The Intelligent Investor: Must-Know Quotes for Smart Investing – Part 1

I recently started listening to "The Intelligent Investor" by Benjamin Graham. Despite being published in 1949, this finance classic remains incredibly relevant. Throughout listening, I've highlighted quotes that have significantly impacted me. This book comes highly recommended by some of the brightest minds in investing, including Warren Buffett, often referred to as the Oracle of Omaha.

I don't intend to offer any groundbreaking revelations about security analysis or value investing. That would be irresponsible and ultimately useless to the reader. Instead, I want to share and comment on the wisdom offered by Mr. Graham and explain the underlying concepts.

Benjamin Graham is often called “The Father of Value Investing”. If you are unfamiliar with the term “value investing”, here is a brief definition from a Nerd Wallet article:

“Value investing is a stock picking strategy where you buy stocks that you think are worth more than their current price. Value stocks are companies whose share prices are lower than they “should” be, judging by metrics such as earnings per share.”

Quote 1:

“People who invest make money for themselves; people who speculate make money for their brokers.”

Understanding the difference between investing and speculating is crucial. Here are definitions from a BankRate article:

Both investors and speculators put money into the stock market, but each has a different focus and outlook. While both methods carry certain amounts of risk, speculating is far riskier and requires a lot of time, talent, and most importantly, LUCK. If you want to be a speculator or day trader as a hobby, be my guest, but do not expect to make millions of dollars. It is far safer and easier to build wealth over time as an investor.

Expanding further on this quote, it's essential to recognize that brokers (Schwab, Fidelity, Robinhood, etc.) often thrive on high transaction volumes, which are more common in speculative trading. Every time a speculator buys or sells an asset, brokers earn a commission or fee. This creates a scenario where brokers might inadvertently benefit more from frequent trading activities than the traders themselves. In contrast, investors who adopt a buy-and-hold strategy incur fewer transaction fees, allowing more of their capital to stay invested and potentially grow over time. This highlights the importance of adopting a long-term perspective and being mindful of the costs associated with high-frequency trading.

Quote 2:

“A stock is not just a ticker symbol or an electronic blip; it is an ownership interest in an actual business, with an underlying value that does not depend on its share price.”

Building on the previous idea of understanding the difference between investing and speculating, it’s also crucial to understand what a stock represents. The quote resonates with me because many people buy stocks without understanding what they truly represent. When you buy a stock, you are buying a portion of a company. The share represents access to future cash flows. The price of a stock is not randomly chosen, and there is no guarantee that the price of a stock will go up or down.

I won’t go into depth on how investors determine stock prices in this article, but if you are interested in learning more, check out any of these free courses on EdX.org.

A relevant example is the GameStop saga in January 2021, where retail investors poured millions of dollars into GameStop stock simply because the price was rising. In January 2021 retail investors poured millions of dollars into the GameStop stock simply because the price was rising.

This event, known as the GameStop short squeeze, showed that very few bandwagon investors understood what they were purchasing, and many people lost money. The stock price soared to over $500 per share, but by the end of the year, the share price had dropped roughly 54%.

As of now, GameStop’s share price is down over 65% from its 2021 high. If you look at my 4-year price graph, there is an obvious downward trend, indicating the stock was overpriced. Additionally, GameStop was fundamentally unsound. Below is the revenue data from 2017-2020:

Data is from MacroTrends.net

As we can see, GameStop’s revenue was consistently declining over these years. This could indicate underlying business issues related to the broad shift toward digital gaming. More analysis would need to be done to determine the fair value of the GME stock, but declining revenue is usually seen as a bad sign.

It is worth noting that the GameStop went through a series of stock splits, so the share prices reflect the lower values than what occurred.

Quote 3:

“And back in the spring of 1720, Sir Isaac Newton owned shares in the South Sea Company, the hottest stock in England. Sensing that the market was getting out of hand, the great physicist muttered that he “could calculate the motions of the heavenly bodies, but not the madness of the people.” Newton dumped his South Sea shares, pocketing a 100% profit totaling £7,000. But just months later, swept up in the wild enthusiasm of the market, Newton jumped back in at a much higher price—and lost £20,000 (or more than $3 million in today’s money). For the rest of his life, he forbade anyone to speak the words “South Sea” in his presence.”

This quote is fascinating because it shows that extreme intelligence isn’t necessary to be a good investor. Even one of the most brilliant minds of all time, Sir Isaac Newton, got caught up in market emotions of fear and greed. Being a good investor has more to do with consistency and discipline than IQ.

Sir Isaac Newton’s experience serves as a stark reminder of the timeless struggle investors face in separating rational analysis from emotional impulses. His initial success in capitalizing on the market's exuberance underscores the allure of quick profits and the temptation to ride the wave of speculative fervor. However, Newton's subsequent decision to re-enter the market at inflated prices reflects the common pitfall of allowing emotions to override prudent judgment. This oscillation between euphoria and despair mirrors the cyclical nature of market sentiment, where optimism can swiftly give way to panic. Newton's reluctance to discuss his losses serves as a testament to the emotional scars left by financial setbacks, underscoring the psychological toll of investment decisions gone awry. In essence, Newton's journey epitomizes the perennial struggle of investors to navigate the delicate balance between intellect and emotion in pursuit of financial success.

