Source: Shaoshupai Investment
Buffett once stated that value investing comprises only two core subjects: one is how to value a business, and the other is how to view the market.
Since the publication of Security Analysis in 1934, the former subject has evolved rapidly. Young lecturers frequently take the stage to preach post-Graham value investing, which has somewhat shaken the status of the "Godfather of Wall Street." Consequently, young investors often ask:
"Is Graham outdated?"
However, in my view, Mr. Graham still firmly holds the premier chair in the course on "How to View the Market." He remains nearly unrivaled in insights into investors' psychological weaknesses and strategies for resisting the tyranny of the market. Indeed, The Intelligent Investor, published in 1949, reads as if it were offering warnings to today's stock investors.
The Intelligent Investor—the classic work that led Buffett to embrace value investing—not only provides readers with a systematic analytical framework but also dedicates significant effort to constructing a unique "stock market psychology." This is because the author believes that emotion, rather than data, logic, or knowledge, is the primary factor determining investment success or failure.
Graham stated that the primary purpose of The Intelligent Investor was "to guide readers against committing substantial errors and to establish a sound investment strategy." To this end, "we will devote considerable space to discussing investor psychology, because the investor's chief problem—and even his worst enemy—is likely to be himself."
Revisiting The Intelligent Investor means revisiting Graham's stock market psychology and re-evaluating the role of "self" in investment decision-making.
I. What Does "The Intelligent Investor" Mean?
While The Intelligent Investor enjoys widespread renown, few people scrutinize the meaning of its title—The Intelligent Investor.
One common interpretation focuses on intellect and knowledge, suggesting that an intelligent investor is someone who possesses the correct information, methods, and theories. Another interpretation defines intelligence by outcomes: those who make money are called intelligent investors, while those who lose money are deemed foolish investors.
However, neither of these interpretations reflects the author's original intent.
According to Jason Zweig, commentator on The Intelligent Investor, Graham discussed the title in the first edition of the book, noting that the term “intelligent investor” has “nothing to do with IQ or SAT scores.”
An intelligent investor—this merely implies possessing patience, discipline, and a desire to learn; it also requires the ability to control one’s emotions and engage in self-reflection. Graham explained that this “intelligence” refers to traits of character rather than intellect.
In this regard, it is not unreasonable that some Traditional Chinese translations render The Intelligent Investor as The Wise Stock Investor, translating “intelligent” as “wise” rather than “smart.” Individuals who possess all five qualities may not necessarily have high intelligence, but they certainly exhibit considerable wisdom.
To some extent, this definition can be viewed as Graham’s portrait of the “ideal investor,” serving as a checklist for investors’ self-assessment. Readers are encouraged to ask themselves whether they can achieve the following:
Patience;
Discipline;
A desire to learn;
Emotional control;
Self-reflection.
At the same time, this definition reflects an underlying theme of The Intelligent Investor: the conviction that investment success or failure depends primarily on the investor. Therefore, regardless of how external conditions change, the responsibility for mastering value investing lies with the investor themselves—as the saying goes, “The gentleman seeks the cause within himself.”
Graham attempts to persuade readers that although the future is unknowable and stock prices are unpredictable, we can face an uncertain tomorrow without fear of the market’s capricious tyranny, provided we do our homework—by adopting the right attitude, employing scientific methods, thinking rationally, and managing our emotions.
Emotional discipline is particularly crucial. Graham stated that “ordinary people” who maintain emotional control during the investment process have a better chance of making significant profits and preserving their capital than those who do not. Although the latter may possess more knowledge of finance, accounting, and the stock market, such expertise is ultimately less important than emotional discipline.
Thus, as he repeatedly admonished: “Dear investor, the problem is neither your fate nor your stocks, but yourself…”
II. The Primary Rule of Investment: Protect Yourself
If you walk into a bookstore and pick up a book on stock trading, what will you find inside?
I would bet ten dollars that the author claims to have secret investment tips. They will suggest that by following their method—first steps one through four, then A through D—you will achieve substantial returns, perhaps even beating the broader market. See? Investing is that easy.
Most stock market books follow this pattern, eagerly promoting magical formulas for high returns and implying that “investing is easy” and that “you too can beat the market.” This reminds me of a famous quote by Munger: “Investing is not easy; anyone who thinks it is, is a fool.”
