The Intelligent Investor

Jason Zweig has a new column at the WSJ, called "The Intelligent Investor":

Could things possibly get worse? I don’t know, but I am an optimist — so I certainly hope things do get worse. Nothing else should satisfy an intelligent investor.

This May, at the Berkshire Hathaway annual meeting, Warren Buffett boiled down what it means to be an intelligent investor into two startling sentences: "If a stock [I own] goes down 50%, I’d look forward to it. In fact, I would offer you a significant sum of money if you could give me the opportunity for all of my stocks to go down 50% over the next month." Knowing he owns good businesses, Mr. Buffett wants prices to go down, not up, so he can buy even more shares more cheaply before the bounce back.

I like this. But I think it’s at odds with what Zweig says later:

Investing is simple: Diversify, buy and hold, keep costs low.

In the Buffett case, you have an intelligent investor who does his homework, knows what his companies are worth, and would love to be able to buy even more of them at as much of a discount to their actual value as possible.

The rest of us are in a rather different boat. We diversify, we buy and hold, we keep costs low — but we really have no idea what our companies are worth; indeed, we’re probably buying index funds, and no one knows what the stock market as a whole is worth. If we buy stocks now it’s not because we think they’re cheap, but rather because we have a vague notion that over the long term buying stocks is the best way to maximize one’s investment returns. If the stock market then proceeds to plunge by 50%, we feel rather foolish.

Some people, like Rob Bennett, have tools with which they try to value the stock market; others spend hours looking at charts and obsessing over "cycles", trying to divine when the market’s going to go up and when it’s going to go down. But I’m not convinced that either of those are particularly intelligent things to do. On the one hand, if you can’t understand a single company, then how will you understand thousands of them? And on the other hand, if you can understand a single company, then why don’t you invest in what you understand?

For nearly any reasonably intelligent person with access to the markets, the most reliable and low-risk way of making money is to simply go out and earn it. A tiny minority of people have so much money that their earnings pale in comparison to their monthly dividend checks; I’m not going to spend overmuch time worrying about them. Investing is always something of a lottery; earnings, by contrast, are determined largely by the individual. The intelligent investor doesn’t count his chickens, doesn’t put at risk money which he can’t afford to lose, and doesn’t care too much about what happens to his money once he’s made his investment decisions: there’s no point worrying about that which you can’t control.

Too many people spend altogether too much time managing and/or worrying about their money, when they’d be much better served doing something — anything — else instead. There’s an enormous amount of investment advice out there, much of which encourages people to know exactly what they’re doing, to do lots of research before investing, and that sort of thing. That’s good advice for Warren Buffett, whose job is investing, and who doesn’t need anybody’s advice anyway. The rest of us are better off making a simple decision, sticking to it, and then just going about our daily lives. And for us, a 50% drop in stock prices would not be satisfying in the slightest.

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