By Paul Cluer, Director of Foord Asset Management:
“The Intelligent Investor” is a seminal text on value investing written by Benjamin Graham (Warren Buffett’s mentor) in 1949. Its content has been applied and debated for the last six decades.
The oft-cited nub of Graham’s investment thesis is that investing should be a rational, analytical process involving a keen assessment of risk and the proverbial “margin of safety.” Graham was quoted as saying that you are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.
Graham’s approach is profoundly rational, but it is not devoid of any psychological or behavioural elements. One of Graham’s basic precepts is the determination of where an investor fits on the spectrum between “defensive” and “aggressive or enterprising”. Graham distinguishes the two investor groups by the amount of intelligent effort they are willing to expend on investment research, not by the amount of risk they are willing to take.
Defensive investors aim to reduce investment effort, annoyance and decision frequency. By contrast, enterprising investors are more willing (or indeed more able) to devote time and care to the selection of securities. Note how defensive investors are not described as “risk averse”, nor are enterprising investors described as “risk taking”.
The ancient Greek aphorism “know thyself” is a Delphic maxim that was inscribed in the forecourt of the Temple of Apollo at Delphi. This seems an appropriate point of departure for any investor. Intelligent investing need not involve a high degree of financial education, and it need not require a full time preoccupation with the investment markets.
Intelligent investing first requires a pragmatic, honest assessment of one’s investment objectives and the time available (and effort required) to attain them. As noted above, Graham urges investors to classify themselves as defensive or enterprising. Dave Foord, in his book Time in the Markets, advises investors to “set investments that are realistic, within their budget and within their intellectual and emotional range.”
This aspect of investing requires a degree of introspection as to an investor’s response or reaction to differing scenarios. Indeed, much evidence exists of how investors sell equities for cash during periods of market weakness, and buy equities at the peaks of market strength. In neither case is the decision correct or rational. Investing is often an effort in crowd control, and a myriad of psychological biases affecting an investor’s decision-making have been identified and studied.
Being an intelligent investor means understanding why you are investing, what the role and objective of your investments are, and appreciating the time horizon realistically necessary to achieve those outcomes. Those tenets form the basis of subsequent successful investment decision-making. They guide the reasoning for selecting a particular kind of investment or fund manager. They provide a framework for forming suitable expectations and managing those expectations appropriately. They compel an investor to reflect carefully on his or her reaction to circumstances, and they are the bedrock of consistency in such responses.
Intelligent investing is a deliberate, thoughtful process, regardless of the investor’s level of skill or experience. It is not a process devoid of emotion, but one that embraces an understanding of emotion and how best to manage such emotion rationally. The maxims are universally applicable, whether to a professional fund manager or to the man or woman in the street.