Robert Hovey

Investments
5/12/17

In 2008, I was 12 years old when the stock market crashed causing financial and

emotional stress on people not only within the United States, but around the world. This is my

earliest memory of really hearing or knowing about the stock market. Although an unforgettable

memory it was a good lesson to learn at such a young age about the stock market that there is

always a possibility it can all come down crashing. Little would I know that six years later in the

summer after my high school graduation I would be walking into an office with half my

graduation money looking to invest in the stock market. My dad was the biggest proponent of

having my siblings and I start investing at an early age even if it was just a small amount. He

would talk about books that we should start reading or interviews we should watch by prominent

investors such as Peter Lynch, Warren Buffet, or Benjamin Graham. With the heavy load of

college school work I never got the chance to really read any books or articles about investing or

even the stock market, so when we had the option to pick a book for this class I knew right away

I would choose ‘The Intelligent Investor’ written by Benjamin Graham. During the course of the

class and reading the book I realized I fit the exact description of a passive investor. After

reading the book, I have realized although a passive strategy is a road to success there is still

information to know and look at regarding my portfolio. When describing Benjamin Graham,

Zweig writes, “Graham was not only one of the best investors who ever lived; he was also the

greatest practical investment thinker of all time” (p. xi). Graham not only provides historical and

analytical data to validate his strategies, but his approach to investing regarding the mental and

emotional aspect are vital for investment success. A summary of the book is important to note
the central investment strategies provided by Graham and make connections with topics we have

learned in class. Also, Graham provides great insight for a passive investment portfolio that will

serve me very well for the future. A counter argument will then be presented from Charlie

Munger, a great investor like Graham whom often publically disagrees with Grahams strategies.

In summary, throughout the whole book Graham writes that the emotional and mental

aspect of a person must be controlled prior to investing any money into the stock market. This

aspect of investing is the first time I have heard of such characteristics for an intelligent investor.

This new aspect has not taken into account any past numerical values or forecasting

characteristics regarding the stock market rather simply the emotional and mental responsibility

an investor must have. According to Graham, “To be an intelligent investor it simply means to be

patient, disciplined, and eager to learn; you must be able to harness your emotions and think for

yourself “(p. 13). Graham really emphasizes the mental and emotional aspect to investing

throughout the whole book. The exact emotional way an investor perceives market behaviors

really dictates how successful they will be. The mental and emotional aspect of creating and

maintaining a portfolio are so important to achieve investment goals. Beyond the emotional and

mental aspect of investing, Graham gives concrete steps to take throughout the book when acting

as two types of investors: enterprising and passive. The passive investor is more defensive by not

making a lot changes to their portfolio once it’s set up and focuses on limiting as much risk as

they can. The goal for a passive investor is to not necessarily beat the market, but work for a long

term gain over a long period of years. The enterprising investor will be more active with their

portfolio making constant changes trying to beat the market. Whether it comes to security

analysis, asset allocation, or portfolio changes the enterprising and passive investor will differ

significally. Graham offers essential elements for being both a passive and enterprising investor.
For the passive defensive investor, Graham states, “The defensive investor creates a permanent

portfolio that runs on autopilot and requires no further effort” (p. 101). On the opposite spectrum

for the enterprising investor, “A key requirement is to concentrate on larger companies that are

going through a time of unpopularity” (p. 263). Recognizing what type of investor one wants to

be with their portfolio will dictate different needs and goals for the investor.

In fact, when it comes to creating a portfolio there are many important lessons Graham

provides when it comes to strategies and goals. Some important tools I focused on were the

passive investing strategies provide by Graham that I will follow in the future. According to

Graham, there are three important concepts for the passive investor: purchase shares of

investment funds rather than a personally selected common stock portfolio, use services and

investment counseling from a well-known investment firm, and use dollar cost averaging when

depositing money into portfolio account (p. 29). Investment funds such as mutual and exchange

traded funds (ETFs) provide a unique opportunity for the passive investor. In the course book,

we learned how investment managers will use funds to make it easier for investors to diversify

company selections within their portfolio and invest in a broad range of industries (Chapter 4). If

