We Study Billionaires - The Investor’s Podcast Network - RWH050: The Intelligent Investor w/ Jason Zweig

Episode Date: October 20, 2024

In today’s episode, William Green chats with Jason Zweig about his updated & revised edition of Benjamin Graham’s The Intelligent Investor, which Warren Buffett describes as “by far the best book on investing ever written.” Jason, who also writes the Wall Street Journal’s Intelligent Investor column, explains why Graham’s classic book still holds vitally important lessons for today’s investors. He also shares what he’s learned from interviewing Buffett & Charlie Munger. IN THIS EPISODE YOU’LL LEARN: 00:00 - Intro 03:33 - How Jason Zweig tackled the “honor & burden” of revising The Intelligent Investor. 11:06 - How Ben Graham’s 4 core principles can help you to invest intelligently. 25:24 - What a sudden plunge in Japanese stocks shows about the craziness of markets. 27:56 - What Jason views as the most important paragraph ever written about investing. 32:42 - How Warren Buffett & Bill Miller profit from being “inversely” emotional. 33:57 - How regular investors can win by tuning out Wall Street’s propaganda.  39:15 - Why you must decide if you’re an “enterprising” or “defensive” investor. 44:40 - Why maintaining a “margin of safety” matters more than anything. 48:40 - Why Jason believes index funds should form the base of your portfolio. 52:52 -Why it’s so hard to pick the tiny minority of “superstocks.” 1:00:21 - What dooms the vast majority of fund managers to underperform. 1:14:33 - How Graham’s most successful investment violated his own principles. 1:33:01 - What life lessons Jason learned from Graham, Buffett, & Charlie Munger. Disclaimer: Slight discrepancies in the timestamps may occur due to podcast platform differences. BOOKS AND RESOURCES Jason Zweig’s website. Benjamin Graham’s The Intelligent Investor, revised and updated by Jason Zweig. Jason Zweig’s book on neuroeconomics, Your Money and Your Brain. Jason Zweig’s satirical survival guide to Wall Street, The Devil’s Financial Dictionary. William Green’s previous podcast episode with Jason Zweig | YouTube Video. William Green’s podcast episode with Christopher Begg | YouTube Video. William Green’s podcast episode with Peter Keefe | YouTube Video. William Green’s book, “Richer, Wiser, Happier” – read the reviews. Follow William Green on X. Check out all the books mentioned and discussed in our podcast episodes here. Enjoy ad-free episodes when you subscribe to our Premium Feed. NEW TO THE SHOW? Join the exclusive TIP Mastermind Community to engage in meaningful stock investing discussions with Stig, Clay, Kyle, and the other community members. Follow our official social media accounts: X (Twitter) | LinkedIn | | Instagram | Facebook | TikTok. Browse through all our episodes (complete with transcripts) here. Try our tool for picking stock winners and managing our portfolios: TIP Finance Tool. Enjoy exclusive perks from our favorite Apps and Services. Stay up-to-date on financial markets and investing strategies through our daily newsletter, We Study Markets. Learn how to better start, manage, and grow your business with the best business podcasts.  SPONSORS Support our free podcast by supporting our sponsors: Bluehost Fintool PrizePicks Vanta Onramp SimpleMining Fundrise TurboTax HELP US OUT! Help us reach new listeners by leaving us a rating and review on Apple Podcasts! It takes less than 30 seconds, and really helps our show grow, which allows us to bring on even better guests for you all! Thank you – we really appreciate it! Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Learn more about your ad choices. Visit megaphone.fm/adchoices Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm

You're listening to TIP. Hi there, it's great to be back with you on the richer, wiser, happier podcast. Our guest today is Jason's Wig, an eminent author and financial journalist who writes the intelligent investor column in the Wall Street Journal. I've been friends with Jason for almost 30 years and regard him as one of the wisest and most thoughtful experts on how to build long-term wealth in the stock market. Equally important, he's also a brilliant observer of the many ways in which investors land themselves in trouble, either because they're not.

deceive themselves or because they're deceived by what he describes as Wall Street's propaganda. So if you want to understand what works and doesn't work in investing, I don't think there's anybody better to learn from. In today's conversation, we focus in depth on one of the landmark achievements of Jason's career. He's about to release a 75th anniversary edition of Benjamin Graham's masterpiece, The Intelligent Investor. As I'm sure you know, Graham's most famous student and disciple was Warren Buffett, who first read The Intelligent Investor in 1950 when he was 19 years old. Buffett concluded then that it was by far the best book about investing ever written, and he's never changed his mind. Jason first revised and updated the Intelligent Investor back in 2003.

Now, two decades later, he's created this new and improved edition, which features his own extensive commentary on each chapter. I recently read a pre-publication copy and was blown away by his ability to read new life into Graham's book, making it extremely relevant to today's investors. It's really a brilliant achievement. In this episode, Jason talks about the most important principles you need to learn from Graham in order to navigate the wild unpredictability of the stock market and the crazy unpredictability of life.

He explains why individual investors have powerful advantages over professional investors, but only if they have the discipline and independence of mind to play their own long, patient, low-cost game. That requires us to resist the kind of hyperactive get-rich-quick game that Wall Street would typically prefer us to play, since it's more profitable for Wall Street, even though it's ultimately pretty much doomed to fail. We also discussed the rewards and challenges of identifying the next great superstocks that can turbocharge your returns. We talk about why it's so hard, even for talented and honorable fund managers to beat the market over the long run. We talk about the qualities that enable stars like Buffett and Bill Miller to defy the odds and outperform.

Finally, Jason shares some of the most valuable life lessons he's learned from three legends, Ben Graham, Warren Buffett, and Charlie Munger. I hope you enjoy our conversation. Thanks so much for joining us. You're listening to The Richer, Wiser, Happier Podcast, where your host, William Green, interviews the conversation. the world's greatest investors and explores how to win in markets and life. Hi, folks. I'm really delighted to be joined today by my old friend Jason Dwight.

Jason writes the Intelligent Investor column in the Wall Street Journal, and he's now created a revised edition of Benjamin Graham's iconic book, The Intelligent Investor, 75 years after the first edition was published. Jason, it's really lovely to see you. Thanks so much for joining us. I'm delighted to be back with you, William. It's a great pleasure. I was looking the other day. You were episode number four was the last time you were on back when we were younger and I have much more hair. So Jason, back in, I think it was May 2020. You sent me an email telling me that you were going to take a book leave from Wall Street Journal to work on this new 75th anniversary edition of the Intelligent Investor. And you described it to me in that email as a huge honor, a huge task, high stakes and a brutal deadline. And you then basically, disappeared for about a year into your man cave. And so I wondered if you could talk a little bit about the experience of writing the book, why it was so intense and stressful and why you regarded this project, both as you put it, as an incredible honor and burden. Yeah. So I think from start

to finish, it was seven months, although it often did she elect 12. And, well, it's easy to explain the honor by pretty much everyone's account. It's, you know, the best book on investing ever written, starting with Juan Buffett, but many other people have said it. And my role is not to rewrite Benjamin Graham, which would be kind of like rewriting Holy Scripture, but to rewrite the commentary that helps today's investors understand what Graham was saying, because of course, He originally wrote the book in 1949. He last revised it in Nike 72. So it's a 75-year-old book,

and the principles all remain valid, in my opinion. In fact, may have become more valid over time, but it's quite a responsibility. And the main technique I used to revise what I had written in 2003, the chapter of commentaries was I never looked at them. What I did was I'm still somewhat paper-based, like everybody I love, you know, electronic files.

But for certain tasks, I really like to work with paper. Because I'm reading a great novel, as I think you know, William, I really like to read a physical book. And for a project like this, it was very important to me to have paper when I started. So what I did was I took my master copy of the PDF of the last edition, and I printed out every one of Graham's chapters, but none of my commentaries. And I never looked at what I had reviewed 20 some years ago. And in fact, I still happened.

And I never looked back. And I just said, starting from a blank slate with no sump costs, how should I approach? this project now as if I had never been involved in it before. And that just enabled me to get like arm's length distance from the original material and especially from my own so that I could approach it freshly. And obviously, our readers will judge whether it's successful, but it was the only way I knew to approach it that wouldn't drive me crazy. Because otherwise, I just would have been trying to improve what I had done. And instead, I said, I'm going to pretend I never did anything at all and start over.

I think it's remarkably successful. I've finished reading the book this morning. It's a huge book. I mean, you sent me a PDF a few weeks ago. And so over the last few days, I've been working through, what is it, 600 pages. But it's a remarkable achievement. And, I mean, it is a totally classic book. It's totally timeless in certain ways.

