The Intelligent Investor_ The Definitive Book on Value Investing - Benjamin Graham [260]
* This is one of the central points of Graham’s book. All investors labor under a cruel irony: We invest in the present, but we invest for the future. And, unfortunately, the future is almost entirely uncertain. Inflation and interest rates are undependable; economic recessions come and go at random; geopolitical upheavals like war, commodity shortages, and terrorism arrive without warning; and the fate of individual companies and their industries often turns out to be the opposite of what most investors expect. Therefore, investing on the basis of projection is a fool’s errand; even the forecasts of the so-called experts are less reliable than the flip of a coin. For most people, investing on the basis of protection—from overpaying for a stock and from overconfidence in the quality of their own judgment—is the best solution. Graham expands on this concept in Chapter 20.
1 Adjusted for stock splits. To many people, MicroStrategy really did look like the next Microsoft in early 2000; its stock had gained 566.7% in 1999, and its chairman, Michael Saylor, declared that “our future today is better than it was 18 months ago.” The U.S. Securities and Exchange Commission later accused MicroStrategy of accounting fraud, and Saylor paid an $8.3 million fine to settle the charges.
2 Jon Birger, “The 30 Best Stocks,” Money, Fall 2002, pp. 88–95.
1 By the time you read this, much will already have changed since year-end 2002.
2 David Dreman, “Bubbles and the Role of Analysts’ Forecasts,” The Journal of Psychology and Financial Markets, vol. 3, no. 1 (2002), pp. 4–14.
3 You can calculate this ratio by hand from a company’s annual reports or obtain the data at websites like www.morningstar.com or http://finance.yahoo.com.
4 For more on what to look for, see the commentary on Chapters 11, 12, and 19. If you are not willing to go to the minimal effort of reading the proxy and making basic comparisons of financial health across five years’ worth of annual reports, then you are too defensive to be buying individual stocks at all. Get yourself out of the stock-picking business and into an index fund, where you belong.
* The Friend-Blume-Crockett research covered January 1960, through June 1968, and compared the performance of more than 100 major mutual funds against the returns on portfolios constructed randomly from more than 500 of the largest stocks listed on the NYSE. The funds in the Friend-Blume-Crockett study did better from 1965 to 1968 than they had in the first half of the measurement period, much as Graham found in his own research (see above, pp. 158 and 229–232). But that improvement did not last. And the thrust of these studies—that mutual funds, on average, underperform the market by a margin roughly equal to their operating expenses and trading costs—has been reconfirmed so many times that anyone who doubts them should found a financial chapter of The Flat Earth Society.
* As we discuss in the commentary on Chapter 9, there are several other reasons mutual funds have not been able to outperform the market averages, including the low returns on the funds’ cash balances and the high costs of researching and trading stocks. Also, a fund holding 120 companies (a typical number) can trail the S & P 500-stock index if any of the other 380 companies in that benchmark turns out to be a great performer. The fewer stocks a fund owns, the more likely it is to miss “the next Microsoft.”
* In this section, as he did also on pp. 363–364, Graham is summarizing the Efficient Market Hypothesis. Recent appearances to the contrary, the problem with the stock market today is not that so many financial analysts are idiots, but rather that so many of them are so smart. As more and more smart people search the market for bargains, that very act of searching makes those bargains rarer—and, in a