Graham was certainly no fool. While sharing investment strategies, he devoted equal (if not greater) effort to warning readers: do not underestimate the difficulty of investing, and do not overestimate your own abilities. This field is fraught with challenges and hidden dangers, especially when you attempt to speculate, predict stock prices, or act out of overconfidence.
This is what makes The Intelligent Investor unique:
When others tell you that investing is easy, Graham tells you it is difficult;
When others tell you how to make money in the stock market, Graham tells you how to avoid losing money;
When others say let’s beat Mr. Market, Graham says let’s survive with caution.
Such perspectives may seem disheartening, akin to telling a novice martial artist that even great heroes must clock in for work, collect salaries, pay rent, report incidents to the authorities, and avoid unnecessary fights. This may appear dull, but after spending enough time in this world, you will realize he is right.
In fact, this is the core characteristic of value investing: a commitment to loss avoidance and error prevention. Klarman stated, “Most investment methods do not focus on avoiding losses, nor do they emphasize assessing the comparison between the actual risks and returns of an investment. As far as I know, only one approach does this: value investing.”
This is also an implicit central theme throughout The Intelligent Investor: how investors can protect themselves.
Following this line of reasoning, we can nearly connect the entire book and naturally understand why the author painstakingly addressed seemingly “off-topic” matters, including defining investment versus speculation, distinguishing between defensive and aggressive investors, reviewing a century of U.S. stock market history, developing the Mr. Market model, and more.
Everything is aimed at teaching investors how to protect themselves. If you follow Graham’s advice, regard this as the primary imperative for survival in the investment world.
After all, no one will protect you except yourself. Not brokerage firms, not the media, not central banks, and not the influential online personalities you follow.
3. Know Yourself: Which Type of Investor Do You Want to Be?
Discussing "self-awareness" in an investment book may seem somewhat out of place, but this is Graham's first piece of advice to readers: You must honestly evaluate yourself and then make a firm decision—whether to be a defensive investor or an aggressive investor?
When I first read The Intelligent Investor many years ago, I was young and naive. I found this section boring and impatient, thinking: What is there to discuss? Just hand over the secret weapon and tell me the surefire way to win in the stock market; skip the useless stuff—I might as well have directly asked Old Man Graham for stock codes ("Just give it to me").
Perhaps concerned that readers might take this lightly, Graham warns that uncertainty about a specific security does not cause significant harm, but "the investor's choice between being defensive and aggressive is highly important. In making this basic decision, he should never be ambiguous or adopt a compromise approach."
01. Two Types of Investors: Defensive/Aggressive
The so-called "defensive investor" refers to someone who prioritizes capital safety and does not wish to spend much time or effort. The main characteristics of such investors are avoiding major errors or losses, and secondly, not having to exert mental effort to make frequent decisions.
In contrast, the main characteristic of aggressive investors (also known as active or enterprising investors) is their willingness to devote time and effort to selecting reasonable and attractive stocks in order to achieve returns above the general average.
Therefore, the distinguishing criterion is to ask oneself honestly: How much do I understand about securities investment? How much time and energy am I willing to invest? How much "intellectual effort" and "skill" do I possess?
02. Answering the Question: Who Is a Defensive Investor?
To help readers understand, Graham creates three fictional characters:
1. A widow with $200,000, relying on this amount to support herself and her children;
2. A successful physician at the peak of their career, with $100,000 in savings that increase by $10,000 annually;
3. A young person earning $200 per week, saving $1,000 a year.
Question: Who is the defensive investor? Who is the enterprising investor?
Many might answer: The widow and the young person are defensive investors, while the physician is an enterprising investor—because the widow appears to have the lowest “risk tolerance”; the young person has time but the smallest principal; whereas the physician is in their prime and enjoys robust cash flow.
However, Graham tells us that all three are likely defensive investors. Moreover, he even states: “The well-paid physician does not face the same pressures and constraints as the widow, but we believe his investment choices will be largely similar.”
Why, in capital letters?
Because the physician must also ask themselves: Am I willing to engage seriously in investment activities?—“If he lacks the motivation or ability, he would do best to accept becoming a defensive investor. His portfolio allocation would basically be no different from that of the ‘typical’ widow.”
