At first glance, chapter 10 of Benjamin Graham’s “The Intelligent Investor” appears badly outdated (there is even a reference to telegrams in one observation—this final edition was published in 1973). Yet, a closer reading brings out several pithy insights that are as relevant today as ever.
Graham starts with the “peculiarities inherent” in the very idea of investment advice. Investors seeking advice are essentially telling the advisers to tell them how to make money:
“That idea has some element of naïveté. Businessmen seek professional advice on various elements of their business, but they do not expect to be told how to make a profit. That is their own bailiwick.”
Those who provide advice include relatives and friends, a local commercial banker, brokerage firms or investment banking entities, financial service providers who publish periodicals and investment counsellors. Looking at that list, he concludes:
“The miscellaneous character of this list suggests that no logical or systematic approach in this matter has crystallized, as yet, in the minds of investors.”
This tells us something important about investors themselves: in becoming competent to choose among advisers and their recommendations, investors move out of the category of defensive investor and into the category of enterprising investor.
And so, it is a matter of common sense, he believes, that investors must limit themselves and their advisers to only standard, conservative and unimaginative forms of investments. To do otherwise would be to push themselves out of the category where they fit best.
Investment counsellors and bank trusts
Turning to investment counselors and bank trust services, Graham says:
“The truly professional investment advisers—that is, the well-established investment counsel firms, who charge substantial annual fees—are quite modest in their promises and pretentions.”
He notes this type of adviser will charge substantial fees to provide “careful, conservative and competent” advice. Their biggest contribution may be helping clients avoid costly mistakes.
Financial service providers
Investors who like to take care of their own investing sometimes subscribe to newsletters and similar services to get what’s often sold as professional advice. Graham says some of those services use technical analysis to forecast market movements, and summarily rejects their advice.
“We shall dismiss these with the observation that their work does not concern “investors” as the term is used in this book.”
Within this group of financial service providers is also the firm now traded as Moody’s Corp. (MCO, Financial). Graham notes Moody’s compiles “voluminous” statistical data for a widely varied clientele:
“As a result they must find it difficult to adhere to any clear-cut or fundamental philosophy in arriving at their opinions and recommendations.”
Graham also has this caustic comment on the full financial services sector: “Nearly everyone interested in common stocks wants to be told by someone else what he thinks the market is going to do. The demand being there, it must be supplied.”
Brokerage houses
Again, with brokerage houses, Graham uses his power of language to make his feelings clear:
“In the past Wall Street has thrived mainly on speculation, and stock-market speculators as a class were almost certain to lose money. Hence it has been logically impossible for brokerage houses to operate on a thoroughly professional basis. To do that would have required them to direct their efforts toward reducing rather than increasing their business.”
“Increasing their business” means generating commissions, and brokerage sales people are prepared to provide speculative advice that customers often demand.
Investment bankers
Then, it’s on to investment bankers, firms that mainly originate, underwrite and sell new initial public offerings. Here, Graham has some positive words:
“Investment banking is perhaps the most respectable department of the Wall Street community, because it is here that finance plays its constructive role of supplying new capital for the expansion of industry.”
And even more positive words:
“The intelligent investor will pay attention to the advice and recommendations received from investment banking houses, especially those known by him to have an excellent reputation; but he will be sure to bring sound and independent judgment to bear upon these suggestions—either his own, if he is competent, or that of some other type of adviser.”
Friends and family
Finally, Graham addresses advice from friends and family, some of whom no doubt have investment knowledge or experience. But Graham still recommends we avoid them:
“The inquirer always thinks he has good reason for assuming that the person consulted has superior knowledge or experience. Our own observation indicates that it is almost as difficult to select satisfactory lay advisers as it is to select the proper securities unaided. Much bad advice is given free.”
Let us add that Graham has spent much of this chapter pointing out that much paid advice is also bad..
Summing up the chapter, Graham says investors willing to pay for management of their funds are advised to find a well-established and well-recommended investment-counsel firm. These investors should expect about average results. He adds that investors should be wary of all who promise spectacular income or profits.
Defensive investors will not be able to judge the recommendations made by their advisers, but they should stipulate they want high-grade stocks and bonds. In the case of stocks, that means large, prominent and conservatively financed companies, as outlined previously in his book.
Enterprising investors will actively work with their advisers, getting recommendations in detail and making their own decisions about those recommendations. These investors will use their own knowledge and skill to assess the recommendations from experts, rather than accepting them on faith.
Other thoughts
In reading this chapter, I’m struck by the radical transformation that has reshaped investment and finance in the years since Graham passed away. Numerous sources of change, particularly the computer revolution and the internet, have created a world that Graham himself might have trouble recognizing.
On the other hand, it seems clear Graham would immediately recognize the human actors and their habits. Technology has transformed the tools available and the tools we use, but they’re only tools, and only as good as the people using them.
And despite the age of his advice, it still rings true and still has value for all investors.
(This review is based on the 1973 revised edition of “The Intelligent Investor”; republished in 2003 with chapter-by-chapter commentary by Jason Zweig and a preface by Warren Buffett (Trades, Portfolio). For more articles in this series, go here.)
