The Intelligent Investor

“And selling short a too popular and therefore overvalued issue is apt to be a test not only of one’s courage and stamina but also of the depth of one’s pocketbook. The principle is sound, its successful application is not impossible, but it is distinctly not an easy art to master.”

Graham highlights early in the book just how important emotional fortitude is in successful investing. He pairs this with a refrain that he repeats in the rest of the chapters, which is that active investing—involving stock selection with the goal of earning above-average returns—is much harder than it looks.

“But trading as if your underpants are on fire is not the only form of speculation. Throughout the past decade or so, one speculative formula after another was promoted, popularized, and then thrown aside […] and all of them violated at least one of Graham’s distinctions between investing and speculating.”

This passage demonstrates two aspects of Zweig’s writing. First, it shows his blunt and vivid writing style, which often employs imagery and metaphors to make a point. Second, it serves as an example of how Zweig reiterates and extends Graham’s teachings by applying them to more recent events.

“The work of a financial analyst falls somewhere in the middle between that of a mathematician and that of an orator.”

Graham says that financial analysis cannot be considered as exact a field as mathematics but that it requires more exactness than oration. Graham cultivates a mix of humility and conscientiousness when discussing the work of financial analysts, recognizing the need for precision and accuracy in their work while acknowledging the limitations and subjectivity inherent in the field.

“The investor’s choice between 50% or a lower figure in stocks may well rest mainly on his own temperament and attitude. If he can act as a cold-blooded weigher of the odds, he would be likely to favor the low 25% stock component at this time.”

Graham emphasizes the importance of temperament in investing, acknowledging that strategy should be determined not just by financial analysis but also by what an investor can handle emotionally. His 50-50 investment strategy leaves room for leeway, up to a 25-75 or 75-25 split, depending on the investor’s attitude and ability to handle risk.

“In fact, medical men have been notoriously unsuccessful in their security dealings. The reason for this is that they usually have an ample confidence in their own intelligence and a strong desire to make a good return on their money, without the realization that to do so successfully requires both considerable attention to the matter and something of a professional approach to security values.”

Graham emphasizes that intelligence alone is not enough to be successful in investing; even doctors—ostensibly intelligent people—can struggle if they do not approach investing with the same level of attention and professionalism they devote to their medical practice. In fact, their overconfidence can be their downfall. Rather than intelligence, Graham emphasizes patience, attention, and careful analysis.

“Day trading—holding stocks for a few hours at a time—is one of the best weapons ever invented for committing financial suicide. Some of your trades might make money, most of your trades will lose money, but your broker will always make money.”

Zweig sometimes employs a blunt writing style to apply Graham’s principles to modern investing practices. While Graham consistently maintains a veneer of politeness and professionalism—even while coyly criticizing certain companies or individuals—Zweig uses a more direct and outspoken tone to warn against risky and speculative trading strategies.

“Weighing the evidence objectively, the intelligent investor should conclude that IPO does not stand only for ‘initial public offering.’ More accurately, it is also shorthand for: It’s Probably Overpriced, Imaginary Profits Only, Insiders’ Private Opportunity, or Idiotic, Preposterous, and Outrageous.”

Zweig uses humorous acronyms as mnemonic devices to highlight the risks and potential pitfalls associated with investing in initial public offerings. This demonstrates how he uses vivid writing, a casual, relatable tone, and a touch of sarcasm to make his teachings memorable and engaging for readers.

“The investment caliber of such a company may not change over a long span of years, but the risk characteristics of its stock will depend on what happens to it in the stock market. The more enthusiastic the public grows about it, and the faster its advance as compared with the actual growth in its earnings, the riskier a proposition it becomes.”

Graham goes against a popular belief that high-growth companies and rising stocks are always good investments. He implies that even a good stock from a good company can become a bad investment if the price is too high.

“The market is fond of making mountains out of molehills and exaggerating ordinary vicissitudes into major setbacks.”

Graham highlights the emotional aspects of investing, characterizing the majority of investors as either overly optimistic or overly pessimistic. Implicit in this quote is the idea that most investors are short-term thinkers.

“We are equally sure that if he places his emphasis on timing, in the sense of forecasting, he will end up as a speculator and with a speculator’s financial results.”

One of Graham’s most important concepts is The Distinction Between Investment and Speculation. Graham emphasizes that the intelligent investor should focus on the fundamentals of a company and its long-term prospects, rather than attempting to time the market or make short-term predictions.

“The moral seems to be that any approach to moneymaking 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.”

Graham warns against following popular, widely-known investing approaches in the stock market. He suggests that any method that is simple and easily understandable by the masses is likely to lose its effectiveness over time as more people adopt it. He implies that there is no such thing as a “get rich quick” scheme in the stock market and that successful investing requires a more nuanced and sophisticated approach.

