The Intelligent Investor

Zweig underscores Graham’s advice that one should strive to avoid losses. He provides a modern example of the unpredictability of the stock market: the dot-com boom and bust that occurred in the late 1990s and early 2000s. Zweig notes that, while some losses are inevitable when investing, one should not get carried away by the enthusiasm of the market.

He emphasizes that the ability to avoid loss is a function of temperament rather than intelligence. He notes that even Sir Isaac Newton managed to lose a huge amount of money in bonds in the year 1720 after he got swept away by the promise of profits and that this was a result of his emotions rather than his IQ.

Reflecting on his current era, Zweig notes that the market swung from incredible optimism in the 1990s to incredible pessimism in the early 2000s. He says that people who were previously excited to buy stocks as they rose ended up selling them as the prices started to fall. He reiterates Graham’s point that the opposite should be true: “The intelligent investor realizes that stocks become more risky, not less, as their prices rise—and less risky, not more, as their prices fall” (17). Because of this, he says, even though the market slowed down considerably in recent years, it is a good time to build wealth.

Graham distinguishes between an investor and a speculator. He defines investment as a capital outlay that, after thorough analysis, “promises safety of principal and an adequate return” (18). He adds, “Operations not meeting these requirements are speculative” (18). He cautions that the term “investor” is now applied too loosely and that its definition should be restricted.

He admits that some speculation is involved in investing but believes they are distinct activities. He warns against mistaking speculation for investing; speculating for fun, and especially without skill or knowledge; and speculating with more money than one can afford. He says that anyone who wishes to speculate should set aside only a small portion of their money to do so and that they should keep this portion strictly separate from the rest of their funds.

Graham then provides separate advice to defensive investors and enterprising investors. In addressing defensive investors, he reviews one of the main pieces of advice he provided in previous editions of the book: that the defensive investor should divide their investments 50-50 between stocks and bonds. He reflects on how markets changed since the last edition of the book, noting that the interest rates on first-grade bonds rose considerably and that the late ’60s proved to be an exception to the rule that bonds fluctuate less than stocks.

He says his expectation for the following year (1972) is that bonds will still be preferable to stocks, though he acknowledges that this cannot be stated with certainty, and so a 50-50 split between stocks and bonds is still advised. According to his calculations for the near future, he says that the return from both stocks and bonds should be around 7.8% before taxes (or 5.5% after taxes) and that while this may not be as exciting as the high stock returns experienced during a bull market, it is still higher than the average defensive investor has earned in the past.

While Graham mostly references the Dow Jones Industrial Average (DJIA) when speaking of the stock market, he acknowledges that one can invest in other companies besides the ones in the DJIA. In the footnotes, Zweig mentions the Standard & Poor’s 500 stock index (also known as the S&P 500) and the Wilshire 5000. According to Graham, one should avoid trends and hype. He advises a conservative approach: “The defensive investor must confine himself to the shares of important companies with a long record of profitable operations in strong financial condition” (28).

Aside from the advice to maintain a 50-50 split between stocks and bonds, Graham also briefly mentions three other approaches that the defensive investor can employ: buying shares of investment funds; using a common trust fund; and purchasing stocks at regular intervals with a set amount of money (dollar-cost averaging).

Graham then addresses enterprising investors. He says that a more aggressive approach to investing does not necessarily ensure better results. The enterprising investor should understand which approaches are likely to be successful and which are not. He notes that three common tactics—trading in the market (buying as stock prices rise and selling as they fall), short-term selectivity (buying stock in promising companies), and long-term selectivity (buying stock in companies with records of high growth)—are not likely to be successful.

Instead, Graham says that decent results can only be expected by policies that are “not popular on Wall Street” (31). He details three opportunities that the enterprising investor can take, all of which are undergirded by the idea that most people tend to be either overly optimistic or overly pessimistic about the market. First, he says that one can buy undervalued stocks and sell overvalued stocks, though he cautions that this is difficult to execute in practice. Second, he notes that an aggressive investor may be able to profit from the mergers of large companies (though Zweig says in the footnotes that this technique is no longer feasible for most people). Third, Graham says that one can benefit from spotting and buying stocks that are hugely undervalued. However, he admits that these anomalous bargains largely disappeared in the last few decades.

Zweig reiterates Graham’s belief that investment approaches should be rooted in analysis, safety, and long-term, modest gains rather than temporary and trendy growth. “An investor calculates,” he says, while “a speculator gambles” (36). He echoes Graham’s exhortation that one should never confuse speculation with investing.

To illustrate the difference, he gives an analogy of two drivers: one who drives at 65 mph to their destination and another who drives at 130 mph. He asks: Is the second person’s strategy “right” if they arrive faster and without dying? Even if they do survive, anyone who attempts to emulate them also risks dying. He likens this 130 mph driver to a speculator who attempts to “beat” the stock market and who advises others to follow suit. Zweig argues that speculative maneuvers are not safe or right simply because they worked once for the person espousing them.

Zweig reflects on how the pace of the stock market changed in the years after Graham published his book, noting how trading became increasingly trendy, fast-paced, and gamified. Online trading and constantly available data turned stocks into “pure abstractions—just blips moving across a TV or computer screen” (40). Zweig argues that treating trading as a fast-paced game is dangerous and that it is foolish to listen to so-called experts who peddle strategies that do not meet Graham’s criteria for investment.

Graham discusses inflation and its impact on investment decisions. He addresses the argument that common stocks can be used to counter inflation due to their potential for higher returns compared to fixed-rate financial assets like bonds.

Graham refutes the argument that common stocks are a reliable hedge against inflation, stating that while stocks have the potential for higher returns, they also carry higher risks. In response to the question of whether an all-stock portfolio would protect against inflation, Graham cautions that it would not be a foolproof strategy because the stock market is volatile. He quotes the financier J. P. Morgan, who, whenever he was asked to predict what stocks would do next, would simply say, “They will fluctuate” (54). In other words, when it comes to investing in stocks, the only certainty is uncertainty.

Graham addresses other ways to combat inflation, such as investing in gold or real estate. However, he believes the prices of both gold and real estate are subject to too many price fluctuations to be relied upon as effective long-term hedges against inflation.

He concludes by returning to his advice that a diversified portfolio of stocks and bonds is the best approach to investment, providing a balance between risk and return: “Just because of the uncertainties of the future the investor cannot afford to put all his funds into one basket—neither in the bond basket…nor the stock basket, despite the prospect of continuing inflation” (56).

Zweig introduces “two inflation fighters that have become widely available to investors” in the years since Graham wrote The Intelligent Investor: REITs (real estate investment trusts) and TIPS (Treasury Inflation-Protected Securities) (63). REITs are a type of investment that allows individuals to invest in income-producing real estate properties. TIPS are special types of US Treasury securities that offer protection against inflation by adjusting their returns to keep pace with inflation. According to Zweig, “For most investors, allocating at least 10% of your retirement assets to TIPS is an intelligent way to keep a portion of your money absolutely safe—and entirely beyond the reach of the long, invisible claws of inflation” (64).