And in some ways, it's a little tired in certain parts and a little dated in certain parts. And you've done such a masterful job of kind of putting those bits in context, providing new examples that revitalize it. And I, without blowing smoke, as I was reading it yesterday, I was thinking there's actually nobody else who could have done it. Like there's something about the fact that you've been engaged with this material for so long. drawing on so much personal experience of the markets, but also so much that you've written. And so the data was kind of in the filing cabinet in your head for you to draw on in seven months. And I know having written some books very quickly, albeit not my own, but the ones I've ghost written, you know, it requires so much that intensity to go into your, into your head and

draw this stuff out quickly and it's kind of game day again and again and again for month after month. So it's an extraordinary achievement. And so, yeah, really kudos to you. It's an amazing thing that you've pulled off. Well, thank you, William. I mean, what would I say? I guess the only thing I would say in response is, I don't know if it's any good. I only know that I can't make it any better than it is anymore. So, you know, I tried as hard as I could to make it the best book I'm capable of. And, you know, I hope I succeed in it. When you decide to take something on, do you have a particular filter that you apply to decide, okay, this is worth the pain and suffering I know I'm going to go through?

Because you already have a day job that's very demanding at the Wall Street Journal. And, you know, you get asked to do lots of speeches and stuff and you're married and you have a couple of kids and, you know, dealing with elderly relatives and the stuff over the years. You know, you have a lot of family responsibilities and work responsibility. How do you decide, okay, even though I'm already overburdened, I'm going to burden myself more? Well, so in this case, I don't feel I had a choice. And, you know, I couldn't very well turn the project down. And it also was obvious that 2024 was the best year to publish it.

I mean, it's the 75th anniversary in the original book. It's also the 130th anniversary of Ben Graham's birth. and it just seemed to mean that the publisher is not over-emphasizing the commemorative nature of it, but I think it'll be obvious to a lot of readers that there's historical significance to the date. You know, the rule I've always used for book projects, and it's certainly applied in this case, is, you know, the only book anyone should ever write is the book that's already inside of you sort of banging on near Riddcage from the inside trying to get saying let me out.

And I once did a book, which I will not name, that I did not do because it was inside of me screaming to be let out, but rather because I thought the money would come in handy. And I've regretted it ever since. And don't press me on it because I'm not going to name the title of some of it. But that's not something that's given my personality, that's not the kind of project I would want. want to be involved in. I, you know, the connection to Graham is personally important to me.

And, you know, it's been very important to my career for over 20 years. So I really felt I had to do it. And I would have felt foolish, not undertaking it. And when you're working on something really intense like this, or like your column, what do your habits look like and, you know, How are you actually managing to get so much done and to focus? And what's deeply idiosyncratic there and what's possibly replicable for people who regard you as a superhero and role model? First of all, they should find some other heroes. But I don't think I have a lot of magic tricks on, you know, people ask me,

oh, you must drink a lot of coffee. I don't even drink coffee. I'm a team man myself and not much. you know, if I have a gimmick, it's that I really like to go for long morning walks. You know, when I was working on the book, I went for a walk almost every morning early, sort of before breakfast, two or three miles. It wasn't that long, but toward the end of the book, I was walking five to seven miles a day. and I often do that during the regular work week as well.

In fact, I walked so much at some point that I broke a bone in my flesh. I'm a big believer in walking to clear your head, and what I find is that when I'm on a long walk, a satisfying walk, my mind emptied out completely. I'm not thinking about the project. I'm not thinking about work, but there's probably some subconscious level. at which my brain is doing some problem solving

while I'm looking at the trees or the river or whatever it might be. And it's kind of, it's like software that's running in the background, maybe in the next room while the computer seems to be idle. And I think that helps. Obviously, I'm not the only writer who loves to walk

and I guess we would call that think. I mean, I'm not in my conscious awareness. I'm not thinking about the project, but surely I am on some level. I did a lot of walking while I was working on Richer Wiser Happier, the book. And I think at some point during that process, I had listened to a podcast that Josh Waitski and the author of The Art of Learning had done. And one of the things that he was talking about was setting, basically setting a goal for your subconscious mind. So you would actually ask what he would call the most important question.

So I would do this at the start of walks off and I would say, all right, while I'm walking, I'd like my subconscious to work on this issue in chapter two. Because what the hell am I supposed to do to synthesize everything that Templeton figured out in the course of 80, you know, I guess 93 years or whatever it was. And so I think I think it's interesting that, you know, I don't know whether that's bogus or whether it really works, but I think it's very interesting the connection between walking and figuring out these difficult problems. Right. And there might be no difference between whether it's bogus and whether it really works. Maybe, again, at a conscious, subconscious level, we think it works. So if we think it works,

it does work. It may be some weird manifestation of the placebo effect, you know. But that's kind of my only gimmick. The other gimmick I had was that, for, For most of the period from April or May through August, I wrote on my laptop on my Mac, which was at a standing desk, and the desk I used was tuned low. So I propped the laptop up on my copy of the two-volume Hoxford English Dictionary, which you probably own.

I don't know how many of our listeners do, but it's probably, what is it, eight or nine inches thick, right? And I imagine that one reason I chose that was because I was just thinking to myself words, words, words, words, words. There's lots of words in there, and I want to pull them out. I never looked at, what would we call it, my podium, my platform. I never looked at it. I never said to myself, oh, that's the Oxford English Dictionary,

holding off my computer. But it was, and that probably did he. hurt? I mean, I think a successful writing project, like any big task that can feel insuperable at first, is about coming up with little gimmicks and hacks, you know, enable you to kind of fool yourself about stuff. And some of them will be conscious and some of them will be subconscious. But other than those two things of walking and using a dictionary as a podium, I don't know, did you feel any kind of conscious connection to Graham himself as you were working? Like, did you, like I sometimes felt like when I was writing about Templeton, for example,

I felt like I was sort of almost in an argument with him that I was, I was sort of thinking about this dead guy who I disagreed with at the time I first interviewed him and then was thinking, what did I totally fail to understand that he was trying to teach me back then? And I realized during that process, oh God, I did. totally misunderstood what he was trying to teach and he got kind of frustrated with me. And I was wondering if you had some kind of sense that without wanting to be too mystical about it, which really means I want to be too mystical about it, did you feel in some way that you were communing with Graham or trying to sort of honor his memory at least in some way?

Well, sure. I mean, I would say above all else, the thing that really stands out for me about Graham. It's how brilliant he was in how many forms of brilliance. I would never use a term like Renaissance Man because it's been so degraded in a popular culture. But I mean, just think about it. So Graham entered Columbia University at the age of 17 because the admissions office had bungled the paperwork. They admitted him when he was 16, but they lost this. They lost the acceptance paperwork. So he had to wait a year. So he entered when he was 17 years old. He graduated in two and a half years while working a night job in a shipping company in downtown Manhattan. He graduated second in his class. And before graduation day, he was offered

faculty positions in three different academic departments, philosophy, English, and mathematics. And when he was 23, he published an article in the American Mathematical Journal about what was wrong with the way American schools were teaching calculus. He invented two sort of predecessors of the slide rule, which he patented. He wrote a Broadway play on the... could speak or read at least a half dozen languages and late in his life. Well after the age when most people are prepared to try to learn a language, he heard about a novel written in Uruguay that was supposed to be great. So he taught himself Spanish and translated it.

And you combine all of that with the fact that he also racked up one of the most extraordinary track records in investing history, which in an email correspondence that I had with Warren Buffett last year, Buffett pointed out that Graham's sort of published track record understates just how good his investors' results were because he closed his fund down in 1956. And the fund then distributed out to its shareholders on its huge position in Geico as part of the fund.

dissolution of the fund, these people all received shares of GEICO. And if you had held onto those, as Buffett pointed out, you not only would have beaten the market by something like five percentage points a year for 20 years, as you would have in Graham's fund alone, but you would have outperformed even longer by an even wider margin because of the position in GEICO. And then as you point out in the book, well, I guess you reprint the super investors of Graham, and Dodsville, the great article that Buffett wrote. And Buffett describes him as the intellectual patriarch of many great investors. And so, Buffett himself worked at Graham Newman from 1954 to 56. Walter Schloss was there. Tom Knapp, who was a co-founder of Tweedy Brown. Bill Ruehain,

who was an amazing investor who took Graham's course in 1951 with Buffett, Munger, Rick Guerin. They were all kind of disciples in different ways. And as Buffett points out, really the central idea, I guess, that they all learned is to exploit the difference between the market price of a business and its intrinsic value. You spend a lot of time talking about the core principles that are kind of timeless, and you talk about four of them. Can we whip through them quickly? And then we'll dig deeper into really what the two most important chapters probably are, which, which is chapters eight and ten. Eight and twenty.

I'm sorry, eight and twenty, you can see that I'm tired. It's because I've been reading this six hundred page book until all hours. Yes, I don't blame you. Yeah. So eight and twenty.

