The Intelligent Investor_ The Definitive Book on Value Investing - Benjamin Graham [54]
Amidst the bear market that began in 2000, it’s understandable if you feel burned—and if, in turn, that feeling makes you determined never to buy another stock again. As an old Turkish proverb says, “After you burn your mouth on hot milk, you blow on your yogurt.” Because the crash of 2000–2002 was so terrible, many investors now view stocks as scaldingly risky; but, paradoxically, the very act of crashing has taken much of the risk out of the stock market. It was hot milk before, but it is room-temperature yogurt now.
Viewed logically, the decision of whether to own stocks today has nothing to do with how much money you might have lost by owning them a few years ago. When stocks are priced reasonably enough to give you future growth, then you should own them, regardless of the losses they may have cost you in the recent past. That’s all the more true when bond yields are low, reducing the future returns on income-producing investments.
As we have seen in Chapter 3, stocks are (as of early 2003) only mildly overpriced by historical standards. Meanwhile, at recent prices, bonds offer such low yields that an investor who buys them for their supposed safety is like a smoker who thinks he can protect himself against lung cancer by smoking low-tar cigarettes. No matter how defensive an investor you are—in Graham’s sense of low maintenance, or in the contemporary sense of low risk—today’s values mean that you must keep at least some of your money in stocks.
Fortunately, it’s never been easier for a defensive investor to buy stocks. And a permanent autopilot portfolio, which effortlessly puts a little bit of your money to work every month in predetermined investments, can defend you against the need to dedicate a large part of your life to stock picking.
Should You “Buy What You Know”?
But first, let’s look at something the defensive investor must always defend against: the belief that you can pick stocks without doing any homework. In the 1980s and early 1990s, one of the most popular investing slogans was “buy what you know.” Peter Lynch—who from 1977 through 1990 piloted Fidelity Magellan to the best track record ever compiled by a mutual fund—was the most charismatic preacher of this gospel. Lynch argued that amateur investors have an advantage that professional investors have forgotten how to use: “the power of common knowledge.” If you discover a great new restaurant, car, toothpaste, or jeans—or if you notice that the parking lot at a nearby business is always full or that people are still working at a company’s headquarters long after Jay Leno goes off the air—then you have a personal insight into a stock that a professional analyst or portfolio manager might never pick up on. As Lynch put it, “During a lifetime of buying cars or cameras, you develop a sense of what’s good and what’s bad, what sells and what doesn’t…and the most important part is, you know it before Wall Street knows it.”1
Lynch’s rule—“You can outper-forms the experts if you use your edge by investing in companies or industries you already understand”—isn’t totally implausible, and thousands of investors have profited from it over the years. But Lynch’s rule can work only if you follow its corollary as well: “Finding the promising company is only the first step. The next step is doing the research.” To his credit, Lynch insists that no one should ever invest in a company, no matter how great its products or how crowded its parking lot, without studying its financial statements and estimating its business value.
Unfortunately, most stock buyers have ignored that part.
Barbra Streisand, the day-trading diva, personified the way people abuse Lynch’s teachings. In 1999 she burbled, “We go to Starbucks every day, so I buy