I decide to create a portfolio largely invested in index funds, Graham suggests to keep 90% of

my money in an index fund and 10% in common stock selections (p. 367). The reason I think

index funds can serve me so well in the future is the time and energy it takes to maintain a

portfolio with them. They are mainly low costing, allow for diversification to lower risk, and

they don’t require constant changes through the years. Some further investment funds Graham

suggests are high grade bonds that provide both tax benefits and either short or long term

maturities. When I decide to get into bonds, Graham suggests to keep 25% of money in bonds

and to buy municipal bonds which are tax free (p.103-106). Also, it’s important to consider the
current interest rates because if they rise bond prices fall so I should buy short term maturities

and vice versa for falling interest rates. An important aspect to note from the course book about

municipal bonds is the computation of after-tax rates of return between a taxable and tax exempt

bond (Chapter 2). These tools are important for my goals as an investor by taking Graham’s

advice concerning limiting risk, but still leaving room for diversification among securities and

industries through index funds and bonds while building a portfolio.

Now, once I recognize my strategy through bonds and index funds in my portfolio the

minor allocation for common stocks should be monitored by a well-respected investment

company. Choosing individual common stocks are tough so they require both management

advice and personal research. It is important to note what Graham initially states regarding stock

selection, “Stocks do well or poorly in the future because the businesses behind them do poorly-

nothing more, nothing less” (p. 45). To really gauge stock selections the sole business should be

researched along with their industry strengths and weaknesses. Some key figures to ask my

manager would be earnings in the past ten years, dividends paid, price to book value ratio,

earnings per share, and stock price. Graham instills the importance and risks of these figures. For

the past ten years, we should find companies that have grown earnings by at least one-third over

(p. 371). The company should have paid dividends and have a price to book ratio of nor more

than 1.5 (p. 374). If the company has increased earnings per share (EPS) well above others over

the past years it is considered a growth stock which carries high risk, so a defensive investor

should stay away (p. 116). Stock prices are obviously the first figured seen, but should be

analyzed based on the basis that their “current price is no more than 15 times average earnings

over the past three years” (p. 374). By finding a respected portfolio manager I can discuss these
type of figures with them to maintain my passive strategy and choose the right stocks to go

alongside with my investment funds within my portfolio.

In particular, concerning the amount of money I should use for my portfolio, Graham

emphasizes the investment strategy of dollar-cost averaging throughout the book. Graham

proposes a dollar-cost average investing specifically for index funds. According to Graham, “The

ideal way to dollar-cost averaging is into a portfolio of index funds…That way, you renounce not

only the guessing game of where the market is going but which sectors of the market will do the

best” (p. 130). Dollar cost averaging provides an easy way for an investor to maintain equity

within his portfolio. For instance, if I decide to make two deposits into my portfolio account with

the first being at the end of summer and the second being at the end of the year I incur some

risks. First, waiting until the end of summer with my summer savings or the end of the year with

my first semester savings I run the chance of not depositing any money. If I see how a large sum

with be taken out of my checking account into my portfolio account I may be emotionally

unwilling to do that because I may feel I need the money to financially survive in the future. As

opposed to depositing a little money each month I don’t run the risk of never depositing that

large sum at the end of the summer or year. We also learned about this strategy by presenters in

our class that this strategy is especially ideal for a beginning investor that can afford to invest a

little money each month. This also helps maintain a passive investing strategy by putting my

portfolio on “auto-pilot” through my index fund. I emotionally don’t care what happens in the

market or the companies within the index fund because either way I am depositing some each

month which will start adding up for the future.

Additionally, regarding my portfolio Graham reiterates the battle of inflation versus

portfolio returns. According to Graham, “Inflation is so important to measure your investing

success not just by what you make, but by how much you keep after inflation” (p. 259).

Especially with a long-term passive investment strategy the battle with inflation over a 25-30

year period is important to consider. Understanding that inflation is one my worst enemies is the

first step to maintaining a portfolio. Graham notes though that inflation is capable of being

overcome by the increase in dividends and share prices of stock shares (p. 47). There are also a

few more ways beyond stocks to keep insurance against inflation. First, real estate investment

trusts (REITS), are bundled into real estate mutual funds that are comprised of companies who

both own and receive rent from properties (p. 63). Second, treasury inflation protected securities

(TIPS), are government bonds that automatically increase when inflation increases, so it won’t

be affected by inflation (p. 63). These strategies are important to consider when battling inflation

versus portfolio returns during my lifetime.