Yeah. So let me see if I can, let me see if I can run through them and, you know, stop me or or add on if I'm, if I'm forgetting anything. So the first important principle is that, you know,

stocks are not, pieces of paper. They're not electronic blips. They're not a thing that buzzins and goes diagonally upward or downward on your phone. Stocks represent an ownership interest

in a business and it's much easier for people to forget that today than it was in Graham's Day, but it's much more important to remember it because if you are going to differentiate yourself from other investors out there,

the most important thing to do is to be different and to stop thinking like everybody else. And if everyone else is going to trade stocks with the same kind of mentality they might bring to betting on a football game or now a presidential election, then what you should be doing is you should be analyzing stocks like businesses and judging them not based on their momentary price movements today or the, this week or this month, but how the value of the business is likely to change over the course of years to come. So that's the first principle. The second really important principle is the difference between investing and speculating. You know, an investor puts original, careful, thorough, thoughtful research into establishing the value of a business based on the cash that it's going to.

to generate in the future. And a speculator is essentially betting on what other people are going to do, typically in the short term. And it's immaterial to a speculator how healthy a business is. All that matters is how much is the stock going to move up or down. And as Graham wrote many times, there's nothing inherently wrong with speculating. Millions of people insure their houses and their cars and are very conservative, but like to go to Las Vegas for the weekend or fed on a basketball game. And if you enjoy that and you don't put any more money at risk than you can afford to lose, there's nothing wrong with it.

But the key is you need to recognize that you're speculating and not tell yourself that you're investing and you need to speculate with no more money than you can afford to lose. Thirdly, you can't add

to your speculative wallets no matter what happens. You set a fixed finite amount of money aside. You make your bets. If they win, that's great. Keep going, I guess. And if they lose,

you have to stop and you can't put more money at. And that's a really powerful principle from Graham. So then the third really important idea is the metaphor of Mr. Market. I think a lot of our readers, listeners are aware of this concept. I mean, Graham came up with this wonderful metaphor that you own a piece of a private business. It might be a dry cleaner or, you know, a video game producer, whatever it might be. And you have a next door neighbor. And every day he leans across the fence between your place and his.

And he offers to buy you out. He's like, you know, you own that business. I'll buy half. And some days, he offers you a ridiculously high price. And some days, he offers you a laughably low price. and you wouldn't take that man seriously. You wouldn't say, oh, I'm the owner of a wonderful business. Let me sell it to this guy who thinks it's garbage

and is offering me a stupidly low price. You would refuse to transact with him. On the other hand, if he offered you way more than it was worth, maybe you'd sell it to him and you'd start a new business all over again. And if people thought about the stock markets as a manifestation of that metaphor, it would be, they'd all be better off. I mean, the example, I've been thinking about a lot this year is what happened on August 5th. I think certainly all our professional viewers and listeners remember. I mean, the Japanese stock market crashed and went down, you know, whatever was 12, over 12%,

in a single day. And the next day, it went back up 10%. And there is no explanation in financial theory to explain how that is possible. And the assets of Japanese corporations were not worth 12% last on one day and 10% more the next day. It just does not happen. And it made no sense whatsoever. there was a panic in the U.S., mini panic. The U.S. stocks went way down too.

They went down all around the world, and then the next day they bounced right back up again. I mean, you could argue that that was investors trying to reprice risk. But Graham would say not. It was just Mr. Market. He was crazy pessimistic the first day and crazy optimistic the next. And when all was said and done, it was as if absolutely nothing had happened.

And that's, that's just the way it ends. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year,

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because all investors are male, obviously, in that era. He should always remember that market quotations are there for his convenience, either to be taken advantage of or to be ignored. And so in a way, it's like this whole idea that the market is there to serve you. That's right. And Graham has this other wonderful line where he says, you should transact only to the extent that it suits your book and no more. And of course, by your book, what do you mean?

it's your portfolio. So you would buy when Mr. Market is depressed, and if you need capital, you would sell when he's euphoric. But otherwise, you would ignore him because he's crazy. You mentioned actually in your explanation of chapter 8, exactly the line you were just talking about. You say when you wrote in the 2003 edition that these words may well be the single most important.

paragraph in Graham's entire book. You said, I was wrong. Actually, those words may well be the single most important paragraph about investing ever written. And so I wanted to, I wanted to draw more attention to this paragraph that you're talking about, which includes the line you just mentioned. And so I'm going to read it quickly, and then if you can explain to us why this is so significant. And I think this also gets at your fourth principle, which is the one that we haven't mentioned, which is basically most of the time markets are right, but they can be terribly terribly wrong at times. So the paragraph that Jason says is the most important paragraph ever written about investing is this. The true investor scarcely ever is forced to sell his shares,

and at all other times he is free to disregard the current price quotation. He need to pay attention to it and act upon it only to the extent that it suits his book and no more. Thus, the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings, is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other person's mistakes of judgment. To explain to us why that's so important, can you just break that down for us? Yeah, well, I think the reason it's so relevant for today's investors, William, is very simple.

it's because, you know, if you're, particularly if you're an individual investor, but also very much so if you're an institutional investor, you're bomb-bartered all day long by propaganda from the financial industry telling you act now, you know, trade zero, you know, zero-date options, use leverage to buy this and, you know, grab this ETF before it goes up more or this stock is cheap or this market expert thinks, you know, stats are about to crash or go straight up. And it all has the effect of making investors feel that the way to win is to play the same game as institutional investors. As an individual, I should try to beat the S&P 500. with individual stock picks and trade as often as necessary and ignore taxes and trading costs

and stay constantly updated on my phone. And what Graham is really saying is the only way to win the game is to stop playing. You have to play your own game. Don't try to play the game that professional investors play. Think about it. I mean, over time, you know, something between two-thirds and 80% of all professional fund managers underperform, certainly the S&P 500 and often other benchmarks as well. And that's mainly because of the frictional costs of trying to beat the market.

And if that's the game you're playing, you have to trade to play it. And Graham instead is saying, tune out Mr. Market. Stop listening to people who tell you that because some sort of action is going on today, you have to participate. Instead, you should wait for opportunity to come along. And that's a function of basically being contrarian. You know, during the COVID crash in 2020, instead of hunkering down in cash, step up and by. And, you know, during the decline in the market in 2022, step up and by. Do the opposite of what the prevailing propaganda tells you, instead of trying to go along with it.

When he says to spare you the mistakes of other people's judgment, what he's really talking about is thinking for yourself and becoming independent. And the really unfortunate thing is that for at least 20 years, ever since the Internet came along, the dominant propaganda in the financial industry, both in advertising and in product developments like apps on your phone or brokerage websites, has been that if you have the same tools as the professionals, you can completely. you can compete with them. You can outperform the professions. But why would I want to try to outperform people who are underperforming? I would much rather compete against Mr. Market rather than try to do what he's doing. And that's really a lesson that Graham is driving at here,

which is that you should take the emotions of other people as contrary indicators. and you should be taking the other side of regression to the mean. When other people are enthusiastic, you need to be skeptical. When other people are despondent, you need to be optimistic. And, you know, I once asked Warren Buffett about this and Bill Miller as well. And they both said the same thing. I said, you know, people often describe you as unemotional when you invest.

But is that really it? Or is it that you're inversely emotional? You get a kind of excitement from picking up on other people's negative feeling and you get a sense of danger or caution from other people's enthusiasm. And Buffett and as Han Miller as well said, yeah, inversely emotional is a much better way to describe it than unemotional or even rational. It's just taking the opposite of other people's dominant emotional state. I was surprised that at one point in your commentaries on one of the chapters, you talked in some depths about the advantage that individual investors can have over professionals.

And we usually regard individual investors kind of as the mug. And it was very interesting to me that you said actually, you said the handicaps on institutions have become as heavy as chains while those formerly faced by individuals have fallen away. Can you talk a little bit about why actually the individual now almost for the first time has at least an individual who's disciplined and has good processes and procedures for investing can actually do really pretty well. So, you know, historically, if you go back decades, most of the trading volumes, certainly in the U.S. stock market,

and I'm sure in other markets around the world, was done by individuals. Institutions bought and held, you know, often for tax reason and sometimes for other reasons as well, and the individuals traded because their stockbrokers were making them trade. And it was naturally, it was extremely expensive to trade individual stocks because it was a retail rather than a wholesale price. Because the wholesale purchasers of stock were not doing much trading.

And the retail purchasers were. So it was a retail market and it was priced like a retail market. I mean, I still remember the first trade I ever made when I was in high school. And I think my cost for a round-trip trade was, I don't know, it was five or six percent has leased. And I actually did make money even after my brokerage costs, but I wouldn't lay in a lot more if the broker hadn't, you know, robbed me. And that was just the way I think he was just charging.

