Warren Buffet says The Intelligent Investor by Benjamin Graham is, “by far the best book about investing ever written.” That’s quite a statement when you consider that the predecessor book Security Analysis, was first written in 1934 and the last edition by Graham was published in 1973—thirty years ago.
I have also heard similar praise for the book from various quarters in recent months—including from real estate investment writers. A revised edition with updated material by Jason Zweig came out in 2003.
I have long looked at similar fields to help me with my writing. Invariably, other parallel fields are more advanced in some respects and thereby can provide useful insights to real estate investors.
To an extent, The Intelligent Investor lives up to its billing. But I was shocked at how much drivel it also contained. If this is the best investment book ever written, the quality of investment books is sorry indeed.
My Succeeding, 3rd edition has a chapter on investment and another on risk. I haven never seen risk discussed the way I do in that book. My investment chapter is a synthesis of great investment writers like John Bogle, Peter Bernstein, William Bernstein, Burton Malkiel, David Swensen, Navvim Taleb, and Jane Bryant Quinn. They do a better job than Graham did 35 years ago.
I also wrote a book titled Best Practices for the Intelligent Real Estate Investor. And yes, I got the “Intelligent Investor” part of the title from Graham’s book. My Best Pracices… book is more of a total investment book with greater discussion of the sorts of things that Gaham talks about but also what he should have talked about. And, of course, it focuses on real estate rather than securities.
Part of the problem is that security analysis is a sort of religion, not an academic discipline. No doubt some readers of this newsletter will chastise me about this article. They always do when I criticize securities. I am not an imam. I am just trying to figure investment out. Zweig says, “Before Graham, money managers behaved much like a medieval guild, guided largely by superstition, guesswork, and arcane rituals.” In fact, there is still too much of that in Graham’s book.
Graham said that your character is more important than your knowledge. He was talking about your ability to ignore the crowd and make your own decisions. I wholeheartedy agree. Indeed, a number of studies in recent years have come to the same conclusion Graham did in the 1930’s.
The technical approach is to buy or sell based on price charts. To a great extent, real estate investors do that, although most never use that terminology to describe it. That is, they are most eager to buy when the market prices are rapidly going up and least eager when prices are slumping.
Graham says, “The one principle that applies to nearly all these so-called ‘technical approaches’ is that one should buy because a stock or the market has gone up and one should sell because it has declined. This is the exact opposite of sound business sense everywhere else, and it is most unlikely that it can lead to lasting success on Wall Street.”
He’s right and he’s softpedaling the Wall Street part. The predominant reason people buy real estate is because prices are rising. The great paradox about that is it usually only means yields are falling. Real estate prices rising is a good thing for buyers if the reason is increased net income, but it is not a good thing if it just reflects investors’ standards (cap rates) falling lower and lower.
Yale Chief Investment Officer David Swensen called technical analysis “quackery” on page 189 of his book Pioneering Portfolio Management, which is a better candidate for best investment book ever written.
The typical run up in prices in Wall Street or real estate is nothing more than a dog [or technical analyst] chasing its own tail. The faster it runs, the faster the tail goes.
Graham says that “…enthusiasm may be necessary for great accomplishments elsewhere,” but it “almost invariably leads to disaster…on Wall Street.” I agree. He means you should make cool, calm, and collected investment decisions, not get carried away by emotions—your own or others.’
“Obvious prospects for physical growth in a business do not translate into obvious profits for investors.” Right on. Clearly the Internet is a new big thing and will make a lot of money as it becomes more used and perfected. But that does not mean that every public company that has some Internet reference in its name will be a good investment.
The real estate equivalent is what I call the Chamber of Commerce speech. That’s where a booster of a particular area cites all the positive developments in the area to prove that real estate prices there will rise. In fact, such predictions almost never prove to be accurate.
Graham says a bear market is a good thing because it offers bargains. He says you can either value a company on its market value or ignore that and look at the hard asset value.
That’s bogus. A bear market may be good if you are a new buyer who owns nothing, or a short seller, but it sure as heck is not good if you already own, that is, have a long position in, stocks. Similarly, ignoring the market value of your stocks or real estate and focusing on the higher “real” value is an exercise in self-delusion. If you want to sell or have to sell, the market rules.
Zweig condemns selling stocks that have gone down in price because it “turns paper losses into real ones.” They already are real losses. The notion that refraining from selling avoids real losses is as nonsensical as it is widespread.
Like wine tasters and other B.S. artists, securities boosters sometimes talk about the market as if it were human. When asked if the price of gold were going up, an “expert” once said, “It wants to.” Graham speaks of “promises” made by the market or by analysis. For example, in differentiating between investment and speculation, he says “…thorough analysis promises safety of principal and an adequate return.” He’s nuts. The benefit of analysis is in its increased probability of a return that is elevated by an amount that is commensurate with the effort required to make the analysis. He does not say that because he cannot find any empirical data that proves that securities analysis increases returns. So he uses a politician’s trick of seeming to say that without actually saying it. He also engages in the nutty practice of regarding some of your money as mad money that can be treated differently from your other money.
A new field called behavioral finance or behavioral economics has arisen to deal with the inconvenient (to Graham cult members) fact that the data do not support the validity of Graham’s “value investing” theories. Stated crudely, the new field says that humans have many biases, like the herd instinct, that cause them to behave illogically when making investment decisions. Graham’s theory is that people sometimes over- or under-value stocks compared to their “intrinsic” value based on fundamentals (financial statements). But his theory says that the dopes who do that, will wise up in a reasonable amount of time, thereby making you a profit. That’s where he went wrong. Investors have shown they can “overvalue” or “undervalue” a stock by Graham’s standards—forever. Most of the money made in the securities market was made by investors who luck into riding speculative mania or selling short during irrational panics.
I read somewhere that Graham lost 60% of his net worth when his value portfolio crashed in 1929. When did nomial values got back to 1929 levels? In the 1960s! So it’s not like just holding on would have taken care of that 60% drop.
This originally appeared in Real Estate Investor’s Monthly newsletter.