“It is for these reasons of human nature, even more than by calculation of financial gain or loss, that we favor some kind of mechanical method for varying the proportion of bonds to stocks in the investor’s portfolio. The chief advantage, perhaps, is that such a formula will give him something to do […] These activities will provide some kind of outlet for his otherwise too-pent-up energies. If he is the right kind of investor, he will take added satisfaction from the thought that his operations are exactly opposite from those of the crowd.”

Graham emphasizes the mental and emotional components that are present in investing. Sometimes inaction or a passive approach is the best course of action. Graham mentions that ignoring financial markets can sometimes be a better strategy than paying too much attention to them. Instead, Graham suggests rebalancing one’s portfolio to maintain a good ratio of stocks and bonds as a way to channel one’s energy and provide a sense of control and satisfaction.

“The investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances. He should always remember that market quotations are there for his convenience, either to be taken advantage of or to be ignored.”

Rather than getting caught up in the daily fluctuations of stock prices, Graham advises investors to maintain a long-term perspective. They are not victims of market sentiment; instead, they are patient analysts with the power to choose which prices to pay attention to and which to ignore.

“Stocks are crashing, so you turn on the television to catch the latest market news. But instead of CNBC or CNN, imagine that you can tune in to the Benjamin Graham Financial Network […] The image that fills your TV screen is the façade of the New York Stock Exchange, festooned with a huge banner reading: ‘SALE! 50% OFF!’.”

Zweig paints a vivid picture of this alternate world to illustrate Graham’s point that bear markets and low prices are not to be feared but rather seen as an opportunity for investors. While many investors believe that they should sell their stocks when the market declines, Graham argues that this is the time to buy as prices are discounted and bargains can be found.

“Defensive investors, as we have defined them, will not ordinarily be equipped to pass independent judgment on the security recommendations made by their advisers. But they can be explicit—and even repetitiously so—in stating the kind of securities they want to buy.”

Graham takes a realistic view of the novice investor, not expecting them to need (or want) to become experts in security analysis. At the same time, he places power in their hands by reminding them that they can and should communicate their investment style to their advisors.

“Unfortunately, it appears to be almost impossible to distinguish in advance between those individual forecasts which can be relied upon and those which are subject to a large chance of error. At bottom, this is the reason for the wide diversification practiced by the investment funds.”

Graham admits that perfect market predictions are not possible. He says this despite the care with which he analyzes past trends. Even knowledge of the past is not enough for Graham to advise putting all of one’s assets in one basket, so he emphasizes The Importance of Diversification.

“What a nice arrangement, then, to charge as much as possible to the bad year, which had already been written off mentally and had virtually receded into the past, leaving the way clear for nicely fattened figures in the next few years!”

Graham explains questionable accounting practices in which companies manipulate financial statements to make their earnings appear better than they are. He adopts a light tone to highlight the deception and hypocrisy inherent in such practices.

“Do not be put off by the stupefyingly boring verbiage of accounting footnotes. They are designed expressly to deter normal people from actually reading them—which is why you must persevere.”

Zweig encourages investors to be thorough in reviewing the earnings reports of any company they invest in. The vivid nature of the phrase “stupefyingly boring” implies that Zweig knows that much financial literature is dense and dry—and even intentionally so. He aims to arm them with the kind of knowledge they are likely to need and to phrase it in a way they will remember.

“A low-cost index fund is the best tool ever created for low-maintenance stock investing—and any effort to improve on it takes more work (and incurs more risk and higher costs) than a truly defensive investor can justify.”

Here, Zweig underscores The Importance of Diversification. Moreover, by emphasizing the benefits of a low-cost index fund, Zweig highlights the concept of simplicity in investment strategies, especially for the defensive investor, who chooses to spend a minimal amount of energy on investing.

“We hesitate to prescribe our own diet for any large number of intelligent investors.”

While Graham has many years of experience as a security analyst and fund manager, he cautions that his techniques may not be suitable or applicable to every investor. This is because he addresses his book largely to the layperson and understands the risks of following a strategy without having the proper understanding or expertise.

“Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions. The purchasers view the current good earnings as equivalent to ‘earning power’ and assume that prosperity is synonymous with safety.”

Graham warns investors not to get swept up in the euphoria of a booming market and assume that high earnings automatically equate to safety. The phrase “low-quality” securities refers to investments that may have underlying issues or poor prospects but are valued based on current earnings. This underscores one of The Principles of Value Investing: an investor should evaluate an investment based on intrinsic value rather than short-term market conditions.

“Investment is most intelligent when it is businesslike.”

Zweig advises the reader to treat investing with seriousness and professionalism. This reinforces The Distinction Between Investment and Speculation, which Graham emphasizes throughout the book. Graham thinks that investing should be approached with the mindset of a business owner, focusing on the long-term profitability and sustainability of the investment rather than short-term fluctuations or emotional reactions to market conditions.

“You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.”

Part of Graham’s philosophy is the belief that popularity should not be a determining factor in making investment decisions. Investors should rely on their own analysis and judgment based on accurate data and sound reasoning rather than blindly following the crowd. Not following the crowd may be the only way to truly achieve success in the market and avoid the pitfalls of speculative behavior.