So what then was regarded as a standard commission. I don't think he was even, you know, doing anything unfair or improper. It's just it used to cost a ton to trade an individual stock. And of course, now you can trade a stock for close to free. It's not completely free because there still is a spread between the bid and ask price that your broker will skim off, even if your broker is Robin Hood, which insists that trading is free. And that cost isn't negligible, but it's well under, well under 1% in most cases. Institutions have to trade huge blocks of stock.

I mean, they often own millions, tens of millions of shares of a single security. And to get into that position and out of that position is incredibly expensive, not just in terms of commission or spread, but also, you know, the total implementation cost, which include the delay. You know, if I'm a professional portfolio manager and I don't own, you name it, you name at Nvidia, and I decide I really want to own Nvidia, it could take me weeks to build up a position at a price that isn't incredibly disadvantageous to me

because I don't want to make my brokers rich and I don't want to eat a big spread and I might have to buy a few hundred shares a day until I amass my entire position. And if the stock runs up over that period, I've incurred an enormous opportunity cost. And that comes out of my hypothetical return and helps explain why my fund has not performed as well as it should have.

Because it took me too long to build up the position because I manage so much money. But if I'm an individual investor and I decide I like NVIDIA, I just grab my phone and buy it. And I can use a limit order so I don't get JIP done an adverse price move. And it'll essentially costly nothing.

And I can hold it through good times and bad. I don't have to worry that my clients will fire me because I don't have any. You know, I might have to worry about what my friends and family think because I, you know, tell them everything I'm doing. But I'm in a better position than most institutions. I have no expense ratio. It doesn't cost me anything to own. the stock. And furthermore, I could put most of my money in a total stock market fund, like a, you know, I'm a ETF that owns all the stocks in the U.S. or all the stocks in the world,

so that I have no fear of missing out on the general upside in the markets. And then with a small portion of my money, I can make concentrated bets and pay close attention to those companies. and see as opportunities develop and capitalize. And those are all really powerful advantages that are a total luxury for most professional fund managers nowadays. They would kill to have those advantage. I think one of the things that came through very strongly for me on this reading of the book, which I guess I read a few times over the years,

is the distinction that Graham makes between defensive and enterprising investment. So not only this question of whether you're an intelligent investor or a reculous speculator, but also this question of whether you're equipped to be enterprising and aggressive. Can you talk about that? Because I think, while it's true that we have advantages as individuals, obviously one of the points you've made many times over the course of your writing career, is that you have to have some self-awareness about whether you're actually equipped to win this game. Yeah, exactly.

So, yeah, I love this distinction that Graham drew and is very sophisticated, even though it sounds very simple. And as usual, he was decades ahead of his time. I mean, you'll remember, William, when you and I first started, you know, covering the investment business, it was extremely common for fund companies, stockbrokers, financial advisors to bucket individual investors into three. piles, right? You were conservatives, moderate or aggressives. And human beings love things in threes, right? Like ABC, one, two, three, father, son, holy ghost, you know, you name it.

Everything comes in threes. And the financial industry loved it because it was simple. It was catchy. It saved people a lot of work. And they would just take every client and they would just say, You sound conservative. Okay, you go 80% in bonds, 20% in stocks. And you sound moderate. We're going to give you 60% stocks and 40% bonds. And you sound aggressive. So we're going to give you all stocks or 90% stocks.

Or maybe if I'm aggressive, I'll recommend to you that you even leverage and, you know, buy more than 100% in stocks. And I mean, you don't have to think about this for more than a few seconds to realize that it's ridiculous because there's more than three kinds of people. And furthermore, people are complicated. They're conservative in one aspect of their life and they're aggressive in another. You know, they bungee jump. They ski off the trail.

They, you know, they drive race cars on the weekend. And then they keep all their money in a money market fund. I mean, you can't pigeonhole people that simply. And so Graham had a much more useful practical distinction. And he described only two kinds of investors. And in this case, I think that's a really useful way to divide the investing population because it actually applies. And he said, you're either defensive or you're enterprising. And if you're defensive, it doesn't mean that you don't like risk.

It doesn't mean you don't want to take risk. It doesn't mean you have all your money in cash or should keep it there. What it means is you don't want to be bothered doing the work, putting in the time and effort to be an active investor. And what you're defending yourself against is the stress, the time commitment, the monitoring, the expense of being an active investor. And of course, active doesn't have to mean you trade a lot, but it does mean you trade. And then the other category of investor is enterprising. And an enterprising investor is somebody who is willing to put in the time, the effort, the energy, the commitment. And, you know, I would say most people are defensive. And if you are, then you don't have to put in the

you don't have to spend the time and commit the energy that Wall Street and, you know, the financial industry would like you to do. And the alternate reality is that if you think your enterprising when you're actually defensive, sooner or later you will discover that you're not defectless because you will be there in 2021, you know, trading GameStop and AMC and bed bath and beyond and thinking, whoopee, you know, every day I'm making, you know, 150% on my money. And the next thing you know, these stocks go down 80 or 90%. 2022 was a bloodbath for everybody.

And all of a sudden you're saying, wow, I thought I knew what I was doing. But I really was just in the right place at the right time. and I don't like this feeling because now I know I'm out of my debt. I don't understand why I lost money. I don't understand how to reverse my losses. And that's the difficulty and that's why it's so important

to the financial industry to try to talk people into being enterprising even if there really aren't because those are the people that brokerage firms make the most money off of. Your description of all of those investors who got eviscerated in recent years by kind of thinking they were more aggressive and more knowledgeable than they were brings us to another really, really central principle that I think as I was working on my book, it struck me sort of almost revelatory that it wasn't just Bathet and Munger and Graham. It was Howard Marks, Joel Greenblatt, everyone I was writing about practically. This was the single most important principle, which is the margin of safety.

And so chapter 20 is titled margin of safety as the central concept of investment. And it begins with this just critically important sentence where he writes, In the old legend, the wise men finally boiled down the history of mortal affairs into the single phrase, this two will pass, confronted with a like challenge to distill the secret of sound investment into three words, we venture the motto, margin of safety. It's so beautiful on so many fronts. I mean, it's it's brilliantly written. It's steeped in his knowledge of classical literature.

It captures something so essential. Can you talk a bit about the concept of margin of safety and why it's something that's become so central for all of these great investors? Yeah. And I think there's a, let me take it. I'll start that way, William, and then I'll take it. in a slightly different direction, I think. So, you know, at hurt, all the margin of safety means is that when you buy an asset,

you want to make sure you don't pay more for it than it's worth. And, you know, if you think back to 2020 or 2021, when millions of people thought they were investing when they were speculating because they had not done their homework, they had not valued these stuff, boxes, businesses. All they knew was that other people were buying them and they were going up. So none of those people gave a moment's thought to a margin of safety. You know, and if you bought Till Ray at, you know, marijuana company or Nicola, the electric truck company, just because a whole bunch of other people were buying it, you know,

you lost pretty much everything you put in unless you got out at just the right moment. And if you had tried to calculate a margin of safety for companies like that, I think you would have either concluded that there is none or it's impossible to say what it is. And in the most basic terms that are applicable for individual investors, if you haven't read, say, three years of a company's annual reports, it's 10K. And you haven't read the past for quarterly reports, you don't know anything about the company. You only know about the stock. And if the only thing you know is that the stock has been going up,

you have no clue what the margin of safety is or whether there is one. And professional investors, of course, will calculate a margin of safety in very formal ways. You know, they might use a discounted cash flow model, dividend, various versions of dividend discount models. and it's not a trivial or universally agreed solution. I mean, when you calculate a margin of safety, you're probably going to come up with a range of values,

not a point, not a specific point. But what individual investors need to realize is that if you haven't studied a company and all you know about is the stock, then you're literally clueless about what the margin of safety is because you don't even know if there is one. But there is one very important development that has occurred since Graham's Day. And that is that diversification has effectively become a free good. And in the marketplace, you can buy, as I mentioned earlier, you can buy a total stock market fund.

You could buy a total international stock market fund. You prefer bonds. You can do the same thing in the bond market. You can do that for real estate. You can do that for most major asset classes. And that can provide a different kind of margin of safety. It doesn't provide a margin of safety for a specific idiosyncratic asset that you may be buying. But what it does do is it provides you insurance,

the background against the risk that you could lose all your money if this thing goes to zero. Because if you own the entire market, you then can afford to make a specific bet on a piece of the market. And that is not something that Graham really contemplated, although he hinted at it in some of the things he wrote late in his life, when it looked as if index funds might be a element on the horizon. And as you know, I've been an advocate of index funds for, you know, decades. And it's not purely because I think, in fact, I would say it's not because I think attempting to beat the market is futile. It's because it's the most efficient way to invest. And you have exposure to the performance of the entire asset class. And it's fine if you've

stop there. But if you want to try to outperform, then it's really good to have that index fund as the base of your portfolio. And then you can overlay a few specific bets in companies or other assets that you feel you really know something about. I was looking last night after reading the book and was, you know, as I wrote about it, my book, I'm always torn between indexing and the desire to try to outperform. And I was interested to see, I think I have a third of our family's investments in deck. And I'm always sort of torn emotionally, but I feel like at least I don't want my wife and

kids to suffer for my own delusions. So I tend always to index their investments. But it's, yeah, I like the idea that index funds should at least be a sort of foundation on which the portfolio is built. It feels like the default. Yes. And, you know, this is especially true, of course, for individual investors. I mean, if you're running a professionally managed portfolio, you're going to have a hard time convincing people to pay you for putting 95% of their out of checks in the next month.