Quote 4:

“The market is a pendulum that forever swings between unsustainable optimism (which makes stocks too expensive) and unjustified pessimism (which makes them too cheap). The Intelligent Investor is a realist who sells to optimists and buys from pessimists.” – Jason Zweig

This insightful quote, extracted from Jason Zweig's commentary in the latest revised edition of The Intelligent Investor, illuminates the cyclicality inherent in the stock market. Renowned for his contributions as a columnist for The Wall Street Journal and authorship of several influential books on investing and personal finance, Zweig's wisdom underscores the timeless principles of prudent investing.

The stock market is very turbulent in the short term. Individual stock prices can have extreme fluctuations from day-to-day, and even hour-by-hour. In fact, there is a very popular theory in finance that posits that stock returns are completely random. More specifically, the Random Walk Theory suggests that stock prices move unpredictably, and historical prices cannot be used to accurately predict future prices. If you are interested in this, check out Burton Malkiel’s book A Random Walk Down Wall Street.

With this theory in mind, an important question arises: If stock price movements are random, how can I become an intelligent investor?

Becoming an intelligent investor necessitates a focus on factors within one's control, including maintaining a diversified portfolio, conducting thorough research, and adhering to a long-term investment strategy. While short-term fluctuations may appear erratic, consistent and diligent investment in well-diversified funds can serve as a foundation for building long-term wealth. By remaining disciplined, informed, and patient, investors can navigate market uncertainties with confidence, ultimately realizing their financial objectives.

It's essential to recognize that attempting to time the market is fraught with risk. Consistently participating in the market acknowledges the reality that, at times, investments may be made at a premium, while at other times, they may be acquired at a discount. Over the long term, this approach tends to average out, reinforcing the importance of adopting a patient and consistent investment strategy.

Quote 5:

“You must thoroughly analyze a company, and the soundness of its underlying businesses, before you buy its stock; you must deliberately protect yourself against serious losses; you must aspire to “adequate,” not extraordinary, performance.”

This concluding quote captures the essence of prudent investing. It underscores the importance of conducting comprehensive due diligence before making investment decisions, emphasizing the need to understand the fundamentals of a company and its business operations. Additionally, it highlights the necessity of risk management, advocating for the deliberate protection against significant losses in one's investment portfolio.

Furthermore, the quote encourages investors to aim for "adequate" rather than extraordinary performance. This implies a focus on realistic and sustainable returns, rather than chasing excessively high gains that may come with elevated levels of risk.

This quote does not just apply to stocks, never invest in an asset that you do not understand. Real estate, your friend’s business idea, cryptocurrencies, etc. You work hard for your money; you should work hard to understand where it goes. Ask yourself this simple question, “How does this company make money?”. It may not be obvious.

For instance, considering Meta, the parent company of Facebook and Instagram, understanding its revenue streams beyond user subscriptions is crucial. While users access Facebook and Instagram for free, Meta generates revenue primarily through advertising and other monetization avenues, highlighting the importance of comprehending a company's business model.

Ultimately, the quote reinforces the notion that prudent investing does not require professional expertise but rather diligence and informed decision-making. For individuals unsure of where to begin, market-indexed funds offer a straightforward and diversified investment option, aligning with the principle of simplicity and accessibility in wealth-building strategies.

Conclusion

In essence, the wisdom distilled from "The Intelligent Investor" by Benjamin Graham illuminates a path to financial success rooted in discipline, prudence, and a steadfast commitment to fundamental principles. Through the exploration of key quotes, we've gleaned invaluable insights into the essence of value investing, the perils of speculation, and the importance of thorough analysis in investment decisions. As we contemplate the enduring relevance of Graham's teachings, it becomes evident that the journey to wealth creation demands a deliberate and informed approach, one that transcends market fluctuations and emotional impulses. Whether you're a seasoned investor or embarking on your investment journey, the lessons imparted by Graham serve as a timeless guidepost, empowering individuals to navigate the complexities of the financial landscape with confidence and clarity.

Works Cited

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NerdWallet. "Value Investing: How to Invest Like Warren Buffett." NerdWallet, https://www.nerdwallet.com/article/investing/value-investing.

Bankrate. "Investing vs. Speculating: What's the Difference?" Bankrate, https://www.bankrate.com/investing/investing-vs-speculating/.

Investopedia. "Buy and Hold Definition." Investopedia, https://www.investopedia.com/terms/b/buyandhold.asp.

edX. "Learn About Stocks." edX, https://www.edx.org/learn/stocks?hs_analytics_source=referrals&utm_source=mooc.org&utm_medium=referral&utm_campaign=mooc.org-topics.

Wikipedia. "GameStop Short Squeeze." Wikipedia, https://en.wikipedia.org/wiki/GameStop_short_squeeze.

Macrotrends. "GameStop Revenue 2010-2024 | GME." Macrotrends, https://www.macrotrends.net/stocks/charts/GME/gamestop/revenue#google_vignette.

Jason Zweig. "About Jason Zweig." Jason Zweig, https://jasonzweig.com/about/.

Investopedia. "Random Walk Theory Definition." Investopedia, https://www.investopedia.com/terms/r/randomwalktheory.asp.

Malkiel, Burton G. *A Random Walk Down Wall Street*. W.W. Norton & Company, 2020. https://www.amazon.com/Random-Walk-Down-Wall-Street/dp/0393358380.

Investopedia. "Index Fund Definition." Investopedia, https://www.investopedia.com/terms/i/indexfund.asp#:~:text=An%20index%20fund%20is%20a%20portfolio%20of%20stocks,lower%20expenses%20and%20fees%20than%20actively%20managed%20funds.