I’ll continue summarizing Graham’s book The Intelligent Investor and today, we’ll touch on a very delicate subject: the investor and their advisors.
As I offer stock market research services, you can put me into both the investor and advisors group. Let’s first see what Graham has to say and then discuss the current environment.
Seeking Investment Advice
As Graham is in favor of investing in businesses, he considers seeking investing advice naïve.
Relying on other people to make investment profits for you isn’t always the best thing to do. There are two different types of investment advice you can get: one is there to protect you from doing stupid things, while you might also seek advice that will give you better than average investment returns.
Graham’s message is simple: you either let somebody else manage your funds and seek a conservative return, or you understand the implications behind more complex investment strategies that might lead to higher returns.
Differentiate Between Stock Market Forecasts & Business Forecasts
As there is plenty of demand for what people think the market is going to do, there is plenty of supply for that but according to Graham, there is absolutely no value there as market forecasters are right or wrong merely thanks to luck. Where there is value is in business forecasts which are a completely different ball game.
When you know the business and apply Graham’s principle that the price you pay in relation to the business you buy is the key factor, then business analysis adds value.
Advice From Brokerage Houses
I don’t think anything has changed since Graham’s time, just read this quote: “Most stock-exchange houses still adhere to the old-time slogans that they are in business to make commissions and give the customer what they want.”
I also see that the current financial environment is geared so much toward trading where such houses keep making their commissions. Even if the average commission is much lower today, the number of trades are much, much higher than they were and you can trade a stock 10 times in a day if you want.
Graham’s take on the matter is that you have to seek value minded and not quotation-minded analysts to help you. If you focus on the former, you will do much better in your financial life.
Graham On Investment Bankers
Graham’s take is simple: investment bankers are needed to create a stock market but when their customers are greedy, they also offer what the customer demands. An example of such imprudent investment banker products are 1999 IPOs, 2006 CDOs, etc. So, always keep an open eye with such vehicles.
My main wish is that everyone takes responsibility for their own financial life and a great way to do that is to read Graham’s book. If one doesn’t have time, today it’s easy and cheap to be a defensive investor where one simply rebalances between risk-free bonds and stocks depending on their earnings yield.
Those who have more time will educate themselves about investing and seek advice from others not in the form of what to do but in the form of research, analysis, and a value, business oriented opinion.
Remember, no one knows whether a stock will go up or down, but there are people who can properly analyze a business. In the long term, business analysis is all you need.