Although there are a lot of financial advisors out there who do that now that I think about it. But I think you'd have a hard time running a fund doing that. But your results might well be better because then you would only invest in the things where you felt you had a real advantage and the rest of the portfolio would track the market. So if you turned out to be wrong, you wouldn't underperform by much. And if you turned out to be right, there's the potential to outperform by a lot. And we know that the distribution of stock returns is very heavily skewed. most companies don't, most stocks don't go, don't make money over time, but those that do make a tonne. And there's a very limited number of stocks that can go up 10,000% or more over the long

run. And if you happen to catch one of those and you don't dilute it with, you know, 150 other investments, but you simply add it on top of an index fund. You could have some, you could have really significant outperformance. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform. So whether you're prepping for a SOC two or running an enterprise GRC program, VANC keeps you secure and keeps your deals moving. Instead of chasing spreadsheets and screenshots, Vanta

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charges, and expenses. This and other information can be found in the income fund fund's perspective at fundrise.com slash income. This is a paid advertisement. All right. Back to the show. There's a very interesting and important study that you mention in your commentary on one of the chapters, which is this seminal study by Hendrik Bessam Binder on shareholder wealth enhancement. And he basically looks, as you explain in your commentary, at 28,000 or so U.S. stocks from 1926 to 22. So a very long period and a very large number of stocks. And he basically concludes. that nearly 59% of all of those 28,000 or so stocks actually lost money for investors over their full histories. And then you point out that the study also shows that only 966 of those stocks, which is basically 3%, little more than 3% of the total, accounted for the cumulative net gain of the entire US stock market. And so there's something really interesting here about the

outsized importance of great businesses, of the real winners. And various people I've talked to on the podcast and privately have commented a lot on this. Some like Peter O'Keefe, who's a remarkable investor who I interviewed on the podcast, said his job is to find that small number of stocks that outperform and they're identifiable to some extent. And that's his entire business, basically. Then there other people who say, well, no, I should index because the chances are then that I'll at least have some of those companies in my portfolio and will benefit from them. And I'm wondering how you think about this kind of central conundrum that a lot of us are facing as investors. Yeah. So again, this gets back to why Graham's idea of defensive versus enterprising investors

is so powerful. If you're a defensive investor, you don't have to have an opinion on this. You can simply say, maybe some people are capable of identifying that tiny minority of stocks that will outperform. But I'm not capable of identifying those people. So therefore, I will just own the entire market and I will benefit from the fact that in that market index is represented the been winners of the future. And if you're an enterprising investor, it makes a lot of sense to try to identify those companies. But I think you have to recognize that the odds are against you.

Most people couldn't do it because if most people could do it, the stocks wouldn't outperform. So most people who can do it, might be highly skilled at business valuation, and maybe you are and maybe you aren't. But there's another element here, which is that maybe you could identify them just because you're lucky. Maybe, you know, in the pick six lottery drawing this week, you know, maybe one, two, three, four, five, six will win. Maybe I just pick the lucky number. And I win the I mean, you could put a lot of effort into trying to pick these, I call them super stocks,

and you could, you might be able to identify one just by luck alone. And if it feels like skill to you, buying. I mean, pat yourself on the bat. But I think it's important to recognize that the odds really are long. And, you know, if we wanted to try to distinguish the people who, can reliably do it, we would need vast amounts of data. I mean, you know, by a lot of statistical tests, it takes decades to figure out whether a portfolio manager is skilled or lucky. And of course, the more volatile that managers' results are and the more they differ from the results in the market

as a whole, the longer the measurement period you would need to establish whether it's skill or luck. But I think this brings us to another point, which is in the book, I talk about two reasons to invest. And I call them investing as endeavor and investing as entertainment. And it's really, in some ways, just another way of distinguishing between defensive and enterprising investors. And if investing is an endeavor for you, you're simply focused on the objective of earning the greatest possible return at the least possible risk over the longest possible time periods. And in that case, again, you don't have to worry about Hank Vesimbenters results. You just buy the whole market and hang on to it. And over very long periods, you should

do well. But maybe investing is also entertainment. Maybe fun. Maybe you really enjoy studying annual reports and going into stores and company facilities and learning how companies operate and figuring out what is their competitive advantage. And, you know, I remember many years ago having an appointment with a fund manager who I just think he's all. I don't want to say he's no longer alive. I actually don't know. But I went to our, this was when you and I were both working at Forbes and I went to our pantry to meet him because the recess. Pinnis said that's where he went. And he was up on the counter looking at the back of the soda machine and his butt was sticking out into the room. His shoes were hanging off the edge

of the counter. And I wasn't, obviously, I wasn't sure it was him because I'd never seen that view of him before. And eventually he got down off the counter and I said, what are you doing? And he said, this is a really good machine. I wanted to make sure I knew who made it. And, you know, If you have that kind of mentality, then investing will be endlessly fascinating for you. And even if you don't outperform the market, you will get psychic satisfaction that could be very valuable to you. And it could have ancillary benefits in other aspects of your life. If you run your own business, you could learn a lot about how to run a business well by studying businesses that are run well for the purpose of investing in. their stocks and that could make you a better business person. And Graham wrote shamelessly,

I think it was in chapter 20. He said investing is at its best when it is most businesslike. And of course, Warren Buffett has famously said that he's a better investor for being a businessman and a better businessman for being an investor. And so that's a long answer. But I think where I would come out is that even if the attempt to outperform the market sales by conventional measures, it may succeed in other dimensions. And it may well be worth your time. And it depends on your temperament, what kind of person you are. I think though it's hugely important, as you've often done over the course of your career,

to make clear just how difficult the game of long-term outperformance is. And it really brought it home to me when I was looking at chapter nine of the book, which is titled Investing in Investment Funds. And Graham talked about how, I think back when he was revising the book, this around the end of 1970, he said there were 356 mutual funds with 50 billion in assets. And so he was talking about the challenge of picking the right funds when it's so bewildering because there are so many. And you pointed out in your note that I think there were now 6,973 mutual funds in the US with 18.8 trillion in assets. And not to mention the ETFs. Right. And yeah, which is another $7 or $8 trillion.

And not to mention all of the worldwide mutual funds, which you said have $63 trillion in assets. So the talk of picking a good fund has become even more bewildering. And so then I was looking back at an article that you had written back when we were young journalist, 26 years ago working together. And you'd written a really good and interesting story about long leave funds, which were managed by Southeast and asset management and co-managed by Mason Hawkins, who I've interviewed before for the Great Minds Investing and by Staley-Cates, who's really good, you know, these are really good, really smart, really honorable people.

And I was looking at their results the other day. This is for the Longleaf Partners Fund. This is as of August 31st, 2024. for and basically since inception 37 years ago for that fund, they've really added no value at all. I mean, and then more recently it's even, it's even worse, right? The Longleaf Partners Fund has earned 4.03% annual return over 10 years versus 12.98% for the S&P 500. And I just wondered what that makes you think about, you know, how it clarifies the difficulty. of this game.

Because they in some ways did everything right. They had the right mentality. They had the right framework. They say on their website, they give credit to Ben Graham for providing them with this framework. What's the moral here? Well, so there's a couple of morals, I think.