Furthermore, there are some strategies and tools I plan on not using that were provided by

Graham. Mainly tools and strategies provided for the enterprising investor who will remain more

active within their portfolio. Grahams urges the enterprising investor to concentrate on larger

companies who are in a bear market so they can buy them “on sale” (p. 163). The tools an

enterprising investor needs are time and energy. If the enterprising investor has the time and

energy to really follow the stock market they can essentially beat the market and receive high

returns. This is one area I’m really not interested in though simply based off those two facts: time

and energy. I am personally not that passionate about the stock market outside a level of being

passive. I would simply like to use my time and energy on other things like my family, career,

and friends. I am perfectly satisfied with having a passive defensive portfolio, so the tools that

Graham provides for the active investor are not for me. The time and energy that is required to
constantly monitor large company stocks going through a bear market to get them at a low price

is beyond my reach and should be left more to active investor to use.

In contrary, the same author Jason Zweig who has helped update The Intelligent Investor

had a recent interview in 2014 with Charlie Munger. Alongside Warren Buffet as a leading

investor at Berkshire Hathaway, Munger is a well renowned investor and businessman of the 21st

century. Although they are partners they remain indifferent about Benjamin Graham’s strategies

and tools for the stock market. According to Munger, “…Ben Graham had a lot to learn as an

investor. His ideals of how to value were all shaped by how the Great Crash and the Depression

almost destroyed him…” (Zweig 2014). The validity of the criticism stands true because

throughout the book Graham often analyzes historical figures of the Great Depression and the

way it changed not only financial numbers, but the intellectual strategies of investing. Graham

remains very defensive and wary of stock prices throughout the whole book. He even hopes

investors could never see the price shares on stocks rather the underlying business components of

a company (p. 396). As I have stated before, Graham really favors the approach of a defensive

passive investor which could have a direct relationship as Munger states with Graham’s

experience with the Great Depression and the Great Crash. Munger further emphasized

Graham’s Great Depression influence by saying…”he was always afraid of what the market can

do. It left him with an aftermath of fear for the rest of his life, and all his methods were designed

to keep that at bay” (Zweig 2014). I believe Munger poses a valid argument, but that does not

weaken any strategy written by Graham in the book. Based on various reasons, Graham has a

point to being a defensive investor because he witnessed first -hand the atrocities a stock market

crash can do to people. For Munger to criticize Graham for being afraid of the market ignores an

important underlying lesson that Graham took away the best aspect of a market crash: he never
forgot it is a possibility. Likewise, I feel the same way because learning about the stock market

crash of 2008 there were no indicators from Alan Greenspan or any other government or private

agencies that there was a bubble, yet it still burst. Munger’s argument has not shaped any

negative view of the book for me rather it deepened my appreciation for Graham’s strategies. By

Graham embracing the fear of the stock market, he has created some of the best conceptual ideas,

tools, and strategies for the stock market.

Finally, Graham’s advice on building a portfolio as a passive investor provides the

investor with both security and freedom to fit his or her needs. My favorite quote in the book

came from another interview from Jason Zweig when he was asking retired people living in the

popular retirement neighborhood Boca Raton in Florida about if their portfolio beat the market.

One of the people said, “Who cares? All I know is my investments earned enough for me to end

up in Boca Raton” (p. 240). That quote captures the most essential part of Graham’s message in

this book. It’s all about finding out what your goals are and what type of investor you want to be.

Once you find that out they can choose through different strategies provided by Graham on how

to succeed. The most important part is having the emotional and mental responsibility to trust

yourself and the process to become an intelligent investor and make enough to fit your own

personal needs.
 Works Cited

Graham, Benjamin. The intelligent investor. N.p.: Harper & Row, 1965. Print.

JasonZweig.com, Info AT. "A Fireside Chat With Charlie Munger." Jason Zweig. N.p., 07 Sept.

2015. Web. 02 May 2017.