Ephemeris of the Mind (Book Review) The Intelligent Investor
Time to read: 5 min read
Book Cover
The intelligent investor is a realist who sells to the optimist and buys from pessimists.
Previous Jason Zweig reviews:
Review
This is my second time reading this book; the first was when my mentor from my first investing internship assigned me a list of to-read books, with this book on top of the list. In my first reading. I was focused on finishing the book as fast as possible and thus did not have time to fully synthesize Graham's ideas; I made up for it in my second reading.
The premise of the book is simple; Graham seeks to teach one how to invest, not by instructing one on how to beat the market (unlike many modern-day gurus), but by teaching one the fundamental theory behind the market and the fundamental psychology which a successful investor must have.
Graham accomplishes this through many examples and metaphors; my favourite of which is the idea of Mr. Market, an irrational entity which constantly swings between overreaction and underreaction. The investor's main goal is thus to not get caught up in Mr. Market's mood swings and to instead sell to Mr. Market when he is overly optimistic and buy from Mr. Market when he is overly pessimistic.
One of the chief ideas which I gained the most value from when I first read the book is that the "investor's chief problem - and even his worst enemy - is likely to be himself". Being a successful investor requires a special mindset, which includes being patient, disciplined, and eager to learn. Being humble is also incredibly important, and Graham exemplifies this in the book by readily admitting to his miscalculations and explicitly stating that he does not have all the answers.
One of the reasons which I am so bullish on quantitative investing is because it removes the most fallible variable from the equation of investing - humans. It appears to me that all of the major blunders in the markets (such as Knight Capital) were caused primarily by humans. By automating all of the logic but none of the emotional burden or carelessness, algorithms can maximize their chances of being correct. I believe that if Graham were still active today, he'd be a quant.
The three main ideas I took away from my second reading are:
Nothing is guaranteed in the market; one can only maximize one's chances of being correct. One can have models like DCFs or Black-Scholes, but at the end of the day, models can only approximate reality and too much faith in models can be fatal. Personally, the unpredictability is what drew me to investing in the first place; the uncertain nature of the markets means that there is always room for improvement and growth as an investor.
To achieve above-average results, one must be contrarian and right, meaning one must have a good idea that is somehow also unpopular. This is especially true today, where the market is, in theory, supposed to be more efficient than the past which means that unique ideas are harder to come by.
It is critical to seperate speculation from investing; speculating is akin to gambling (quick wins and losses) while investing is more like paying off a mortgage (slowly building up equity and wealth over time). While speculation can be fun in the short-term, in the long-run, the patient investor will most likely win out, both due to the longterm behaviour of markets to return to their fundamental values and also because of the market structure itself (transaction costs for frequent trading). As I am writing this, stocks of overly-short companies such as GME are experiencing the rally of a lifetime. I have friends who argue that GME is fundamentally worth the valuation (it's not); I personally view GME as a short-term microstructure bet, and thus falls under speculation.
Graham also offers more practical advice; although most of it is outdated (such as specific PE ratios), some of his general practical advice is still valid today. Graham stresses the importance of asking the right questions to sellside stock analysts (a lesson I learned the hard way when I bought everything sellside analysts have been feeding me for my first professional stock pitch). Graham also stresses the importance of diversification; I'm a bit on the fence with this one, as technically, if unique good ideas are hard to come by, one should capitalize as much as possible on said ideas. Speaking of ideas, good strategies are crowded out once it's mainstream, Graham stresses the importance of continual innovation and generation of ideas (or keeping good ideas hidden). I think he'd agree that teaching an algorithm to learn (maybe through reinforcement learning) will be crucial to being competitive in markets of today and the future.
Throughout the book is also Zweig's commentary, which I found to be incredibly insightful (although still dated) and added to the witty and sardonic tone of the book. The market has obviously changed greatly since the times of this book (and commentary); I believe many of Graham's ideas can and should still be applied to quantitative investing.
Conclusion
One of the best books written on investing; a little academic at times, but incredibly insightful.