One is that active investing is expensive. And it's not just the explicit cost, like in a mutual fund's expense ratio or in the old days that commission, you might pay. Or if you're buying individual stocks, obviously you have brokerage costs. It's not just the explicit costs, but it's the implicit costs. You know, if you're a large investment firm like Southeastern asset management, you have to pay a lot to buy and sell a stock. It's expensive. And that can be a real drag on portfolio returns. But more importantly, I think,

is that in the past 10 to 15 years, the historical value premium, the, you know, how performance that cheap value stocks exhibited in the stock market has kind of faded, if not disappeared, and it may even have gone negative. And the theories on that are very controversial. And everybody, you know, everybody has an, you know what they say about opinions. everybody has one like a certain anatomical park. And everybody has an opinion on why value investing has underperformed. You know, the explanation I kind of favor is that by the early 2000s, everybody had, mid-2000s, everybody had concluded that value investing was superior and would never underperform again, at which point it stopped outperforming. And I don't personally expect that

situation to persist indefinitely. But many, and there's some indication that it may have started to reverse already, but the power of indexing and also the kind of winner take-all structure of today's technology industry may mean that value investing is no longer the sure thing that it once was. And if I could ask Ben Graham one question if he were around today, I know I would ask him. Do you think value investing will again prevail? Because for quite a few years now, it has struggled. It's such an interesting and challenging thing, right? Because he writes a lot about pendulum swings, and the pendulum swings are clearly eternal. And so there's this assumption say that, you know, sooner or later, the pendulum will swing back to value investing the pendulum.

pendulum will swing back to emerging markets and international stocks. But there's so much uncertainty. And I had an extraordinary conversation in England a couple of weeks ago. I was moderating a panel with Chris Begg, who I've interviewed on the podcast before, Frederick Blackford, who's a very smart venture capitalist. And James Anderson, who's this legendary, as he would put it, hyper-growth investor, who was previously at Bailey Giff. And James Anderson had written an extraordinary piece back, I think in 2018, I'm sure you've read before where he was saying, look, this is a wonderful book, The Intelligent Investor, and Jason's done a brilliant job. It's fantastic, and he fathered all of these magnificent investors.

But he posits the possibility that something profound may have changed. And what he was saying is that in recent decades, there are these companies that have, as he put it, have scaled super linearly. Yes. And he said, is this a temporary change that is noise in the data or something more serious? And so one of the things that he was he was talking about was that, you know, if you study, if you study Graham, you would assume there's this reversion to the mean, right, that all of these growth stocks end up kind of disappointing in the end. And I think this kind of appeals to people like you and me who are sort of contrarian. And there's something almost moralistic about it, that these idiots who bet that growth will go on forever will get their heads handed to them. And he says, actually, you look at all these companies like Alphabet. and Netflix and Amazon since it went public in 1997, I guess it was, or Facebook since it went public in 2012. And he says, you have to wonder if something has actually changed and that,

you know, when Graham was warning that you shouldn't participate in what he called glamorous and dangerous fields of anticipated growth, he was actually kind of, he's been proven wrong by this period. Can you unpack that a little for us? Because I think it's such a, it's such a provocative and interesting argument. Yeah, it is. And I know James quite well, and I have a lot of respect for him. He's a terrific portfolio manager and a very smart,

very smart guy. And we've debated this not in public, but over breakfast and lunch several times. I think where I come out on this is maybe not a very satisfying place. I kind of think it's where Graham would come out. And where I come out on it is it's sort of points in the book. Graham looks back at past data to draw inferences from the evidence of historical re-signs.

And, you know, he looks at 10 years, he looks at 25 years. But then he insists on extending it out to 50 years. And even then, he sort of throws in the caveat that this might not be a long enough period to draw a sensible conclusion for us. But what we do know is that there's an incredible amount of noise in financial markets. And James Anderson may well be right. He certainly has been right so far that what he likes to call them West Coast companies, you know, these companies that have this business model of the, you know, dynamic, you know, eccentric founder and the Elon Musk, the Jeff Bezos, the,

Mark Zuckerberg, you know, the closed coterie of original employees, maybe the dual class shares where outsiders don't get the same voting rights, and very long-term business plans where, you know, Jeff Bezos famously didn't want to do anything that would pay off in less than 10 years. And this West Coast business model has worked really well for the obvious winners. But I mean, there's a couple things I'd point out. First of all, it's worked really badly for a lot of companies. You know, we tend to forget that the winners and the winners capture all our attention. And we forget entirely about the losers. And most of the losers in the technology industry had very similar business models to the winners. And a lot of what separates the winners

from the losers is what a finance professor would probably call luck and what the founders or I would say maybe a fair objective observer would call something unobservable. There's some magic, some jeunise qua, to these companies that their competitors don't have. It's lightning in a bottle. And maybe you can recognize that. Maybe you see something. Maybe you see something that looks like it, but turns out not to be. But I think the question becomes at what point do these companies grow so big, so fast, that they no longer can sustain that hyfer growth that James Anderson is talking about. I mean, I would think it's sort of a law of financial physics that if you have a curve that looks like this, eventually it has to plet

I mean, if it's just a parabola, for our audio listeners, you're going to have to use better terminology than hand movements, Jason. Yeah, sorry about that. I mean, if the company's growth just, you know, is scaling at this incredibly rapid rate. And in fact, if it grows faster as it gets bigger, which is close to the case for a lot of the biggest technology companies, it's hard for me to imagine that that's, indefinitely sustainable. You may remember, William, there was a swan in the 1990s where Walmart was growing so fast. I think it might have been when it was just beginning its expansion into Mexico,

but it was growing so fast that some analysts on Wall Street were projecting that it would, you know, it was become a trillion dollar company in a few years. And of course, Walmart has grown really fast, but its growth rate has slowed down a lot as it's gotten bigger. Now, it's not a technology company in the same sense that, say, alphabet is, or meta, but, you know, growth to some extent historically has sowed the seeds of its own destruction. These companies seem to be the exception to that pattern. And that's what James Anderson is emphasizing. He thinks it is an entirely new, model of doing business. And it may be.

I think it's interesting that James and Bill Miller and Nick Slee were all steeped in Santa Fe Institute kind of studies of network effects and the like. I think they did see something that the rest of us hadn't seen. And I love this line from James Anderson's piece where he said, if you live in a technology and knowledge-driven universe of great complexity and initial path dependence, why wouldn't you expect the lucky merchant feud to buck the notions of the fallibility of growth stocks? And so it may just be that something has shifted. I think this just gets us at the perennial difficulty of investing.

It goes back to Munger saying, you know, anyone who thinks this is easy as stupid. Yes, exactly. And, you know, look, Munger got it right with Costco. and he got it right, at least for a good while with BYD in China. But it's extraordinarily difficult. And if it were easy, then you would see the founders of these companies. You would see their family offices that invest on their own personal behalf. You would see them earning the highest returns in the world.

because they, I mean, if Jeff Bezos, if somebody's running his money and Jeff Bezos says, oh, that's the next Amazon, then you would expect he would know what he was talking about and they would buy it. And I don't believe the family offices of these company founders have done any better than anybody else. And they might not even have done as well. And it's, I just think we can't emphasize enough. how difficult it is to, not just to identify a superior business model, but a sustainably unbreakable business model. You know, everyone in the professional money management business talks about moats all the time. And there is a whole bunch of funds,

actively managed funds, ETFs that purport to identify companies with great moats. But, you know, even Warren Buffett has made mistakes about moats. Not every company he bought and he thought had a great moat, had a moat at all. And it's very tricky. It's very tricky. The whole case of Geico is really interesting, right?

Where Munger obviously has pointed out the irony, which Ben Graham admits to in the postscript of this book, that after spending a lifetime being so dissoning. disciplined as a value investor buying stuff cheap, that basically he ended up, Graham ended up making much of his fortune off one high quality company, GEICO, that wasn't particularly cheap. And that he made a very big bet. I think you point out that he put about a fifth of his portfolio in it and then wrote it for something like 25 years. So in a way, Munger pointed out that there's this inherent contradiction that supports the idea that you don't just want to buy. really cheap stuff that's undervalued because Geico kind of violated all of Graham's own rules about concentration and valuation and the like, what do you think of the, like, what's your

view on the whole kind of Geico controversy? Well, so it's hard to, it's hard to disagree with the point Charlie Munger made. I mean, Graham himself, although he's a little coy about it, he does, He does fess up. And, you know, when you learn the details, it turns out that Jerry Newman, who is Graham's partner, named partner in the Graham Newman Fund, twisted his arm and said,

you know, it's a good deal. Let's do it. And Graham didn't want to do it. And I believe that Graham wanted to pay, I think I remember this correctly, he wanted to pay $50,000 less for the block of stock. and the he was the family the insider family wouldn't budge on the price and Newman said come on Ben let's just do it and they did and so Graham you know is you know you can tell that he's wistful

about this he realizes that you know the single most important decision he ever made wasn't in accord with his principles and he probably wouldn't have made it at all if his partner hadn't talked him into it. But that points to another very important factor. And you don't need to look beyond Warren Buffett's or Charlie Munger to recognize the importance of it, which is there's kind of a loose tightness or a tight and loosen looseness to a bunch of these ideas. You know, Buffett has broken his own rules over and over and over again.

and, you know, he buys stocks in the public market when the market crashes, and then he buys companies in the private market when they're cheap. And when neither publicly traded stocks nor private companies are cheap, he does nothing and he just lets cash build. He doesn't feel he has to do something that squares with his principles if the opportunities aren't really attractive. and, you know, here was Graham who had all these policies and procedures and, you know, in theory, at least ran everything through filters to determine that devaluation was attractive. And here he is, he's presented with a company that doesn't meet his standards.