Indeed, “in general, the physician may be more likely than the widow to become an enterprising investor, with greater chances of success,” but as an investor, the physician “faces a significant obstacle: he has neither the time to acquire investment education nor the time to manage his own investments.”
The following passage may be somewhat biased, but it can be viewed as advice to all “professionals”:
“In fact, the incompetence of medical professionals in securities trading is well known. The reason lies in the fact that they usually have great confidence in their intelligence and a strong desire for high returns, yet they often fail to realize that achieving success in investing requires not only substantial effort but also professional judgment of security values.”
Ultimately, the choice of which securities to purchase and what rate of return to target depends not on an individual's financial capacity, but on their financial competence, encompassing knowledge, experience, and temperament.
3. The Choice for the Majority: The Defensive Investor
Astute readers may observe that, by this standard, most individuals should qualify as defensive investors.
Indeed, this aligns with Graham’s view: “If we follow this logic, perhaps the majority of security holders should choose to become defensive investors. Most people lack the time, decision-making ability, and energy to engage in investment activities with the same dedication as running a business.”
It is unrelated to your age, assets, or profession. In Graham’s framework, an investor’s most valuable resources are time, effort, and intellect.
Now, if after an honest self-assessment you decide to become a defensive investor, what does this entail? It essentially means you should:
Adopt only simple and easily understandable investment methods;
Avoid spending excessive time on securities investments;
Prioritize the safety of principal;
Be content with a modest rate of return;
Diversified investment is a mandatory requirement.
(Note: Defensive strategies often point to index funds; this topic will not be elaborated upon here.)
At the same time, the difficulty of this path lies not in knowledge but in mindset: investors must be content with the superior returns (or even lower returns) that a defensive portfolio can provide, and they must firmly resist the constant temptations to deviate from this course in pursuit of higher returns.
However, regardless of the path you choose, the standard approach is to view yourself honestly.
4. Cognitive Behavior: The Confusion Between Investment and Speculation
"Telling you not to speculate is easy for us; but following our advice is difficult for you."
— Benjamin Graham
These words convey a deep sense of disappointment in human nature. I believe the author is well aware that, no matter how eloquently he argues against the dangers of speculation, many people will still succumb to temptation, abandon value investing, and head straight toward the Russian roulette of speculation without looking back.
In the context of overcoming gambling addiction, mathematics, logic, history, and even experience have limited efficacy.
This is the reason why ordinary investors incur losses: they fail to recognize their own behavior honestly—particularly whether they are investing or speculating—and, more dangerously, they claim to be engaging in value investing while actually gambling.
How to distinguish between investment and speculation? There are three key points.
1. Differences in Definition
Graham provides a strict definition of "investment."
"An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative."
Jason Zweig expands this definition into three key elements:
1. Before buying stocks, you must conduct a thorough analysis to ensure the company and its related business operations are sound.
2. You must protect yourself against significant losses.
3. You should only expect an "adequate" return, avoiding unrealistic expectations.
Under this definition, chart-based trading does not qualify as investment, nor does acting on rumors; attempting high-risk bets hoping for outsized gains is certainly not investment.
2. Differences in Focus
Graham stated, "The true distinction between investors and speculators lies in their attitude toward stock market movements. Speculators are primarily interested in participating in market fluctuations to profit from them, whereas investors focus on buying stocks at reasonable prices and holding appropriate positions."
Jason Zweig offers a vivid analogy: "For speculators, continuous price quotes are like oxygen—cut them off, and lives are lost." In contrast, "Graham would urge you to invest only if you can feel confident about the stocks you hold, even without knowing their daily prices."
03. Differences in Methodology
Typical speculative behavior is obsessed with following stock prices: "Most speculators decide when to buy or sell based on chart patterns or other mechanical methods. Almost all 'technical approaches' adhere to this principle: buy because the market is rising, or sell because it is falling."
Graham criticized this approach, stating, "This practice completely violates sound business principles and rarely leads to sustained success on Wall Street. Based on our more than 50 years of market experience and observation, we have never found anyone who could consistently make money over the long term by following this 'market-following' method. We can boldly assert that this popular approach is, in fact, quite absurd."
