WSJ, Oct. 18, 2024
Thanks to today’s incessantly twitchy, infinitely networked markets, it has never been harder to be a disciplined and independent investor
Investing isn’t about mastering the markets; it’s about mastering yourself.
That was the central tenet of Benjamin Graham’s “The Intelligent Investor”—and, in large part, why Warren Buffett has called it “the best book about investing ever written.
Graham’s emphasis on self-control is also why, although first published in 1949, the book is still relevant today. In fact, it’s more relevant than ever.
Graham wasn’t only one of the best investors of all time; he may have been the wisest. His intellectual brilliance, six decades of investing and study of history gave him a profound understanding of human nature.
As he wrote: “The investor’s chief problem—and even his worst enemy—is likely to be himself.”
This [Zweig's] column is named after that book, which I edited in a revised edition published in 2003. A newly revised version comes out Oct. 22. (Graham’s original text remains intact; I’ve written commentaries that put each chapter in context for today’s investors.)
To be an intelligent investor doesn’t require a stratospheric IQ. It does require discipline and the ability to think for yourself.
As Graham pointed out, individual investors are “scarcely ever” forced to sell stocks or funds and—unlike professional portfolio managers who are continually measured against the market—are never compelled to care what other investors are doing.
That independence is your single most valuable asset, a luxury most professional investors can only dream of possessing. It’s what Graham called the “basic advantage” of the intelligent investor. But, he warned, “the investor who permits himself to be stampeded [by other people’s behavior]. . .is perversely transforming his basic advantage into a basic disadvantage.”
As I argue in the new edition of the book, it has never been harder to be a disciplined and independent investor. In today’s incessantly twitchy, infinitely networked markets, the siren song of smartphones, social media and streaming video can tempt you to trade more and copy the crowd.
After all, it often makes sense—and just feels right—to join the herd.
You probably wouldn’t eat at an empty restaurant, purchase a product that has no positive online reviews or buy a house nobody else will bid on.
Own a soaring stock you can chat about online with thousands of other people who love it, and you’ll feel you belong to a pride of lions. Own a falling stock that nobody wants to touch, and you’ll feel like a skunk at a garden party.
Starting in 2020, swarms of investors coalesced on Reddit, Twitter and Discord to pool their buying power and drive up the prices of such stocks as AMC Entertainment Holdings, GameStop and Bed Bath & Beyond. A few leaders and early birds made huge profits.
Yet crowds aren’t always right, and their errors are contagious. What separates the wisdom from the madness of the crowd?
In 1907, the statistician Francis Galton described a contest at an agricultural fair in which nearly 800 visitors tried to guess the weight of an ox. Although many knew little or nothing about oxen and their guesses varied widely, their average estimate turned out to match the weight of the ox exactly.
Galton’s guessers had a variety of viewpoints, sought to win a prize for accuracy, didn’t know other people’s estimates and had to pay an entry fee. The sponsors of the contest collected and tallied all the guesses.
The judgments of that crowd were independent, confidential, diverse, incentivized and aggregated—and, therefore, remarkably accurate at estimating simple values.
But the judgments of today’s crowds are often the opposite of Galton’s.
“Finfluencers” like Elon Musk and Chamath Palihapitiya can set off stampedes, crushing cognitive diversity as countless people rush to emulate them.
Whipping each other into a frenzy, online packs of investors hold on for dear life to fading stocks like AMC—or drive a hot stock like Palantir Technologies, up more than 140% this year, to heights that may be unsustainable.
There are no barriers to entry, no way to authenticate claims of expertise, and no registry of how accurate the opinions are.
That can degenerate the wisdom of the crowd into madness. The weight of an ox doesn’t change with people’s estimates of it. However, if thousands of speculators decide a stock or cryptocurrency is worth $100,000, it will skyrocket—at least temporarily—even if it’s worthless.
Joining the crowd can change how you think, no matter how much you pride yourself on your independence. That’s especially insidious because it occurs subconsciously.
One recent study found that investors on social media are five times more likely to follow users who agree with them and will see nearly three times more messages they agree with than disagree with. Falling into such an echo chamber, the study showed, leads people to trade more—and earn lower returns.
Meanwhile, bucking the consensus engages circuits in the brain that generate pain and disgust. Experiments have shown that when you find out your peers disagree with you, your choices become up to three times more likely to match theirs, although you have no conscious awareness of being influenced.
In today’s digital world, those influences have morphed into tools designed to kidnap your attention, corrode your patience and kill your ability to think for yourself.
The companies behind Robinhood and other popular trading apps often describe them as “gamification.” A more accurate term would be “gamblification.”
These trading apps are fun to use, but have three pernicious features. They are designed to encourage short-term trading. They are potentially addictive. And they rely on manipulative techniques perfected by the gambling industry:
- audiovisuals that display market prices like the spinning reels on a slot machine;
- scratch-off rewards resembling lottery tickets, giving you a share of a random stock and the excitement of playing with what feels like free money;
- frequent alerts notifying you of big moves and goading you to trade.
Gamblified apps also prod users into buying and selling options contracts, which can be riskier—and are far more costly to trade—than stocks.
A study by the Ontario Securities Commission found that earning rewards prompted people to trade 39% more often; seeing a weekly list of top-traded stocks led participants to increase their trading of those stocks by 14%.
Gamblifying a brokerage app by adding badges, levels and leaderboards can also change how investors think. Instead of seeking to fulfill their own financial goals, they will strive to beat everybody else, becoming up to twice as likely to buy a risky stock.
The people who run your online brokerage know all this. That’s why they want to hook you on their apps. The more time you spend on your device, the more often you’re likely to trade, enriching the brokerage instead of yourself.
Because you may never realize how much a group is influencing your decisions, it’s vital to protect yourself before you join the crowd.
Seek out patient, like-minded investors at online communities such as bogleheads.org, HumbleDollar.com, MutualFundObserver.com or ValueInvestorsClub.com.
Look for posts that:
- steer clear of hot takes on the latest headlines;
- avoid anger, boasting and mockery;
- and reveal their sources by linking to long-term data and peer-reviewed research, rather than just making assertions without evidence.
Instead of investing based on the whims of the crowd, follow policies and procedures.
If you have views about which asset or investing strategy is right for you, write down your reasoning before you explore what some online group is saying. Take no action without reviewing your original rationale and determining that there’s a reasonable basis for changing it—grounded in independently verifiable evidence, not just the opinions of random people online.
Use a checklist to focus on the stability of the underlying business rather than share-price movements. Have I read the company’s financial reports? Do its executives admit mistakes, use conservative accounting and avoid hype? Have I written down at least three reasons why this is a good business that will be even better five years from now? What, exactly, do I understand about this company that most other investors are missing, and why?
After thoroughly filtering companies, put your favorites on a watchlist. Set limit orders in your brokerage account to buy them automatically if they drop, say, 25% in price.
That way, you lock yourself into doing the opposite of the crowd.
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Adapted from “The Intelligent Investor, 3rd Ed.: The Definitive Book on Value Investing” by Benjamin Graham and Jason Zweig, to be published by Harper Business on October 22, 2024. Original text Copyright © 1973 by Benjamin Graham. New material Copyright © 2024 by Jason Zweig. Printed by arrangement with Harper Business, a division of HarperCollins Publishers (which, like The Wall Street Journal, is owned by News Corp).
Write to Jason Zweig at intelligentinvestor@wsj.com