February 27, 2017 | Vishal Khandelwal
“Life is really simple, but we insist on making it complicated.” ~ Confucius
“Simplicity is a great virtue but it requires hard work to achieve it and education to appreciate it. And to make matters worse: complexity sells better.” ~ Edsger W. Dijkstra
It’s a sad fact of life that great people rarely divulge deep insights into how they achieved their greatness. And the sadder fact of life is that when a few of the greats do divulge the secrets of their greatness, we ignore them because the secrets often are too simple, too pedestrian, for us to appreciate.
“Huh! That’s it? It can’t be so simple!” we would say when we hear a great shelling out simple advice to achieve greatness.
Like, if you are learning martial arts and you hear Bruce Lee speak out the secret to his greatness – “Absorb what is useful, discard what is not, add what is uniquely your own” – you say, “Great thought, but is that it? It cannot be so simple!”
Consider investing. When we read Warren Buffett revealing that the only two rules of successful investing are – Rule No. 1: Never Lose Money. Rule No. 2: Never Forget Rule No. 1 – our brain protests, “Great thought, but is that it? It cannot be so simple!”
Investing is simple, like Buffett also says, but not easy. Take a simple idea, Charlie Munger suggests, but take it seriously.
Consider this book called The Intelligent Investor that Ben Graham published in 1949.
I ask this question in my workshop – “How many of you own The Intelligent Investor?” A lot of hands go up.
My next question is – “How many of you have read it?” Most hands go down.
“It’s a complex book to understand,” a lot of people would tell me. “There are no simple rules,” some others would mention.
For one, I agree that The Intelligent Investor – on a relative basis, like when I compare it with Peter Lynch’s One Up On Wall Street – is a slightly difficult book to read. But one of the biggest causes of ‘difficulty’ for most people, as I can assess, is that this book – The Intelligent Investor – does not lay down clearly the secrets of making it big in investing. It does not reveal any secrets of finding the next 100 baggers. It does not talk about beating the markets. It does not offer any secrets of making your next million. And it is these reasons that add to its perceived complexity.
But as I have realized through my multiple readings of this book, this is one of the very few that help build the character required to become an intelligent investor. And character building, as compared to wealth building, is often a complex subject to read about and practice.
We invent these excuses – that something is complex – because they provide us comfort and safety and the reason to not pursue those things (like reading The Intelligent Investor). But then these excuses often lead us to bad behaviour and poor decision making.
Investing and the Tale of Two Chapters
Take these two chapters from The Intelligent Investor – Chapter 8 (The Investor and Market Fluctuations) and Chapter 20 (“Margin of Safety” as the Central Concept of Investment). These chapters I believe contain 80% of what you need to know and seriously practice (taking an idea and taking it seriously) to become an intelligent, successful investor.
The common theme that binds these two chapters is how an investor should think, behave and act intelligently.
In Chapter 8, Graham writes how and why investors must think of stock investing as owing small parts of businesses, and thus not get excited or depressed seeing prices fluctuate daily –
The true investor…can take advantage of the daily market price or leave it alone, as dictated by his own judgment and inclination. He must take cognizance of important price movements, for otherwise his judgment will have nothing to work on. Conceivably they may give him a warning signal which he will do well to heed—this in plain English means that he is to sell his shares because the price has gone down, foreboding worse things to come. In our view such signals are misleading at least as often as they are helpful. Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.
One of Graham’s powerful insights in this chapter is –
The investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage (i.e., the freedom to choose whether or not to follow stock prices) into a basic disadvantage.
Graham then takes this idea of not using market prices but business principles as a base for valuing stocks into Chapter 20. Here he explains that stocks should only be bought when they are priced substantially below their intrinsic value. In fact, he considers this principle – that he terms as ‘margin of safety’ – to be of paramount importance as seen from how he opens this chapter –
In the old legend the wise men finally boiled down the history of mortal affairs into the single phrase, “This too will pass”. Confronted with a like challenge to distill the secret of sound investment into three words, we venture the motto, MARGIN OF SAFETY.
The idea that Graham professes in this chapter is that a prudent investor, like a prudent business owner, must have a margin of safety available while making investments. This is because such a margin would help the investor absorb the effect of miscalculations or worse than average luck.
What is more, Graham suggests that this margin of safety must rest ‘upon simple and definite arithmetical reasoning from statistical data’. Here we go back to Chapter 8 where he writes –
A stock does not become a sound investment merely because it is bought at close to its asset value. The investor should demand, in addition, a satisfactory ratio of earnings to price, a sufficiently strong financial position, and the prospect that its earnings will at least be maintained over the years.
So, that is it. What Graham suggests in these two chapters that an investor must do is the simple part of the equation. The not easy part is taking these lessons seriously and practicing them over long periods of time, and especially in today’s times when too much information and too much noise crowds these lessons out of an investors’ brain. And when too many people are seeking instant gratification.
Chess legend Garry Kasparov advises this in the introduction of his book How Life Imitates Chess –
The stock market and the gridiron and the battlefield aren’t as tidy as the chessboard. But in all of them, a single simple rule holds true: make good decisions and you’ll succeed; make bad ones and you’ll fail.
Let me change this quote a bit and suggest –
To become an intelligent investor, a simple rule holds true: read and seriously apply the lessons from Chapters 8 and 20 of Graham’s The Intelligent Investor and you’ll succeed; don’t apply those lessons and you’ll fail.
Investing, after all, doesn’t have to be complex to be intelligent.
Disclosure: I participate in the Amazon Associates Program, which simply means that if you purchase The Intelligent Investor or any book on Amazon from a link on this page, I receive a small commission. The book does not cost you any extra. I give away 100% of the commission for the betterment of the under-privileged.
http://www.safalniveshak.com/investing-simple-not-easy/