Interestingly, although Graham opposed speculation, his reasons were not moral; he simply viewed speculation as an illogical game destined to lose money: "Speculation itself is neither illegal nor immoral, but for most people, it usually fails to enrich their pockets."
"Speculation is clearly unwise," particularly in the following situations:
Believing one is investing when one is actually speculating;
Engaging in speculation seriously rather than as recreation, despite lacking sufficient knowledge and skills;
Committing excessive capital beyond one's capacity to absorb losses.
For those still inclined to speculate, here is Graham's final advice: "If you wish to speculate, keep your eyes wide open and recognize that you may ultimately incur losses; strictly limit the assets allocated to speculation and keep them separate from your investment plan."
5. Viewing the Market: Liberation from the Tyranny of the Market
Is there a "potion of forgetfulness" that, once consumed, allows one to forget all worldly grudges and emotional entanglements? No.
Is there a "market-forgetting potion" that, once consumed, allows one to forget the greed and fear associated with stocks? No.
On all matters concerning human nature, there are never simple solutions.
Therefore, we cannot expect to become immune to market volatility immediately after reading The Intelligent Investor. The only thing we can hope for is that, by carefully following the signposts left by Graham, we may encounter fewer detours, mistakes, and fears on our investment journey.
If all goes well, we will have the opportunity to liberate ourselves from the tyranny of the market.
01. Be Honest with Yourself
When Graham tells readers that they can ignore market fluctuations and not worry about the future, he implicitly assumes two prerequisites: 1. You know who you are; 2. You know what you are doing.
These two principles in The Intelligent Investor essentially require you to: 1. Most people should act as defensive investors; 2. Never speculate. I believe that if an investor adheres to these two principles, at least half of the investment challenges they face will be eliminated.
In essence, Graham is encouraging readers to be honest individuals, particularly honest with themselves. "To be sincere in one's intentions means not to deceive oneself."
02. Acknowledge it: markets will fluctuate.
Has anyone ever predicted future stock market movements with 100% accuracy? Yes, there was J.P. Morgan’s famous remark: “It will fluctuate.”
Similarly, in The Future of Stocks (1974), Benjamin Graham wrote, “I can predict with confidence that, as in the past, common stocks will rise too high and fall too low in the years to come. Investors and speculators alike, institutions and individuals alike, will all experience periods of both fascination with and disappointment in equities.”
Thus, this is an immutable fact, whether you like it or not: the stock market will continue to fluctuate. No matter how you select stocks or construct a diversified portfolio, prices will sometimes fall below your cost basis. In the short term, this is unavoidable; you must simply accept it.
Rather than praying that “the stock market will not fall,” we should prepare for volatility. As Howard Marks has said, while the future cannot be predicted, we can prepare for it.
The only expectation you can reasonably hold is that, given sufficient time, your portfolio will revert to its intrinsic value and ultimately deliver satisfactory results.
"In any case, investors would do well to accept beforehand the fact that most of their holdings are likely (not merely possibly) to experience significant volatility over the next five years—for example, rising by 50% or more from troughs at different times, or falling by one-third from peaks."
03. What is risk?
Does a decline in stock prices necessarily imply danger? Graham says no.
Graham stated, “People often broaden the concept of risk to include any situation where security prices might decline, even if such declines are cyclical or temporary and the holder is not compelled to sell at that time. … However, from a practical standpoint, we do not consider this to be true risk.”
This explanation is highly reasonable, as markets are inherently volatile. Even in the absence of specific events, stock prices will fluctuate above and below your cost basis. If you are not forced to sell your holdings, these interim fluctuations will not cause you substantial harm.
Even if prices decline, your portfolio may still be secure: "True investment does not result in a loss merely because share prices fall; while prices may drop, this does not necessarily imply a risk of actual loss. If a carefully selected portfolio of stocks delivers satisfactory overall returns over several years, it can effectively be considered 'secure.'"
"During this period, its market value will inevitably fluctuate and may even fall below the purchase price. If we insist on viewing this scenario as 'risk' associated with the investment, then the investment would paradoxically be both risky and secure."
