements.
I would like to make some final observations, relating to a long period of time, as to what has happened to the conduct of business in Wall Street.
If you can throw your mind, as I can, as far back as 1914, you would be struck by some extraordinary differences in Wall Street then and today. In a great number of things, the improvement has been tremendous. The ethics of Wall Street are very much better. The sources of information are much greater, and the information itself is much more dependable. There have been many advances in the art of security analysis. In all those respects we are very far ahead of the past.
All of these things have continued to improve since the mid-1940s. And a couple of things can be added to Graham’s list as well, like lower trading costs and easier access to markets.
Less than twenty years ago, the average investor had to dig through a Standards & Poor’s or Moody’s Manual to find data on a company.
Now we have access to so much information at our fingertips, we don’t know what to do with it all. Maybe to our detriment. Both the amount of signal and noise has vastly increased in the last decade.
But many finance geeks have taken it upon themselves to backtest…everything. Wall Street aphorisms, investment strategies, you name it, the easy access to data means it all can be proved or disproved and will only continue to get better.
But then Graham warned about two important things that hadn’t changed:
In one important respect we have made practically no progress at all, and that is in human nature. Regardless of all the apparatus and all the improvements in techniques, people still want to make money very fast. They still want to be on the right side of the market. And what is most important and most dangerous, we all want to get more out of Wall Street than we deserve for the work we put in.
There is one final area in which I think there has been a very definite retrogression in Wall Street thinking. That is in the distinctions between investment and speculation, which I spoke about at the beginning of this lecture. I am sure that back in 1914 the typical person had a much clearer idea of what he meant by investing his money, and what he meant by speculating with his money. He had no exaggerated ideas of what an investment operation should bring him, and nearly all the people who speculated knew approximately what kind of risks they were taking.
Human nature has barely budged. In fact, the long history of gambling, going back several thousand years, shows how long human nature has been at a standstill. Simply, we love the idea of making a lot of money quickly. Lotteries wouldn’t exist without it.
So it should be no surprise that speculation and gambling in the stock market continue to be a thorn in the side of many investors. The line between the two is probably more blurred than ever.
The problem lies in expecting more than what the market is capable of offering. Whenever the markets are rising, and people around us are making money quickly, the pull to get a piece of the action grows.
Succumbing to the urge rarely works out the way we envision it though. That’s because lottery-like gains in the stock market come with lottery-like probabilities of paying off. In other words, losing is practically inevitable. And trading more often only hastens the losses.
About two years after this lecture, Ben Graham would publish the first edition of his classic The Intelligent Investor. He laid out, right in the introduction, the biggest problem investors face — ourselves. The advantage goes to the investors who can get out of their own way.