Five Cent Nickel (after inflation, it’s only worth a penny) uses these wise words of Warren Buffett’s teacher/mentor – and the ‘father’ of Value Investing (the art of buying a stock for less than its ‘real’ or ‘intrinsic’ value) to teach us about the value of index funds:
The recommendation to track an index rather than pick stocks may sound somewhat surprising coming from the man who wrote one of the most well-respected books ever written about picking stocks. However, as more and more investors are learning every year, index funds make a lot of sense compared to the alternatives.
5c’s heart is in the right place, but it’s not what Benjamin Graham was suggesting at all; he simply suggested that analysts and untrained investors should invest via Index Funds …
… then dedicated his life to teaching others (and, practising what he preached) how to select common stocks that will give better than average results.
The trick is that you need to become a trained investor to do so … it’s a business and like any other business, it requires training, dedication and a certain degree of risk-taking (although, I fail to see how suffering a 15% loss – as I did – while the indexes all lost 50+% is more risky?!).
Phil Town reportedly turned $1,000 into $1,000,000 using Grahamesque ‘value investing/trading’ techniques, and Warren Buffett created a $40+ Billion monolith using similar techniques … and Graham himself made millions. And, studies have shown that this is due to skill, not luck (as is the case for most successful ‘businesses’).
By all means, realize that you don’t have the skills and stick to Index Funds … because, if you DO want to invest in stocks, these experts are telling you that you MUST first acquire the skills.
“5c’s heart is in the right place, but it’s not what Benjamin Graham was suggesting at all; he simply suggested that analysts and untrained investors should invest via Index Funds …
… then dedicated his life to teaching others (and, practising what he preached) how to select common stocks that will give better than average results.
The trick is that you need to become a trained investor to do so …”
Interesting distinction…I guess the one question I have is what stock selection knowledge/skill does a ‘trained investor’ possess that an analyst does not? In other words, if there truely is a difference between the two, what secret does the ‘trained investor’ hold that analysts have been incapable of obtaining?
I saw your post in Yahoo Finance, good tip Adrian
@ Jeff – Aaah … I was waiting for that question 😉
It’s the difference between involvement and commitment: the analyst is involved in the decision making process … the trained investor (investing his OWN money, perhaps as well as those of others) is committed.
If you don’t understand the difference, next time you sit down to a hot bacon and egg breakfast think of the chicken who was involved and the pig who was committed 😛
I liked your Post here today. I pour my hart and soul into learning about stock investing,because I believe it can be beneficial in our quest for our number/date.
@ Steve – IMHO you should probably “pour your heart and soul” into your business/es and learn enough to invest your ‘spare cashflow’ into RE and/or stocks … it’s a simple matter of which can produce the best compound growth rate 🙂
Thanks Adrian, I have one business I really want to get going which I am sure would really grow well. I foresee 30 to 50 % in the first 3 to 4 years, out farther, maybe a bit less. but I really need that capital to get it off the ground .
A Small,Short term Loan will really pay off in terms of reaching my number/date.
@Adrian-
“It’s the difference between involvement and commitment: the analyst is involved in the decision making process … the trained investor (investing his OWN money, perhaps as well as those of others) is committed.”
No offense, but I’m not sold yet.
I think an analyst investing in their own selections is merely indicative of the analyst’s own confidence-level in those selections, not whether those selections are actually superior. Put differently, just because someone has confidence their picks are superior, doesn’t mean they are right.
I also have a problem with your distinction between ‘analyst’ v. ‘trained investor’, as you are assuming Graham’s term ‘analyst’ means those who are trained in stock/company evaluation, but do not invest their own money (or others money) in the investments that they know the most about. That just doesn’t seem right to me.
@ Jeff – That’s exactly the distinction that I am making; what do YOU think it means?
@Adrian –
I think the term analyst (as used by Graham) means someone who analyzes the stock market professionally. I did not see a rationale for bifrucating analysts into two groups: those who invest in their own area of expertise (your ‘trained investors’) and those who did not (which I think is a very small subset of all analysts). It just seemed wierd that Graham would use the broad term ‘analyst’ to define such a narrow group…
In any case, I feel the reason Graham had little confidence in the ability of any analyst to pick stocks is that those who have actual stock-picking skill (as opposed to luck) are rare and even more difficult to identify beforehand. It seems your analysis doesn’t utilize the same assumption…as any analyst can beat the market with superior stock picking skill so long as they invest their own money.