And in the end, he says, yeah, all right, let's do it. And it worked out great. And Graham himself says when he's describing it that, you know, sometimes he can't. can't tell luck from skill. And in effect, it doesn't really matter. If it works out well, more power to you, right? And this gets to part of the idea that investing should be fun. And it should be engaging.

And if you don't find it fun, you don't have to play that game. You can just be a defensive investor and not attempt to pick stocks, not attempt to pick funds, just buy the whole market and, you know, go to sleep for 30 years. I think it also gets at one of the fundamental insights from Graham's writing, which is that the world is just a hugely uncertain place and everything is changing all of the time. And we have no idea what's going to happen. And there's a, there's a lovely bit in one of the chapters where he focuses on four companies, right, Emerson Electric and Ultra and Em Hart and Emery Air Freight and you point out that only one of them still exists in that form.

And I was wondering what working on this old book teaches you just about the nature of change and impermanence and creative destruction in the world of capitalism. Yes. I mean, it's kind of remarkable. You know, Graham was writing in 1972, which was right after the disastrous collapse of Penn Central. which the rail, you know, which Dan, I believe, was the largest railroad in the U.S. And was also the largest bankruptcy in American history up until that point. And was the big, by far, the biggest news event in, you know, in financial markets in the early 70s.

And of course, in 2003, when I edited the last edition of the book, railroads were moribund. You know, nobody cared about railroads. They seemed to be a dying technology. You know, it was all about, it's all about air freight and, you know, maybe trucking. And of course, now railroads have done extraordinarily well. And Buffett has made a fortune on Burlington Northern. And you see that over and over and over again.

And I believe that, you know, Graham kept coming back over and over again to the same basic ideas. You alluded to it earlier, William, you know, this two shall pass. But also he talks about how the first shall be last and the last shall be first, which of course is from the Bible. And then he also quotes the Latin poet Horace in the epigraph of the book saying something like, you will be safest in the middle way. Well, in security analysis, he quotes Horace as well, right? where he says many shall be restored that are now fallen and many shall fall that are now in honor.

That's right. And so he's always conscious of the incredibly long time scale over which market cycles can play out. Of course, they can be very quick too, as we saw in 2020 and as we've seen since. But often they can take decades to manifest themselves and to reverse. And Graham gave him a speech very late in his life. I think it was at his 80th birthday party. And he talked about how he preferred to view things on his favorite philosopher, he said, was Spinoza. And he said, I prature to view things through the lens that Spinoza provided, which is the...

Yeah, eternity, right. Eternity, right. So, especially Eternatast or something like that. the perspective of eternity. And of course, Spinoza worked, do I remember this right? He worked as a lens grinder, right? And that was his day job. So he made microscopes and telescopes.

And so Graham was, you know, as somebody who was steeped in Greek and Latin philosophy and literature and who had traveled all over the world and spoke at least a half dozen languages, he was always aware that, you know, what's happening now, is only happening now and you can't count on it to continue and sooner or later it's likely to reverse

but you can't predict when it'll be I think this gets something so important and fundamental here which is part of the greatness of the book I think is Buffett said I think in the introduction

or the preface he talked about how Graham had an intellect whose breadth almost exceeded definition and so because he was so steeped in literature, he had this kind of expansive sense of what can happen to mankind and how we go through these periods of disaster. And he had gone through terrible periods

of disaster himself, right? We talked about last time you were on the podcast about what he had lived through in terms of wars and bankruptcies and great depressions and losing the family home and stuff. And I was very struck at the start of the intelligent investor, he quotes this beautiful line from Virgil, where he says, through chances various, through all vicissitudes, we make our way. What does that make you think? Like, the fact that he chose that line for the start of this book and then in security analysis that the quote we mentioned from Horace, the Roman poet about, you know, many should be restored that are now fallen. Well, first of all, he was kind enough to translate from the Latin's. Because if Alainan Graham's

life, he used to play, he used to translate Homer into Latin and Virgil into Greek as of pastime. So we can be grateful and he actually translated those for us. But he did it because he wanted us to learn the lessons. And I think it boils down to something really basic and fundamental, William,

which is intellectual humility. You know, the markets are just full of people who, you know, have passionate conviction on the basis of fragmentary evidence and sometimes they're just making it all up or they think they know the answer when they don't know anything or they know something that isn't true.

And the message of the blogger is that the reason Graham emphasizes the margin of safety so much is because he wants you to look inside yourselves and realize I shouldn't just be calculating the margin of safety of this investment I have to calculate the margin of safety of myself as an investor. Do I know what I think I know? How do I know what I think I know?

What evidence is there that I might be wrong? And what has been the performance of the thousands, probably millions of people who've tried this thing that I've just discovered before? Why do I know something about this asset? that most other investors haven't figured out. Why exactly would I be right when all of them are wrong? And by constantly invoking classical literature and the ideas of regression to the mean

and the futility of prediction and the difficulty of being right and even the limitations of what human knowledge can do, Graham is trying to remind us, you know, it's really important to sustain that sense of humility in yourself. And, you know, you and I, I think, have talked about this before, although maybe not on the podcast. You know, many years ago, when I interviewed Buffett, I think for the first time, so 2003 or four, I asked him, you know, there's so many people out there who think you're a genius. But most finance professors think you're lucky. Well, what is it? What do you, how do you think about yourself? And his answer was really interesting. He basically said, I don't have any interest in

thinking about that. Other than acknowledging that he was lucky to be born when and where he was, so that he could make the most of the skills he had, to him, the question of his, like, superiority was not interesting and he spent no time on it and this wasn't it clearly wasn't an act really sort of he was very matter of fact about it and very direct just like I'm not interested in figuring out how's you know whether I'm smarter than everybody else doesn't matter one thing I thought was very interesting in Buffett's preface to the intelligent investor where you you reprinted I think an article that he'd written in 1976. So right after Graham died,

he talked about how more than any other man except my father, he influenced my life. And when he was trying to explain what made Graham great, not only as a thinker, but as a human, he said, in each relationship, just as with all his students,

employees and friends, there was an absolutely open-ended, no scores kept generosity of time, ideas, and spirit. And then he talked about how he embodied what Walter Whitman described, as men who plant trees that other men will sit under. And he said Ben Graham was such a man. And I was wondering when you think about lessons from Ben Graham's life,

like if there's anything that you've kind of internalized yourself that sort of changed the way you think about your own life or how you want to live your life. An interesting question. Well, of course, Graham had a very secular home life, which we won't get into here. This is a family podcast, after all. Suffice it to say, he, he, he, he,

enjoyed physical pleasures. Yes, indeed. Sometimes, well, yes, he did. But I think the lesson I take away from Graham is one that's probably close to your heart, William, and very much in tune with your book. Graham wasn't very interested in making money for money's sake. Both Warren Buffett and Charlie Munger

have told me that repeatedly, that Graham thought money was kind of boring. And, you know, he was a wealthy man for his time when he died. But he could have made so much more money than he chose to. You know, when he ran his mutual fund, it had a very low expense ratio. He charged a substantial, well, it wasn't a man. He paid himself with a very decent salary. But when you calculated it as an annual expense,

it was quite lost. And he had no interest in marketing the fund or making it big, and the fund was quite small when he shut his death. And when he got out of the money management business, he just got out. He retired. He continued to teach.

He taught into the 70s, but he put most of his portfolio into municipal bonds. Because he didn't feel like being bothered following the stock market every day. At the very end of his life, he got re-involved in what today, we would probably call smart beta, you know, factor investing. With a stockbroker named James Ray, he felt he had identified value factors that would outperform

statistically. Like if you bought hundreds of stocks that all had these same characteristics, you were likely to outperform. And the fund actually did not do very well. And that's a story for another day. But he was much more interested in spending his time with. family and friends. And he was the founder of what later became known as the Buffett group. You know, every year, Graham would have a little reunion for a bunch of his friends at the Hotel

Coromato in San Diego. And they would all go out and spend a couple days with Graham. Buffett went, Charlie Munger, went, Rick Guerin went, all these leading investors. and they would debate things, and Graham would present mental puzzles that people would have to solve. And usually Buffett was the only one if they'd figure them out. Suffen and Munger often got them right.

And nobody else ever could. And he really, he enjoyed, he enjoyed his life. And he didn't regard investing as a rat race. And it's very interesting the way he was able to turn his back on it after being one of the most successful people in the field ever, he just walked away. He had extraordinary breaths, right?

I mean, he had a tremendous intellectual breadth. Yes. And, you know, there he was in the south of France, translating an Uruguayan novel from Spanish to English and playing's multilingual scrabble with everyone at the table on his patio in southern France. So his wife was fluent in French. some other visitor might know Italian or Germans,

and each of them would play in his or her in his own native language, and Graham would still beat for us. When I asked Charlie Munger about Ben Graham, he talked about that idea that I think is in the preface that the Buffett refers to, where Graham had said something about how every day he tried to do something foolish, something creative, and something generous.