"To avoid such confusion, we limit the concept of risk strictly to the loss of value (for example, losses incurred upon sale due to severe deterioration in the company's condition, or because the security was initially purchased at a price far exceeding its intrinsic value)." This is Graham's perspective on risk.
04. Avoid Being in a Position of "Forced Selling"
The key principle of investing is: Sell when you want to sell, not when you have to sell.
Graham stated, "Note this important fact: A true investor is never forced to sell stocks and need not concern themselves with price fluctuations at any time. They only pay attention to stock prices when a reasonable selling price presents itself."
In fact, anyone who is forced to sell stocks to 'cover costs' (such as through forced liquidation, debt repayment, or bill payments) is never qualified to claim they can ignore stock price volatility—what else could this be but self-deception?
05. The Meaning of Stock Prices
If you view stocks merely as ticker symbols, then the stock price is an intrinsic attribute of the stock; if you view stocks as ownership in a company, then the stock price is simply the collective market evaluation of that company.
In Graham’s world, investors are entitled to remain detached from this valuation framework—you may choose to accept or reject their views. Stock prices merely reflect their opinions; what matters is not what they think, but what you think.
As Graham stated, “A market that provides quotations gives investors a certain option, which would otherwise be unavailable. However, the securities market does not compel investors to accept current quotations; investors may prefer to rely on other sources and conduct their own valuations.”
“Therefore, if an investor panics and sells stocks due to fears of irrational market declines, he transforms his fundamental advantage into a fundamental disadvantage. For such individuals, it might be better if stocks had no market quotations, as this would spare them the mental anguish caused by the misjudgments of others.”
Consider this: sometimes stock prices fall not because you have made a mistake, but simply due to “the errors of others.” Why torment yourself over the mistakes of others?
“He should always bear in mind that market quotations exist solely for trading convenience. He may choose to exploit market fluctuations or ignore them entirely. Never buy a stock simply because its price has risen, nor sell it simply because its price has fallen.”
“Fundamentally, price volatility holds only one significant meaning for the true investor: sharp declines offer prudent buying opportunities, while sharp increases offer prudent selling opportunities. At other times, he would fare better by ignoring the stock market altogether and focusing on dividend yields and corporate operational performance.”
VI. Epilogue: Major Investment Errors
When Graham wrote in the introduction to The Intelligent Investor that his purpose was “primarily to guide readers away from possible serious errors and to help them develop a sound investment strategy,” he revealed that the book would focus on major investor errors. These significant mistakes and dangers stem from the investors themselves.
Although Graham did not state it explicitly, he made it clear that the two most common errors made by investors are: a mistaken perception of oneself, and a mistaken understanding of one’s own behavior.
I believe this will surprise most people, as many assume their financial losses result from: a lack of key information; failure to master some magical method; absence of formal training; or insufficient trading skills.
But as Jason Zweig said, “Ultimately, financial risk lies not in what kind of investments you hold, but in what kind of investor you are. If you want to know what real risk is, go to the nearest restroom, stand in front of the mirror—the person you see in the reflection is the greatest risk to your investments!”
So why do you lose money? In most cases, there is no complex reason; you simply did something foolish. It is an act that would be considered stupid in the real world—if gambling is foolish in reality, it is equally so in the stock market.
Finally, value investors are known for “ignoring stock price fluctuations.” However, achieving this requires not only the necessary knowledge base but also ensuring one thing: avoiding foolish actions. Only under this premise can value investors have the confidence to face Mr. Market directly, or even ignore his existence altogether.
If all these conditions are met, investors need not fear the future, nor Mr. Market, nor the lack of consensus on their views. In the final chapter of his book, Graham stated, “The fact that others disagree with you does not determine whether you are right or wrong. If your data and reasoning are correct, your actions are justified.”
“In the field of securities investment, once sufficient knowledge and validated judgment are acquired, courage becomes the supreme virtue.”
Last but not least, during my reading and writing about Graham, a particular image repeatedly came to mind: Mr. Market transforms into a monstrous beast, wreaking havoc across the city. It roars angrily at investors, baring its fangs, but the truly mature value investor calmly responds, “I am not afraid of you.”
Previously, I thought the beast was named Mr. Market; now I realize that the beast originates from our own fragile hearts.
Editor/Jayden