And Charlie, of course, didn't pick up on the foolish bit. he picked up on the generous thing. And he said, that's a nice thought for an academic. And he said to me, he taught without pay for 30 years. And then he said, he helped a lot of people. It was a very worthwhile life. And I was thinking the same really could apply to Charlie, who died last November. And you spent a lot of time interviewing Charlie over the years,

and you read a lovely reminiscence of him in the Wall Street Journal. And I was wondering if you had thoughts about, important life lessons that you'd learn from Charlie as well who you know when you when you write in the book that the Ben Graham was probably the wisest of investors Charlie would be about the closest that you come to to Ben Graham in terms of wisdoms probably probably yeah I think from both him and from Warren Buffett I think I've learned a lot about the importance of of teaching you know late in munger's life he spent enormous amounts of time, meeting with people over lunch, over dinner, sometimes traveling to them,

more often they traveled to him, politicians, academics, entrepreneurs, venture capitalists, fund managers, just business people, even students. And he would just talk and share what he'd learned in this unbelievably long life. You know, he died a few weeks short of his hundreds his first day and he was still going. I mean, I interviewed him in, I think it was the end of October or the beginning of November and he died, I think, at the end of November of last year. And he hadn't lost a step. And, you know, Buffett does the same thing. He still meets with groups of students. And in the old days, he used to travel a lot and he would go to MBA classes. He would go to undergraduate graduate classes and just talk about life. And these guys are very, very wise. And it's kind of

interesting. I think in Western culture, we've lost a lot of the reverence that's so common in other cultures around the world for our elders. A lot of Americans certainly, and I think some Western Europeans kind of regard their elders as a burden. And, you know, in places. like Africa and Asia and Latin America. Elders are revered and we've kind of lost that. And I know in like in Renaissance Venice, if I remember the way this, the way I've read about this, I think you couldn't become the Doge, the Duke of the city, until you were at least 85 years old on the theory that you wouldn't be wise enough to govern well. It might also have been because you wouldn't be around for too long.

But we see the same thing with the papacy, for example. I mean, popes tend to be kind of old. And Americans kind of like to mock that sort of thing. But maybe we should learn to be more reverent of the wisdom of older people. And certainly, you know, when Graham held these groups in San Diego, you know, these investors would come from everywhere. to spend time with him and learn from him. And Botte has continued that tradition,

that's what he calls in Botted Group. I wanted to ask you one final thing before I finally let you go, Jason. In the acknowledgments, you end the book by saying, above all, I thank my wife, she did everything but this, so I could do nothing but this. And you also once wrote to me, without our wives, we're nothing, which is pretty true, I think, because certainly my wife, Laura, keeps me on track to an extraordinary degree.

I would kind of disintegrate otherwise. And I wonder if I could just ask you to say something about your wife and how she's made your career possible. And, you know, there's something kind of funny about the fact that you've written hundreds and hundreds of columns filled with investing advice. And I sort of figured I should actually hit you up some relationship advice that you can share with this since you've been married to a remarkable woman, Liz, for decades and she's put up with you to an astonishing degree.

So what's worked and what marital advice can you dispense to us? Well, first of all, William, thank you for getting me in incredibly hot water because my wife is an intensely private person. She's going to kill me when she frost. I answered this quest. She'll never make it to the end of the podcast. Well, that could be, but she might hear about it from somebody and that might be worse. So when I was working on a book, and I alluded to this before, but because she's so private, I left her out of the answer.

So you asked me what sort of rituals or routines did I have. So when I was working on the book, she was on sabbatical. By coincidence, she was on sabbatical while I was working on the book. So when I took that morning walk, she went with me. So we walked to her three miles every day before breakfast. and it just got my workday off to an incredible start. And she's amazingly supportive and patient and puts up with all kinds of nonsense.

And it was quite literally true that for seven months, I didn't have to do any of the normal thing. I usually contribute a little bit around the house. I do some of the cooking. I do some of the cleaning. And I run quite a few. few in the errands. And she just took all that across me and just did it all. And if she hadn't done

that, I don't think I could possibly have finished. And relationship advice, I don't know what else to say except take it one day at a time, which I think is the best advice anybody can give you, can give one. I don't imply I'm giving you advice. Why is that such important advice? Because I think people have a tendency to live either in the past or in the future. And when things are going poorly, they will compare to some period in the past when things were better and say, oh, if we still had that spark. Or when things are going well, they worry that down the road, oh, we're not going to have that sparks. And instead to, you know, live for today and enjoy the moment and be grateful you have somebody who's good with you and good for you.

Ben, just by the way, Ben Graham, you wouldn't want to ask him that it's Tish. I mean, it's interesting, right? A lot of the great investors that we write about have had these lousy personal lives where their kids don't talk to them or their wives hate them or their ex-wives hate them. And so, I don't know, it's one of the, it's one of the quandaries, I think. How do you become a super high performer at what you do without wrecking the lives of the people around you? Yeah, I mean, I think it's just you have to find ways to keep your worthaholism and obsession in check. And I think Warren Buffett would tell you that when he was young, he neglected his kids to an extent that he probably regrets today.

although obviously it was a big part of his financial success but I think he probably wishes he could do some of that he could have a do-over because when you're that driven you know you kind of put everything else aside and look my kids are my kids are out of school they're older if I had tried to do this when my kids were young I don't want to predict how it would have worked out it's it's funny you know I I I I I

I was almost going to ask you this at the start of the conversation because it's something I've been wrestling with a lot myself where I had written to you back when we were first discussing you doing the book and I said I'm trying to practice letting go more in my life, not trying to control things quite so tightly. I feel like I've always been battling everything with gritted teeth and it's too difficult and draining. I want to try to do the same things, but with more ease and lightness of spirit. there's some sense that it's all a gladiatorial battle to the death, which is still something I battle with constantly. And you sent me this lovely quote from Philip Ross, the great novelist who both of us love, who said,

sheer playfulness and deadly seriousness are my closest friends. That's the formula to describe the concoction that energizes virtually any writer worth his or her salt. I thought that was just so interesting that it's like you somehow want to go about these pursuits, whether it's writing or investing, with deadly seriousness, and at the same time sheer playfulness. Yeah.

I mean, I guess one way I have described this now that you mention it is that I take my worth to incredibly seriously. I'll take myself seriously at all. And another way to put that is I have ego in my work and I have no ego for my worth. So I throw everything I've got into it. I leave nothing on the field. But when I'm done, if you ask me, you know, it's great, right? Outday, probably not.

It's probably somewhere between terrible and okay. And I'm not really faking it either. I think I'll leave you on this note. But I think the stars kind of aligned on this project. And it played to your strengths in a beautiful way. And you kind of took this timeless but slightly worn book and breathed new. life into it in a beautiful way and you you made the um the lessons very timely and the principles are very robust but it you did a lovely job so uh you may not give credit to yourself but i'll i'll

give you credit well that's very nice William i hope you're right i'm always right jason yes genet uh no there are many things i'm wrong about but i think i'm right about this one because uh i i have judgment about your work and i've seen your work for many years and you nailed this one it's it's a beautiful piece of work so congratulations thank you Thank you. Well, the marketplace will decide. Yeah. All right. Well, thank you so much. It's been a treat as ever talking to you. Well, thanks, Williams. Great. Absolutely. All right. Take care.

All right, folks, thanks so much for joining me for this conversation with Jason's Weig. If you'd like to learn more from Jason, it's well worth listening to the previous podcast episode I recorded with him a couple of years ago. Among other things, we spoke in depth back then about his experiences of working with the Nobel Prize winning economist Daniel Carnham. It was an incredibly rich conversation, so I hope you'll check it out. I'll include the link to that episode in the show notes for today's episode. I'd also strongly encourage you to read and study Jason's new revised edition of the Intelligent Investor, paying particularly close attention to two chapters, chapters 8 and 20, that is. Personally, I think this special 75th anniversary edition belongs on the bookshelf of any serious long-term investor. I'll be back very soon with

some more great guests, including a fascinating conversation with an author named Brad Stolberg, who's an expert on high performance, resilience, and sustainable excellence. Down the road, I have interviews lined up with some remarkable investors, including a legend named Terry Smith, so I hope you'll keep tuning in. In the meantime, please feel free to follow me on X at William Green 72 and connect with me on LinkedIn, and as always, do let me know how you're enjoying the podcast. Always really pleased to hear from you. Until next time, take good time. Take good time. care and stay well. Thank you for listening to TIP. Make sure to follow Richer, Wiser, happier on your favorite podcast app and never miss out on episodes. To access our show notes, transcripts or courses,

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