The Investor and His Advisers (MG Book Club Chapter Ten)
Investing in Investment Funds
This is the tenth discussion of the ModernGraham Book Club’s reading of The Intelligent Investor by Benjamin Graham (affiliate link).  In last week’s discussion, we discussed the ninth chapter, which reviewed investment funds, where they may fit in a portfolio, and how intelligent investors should approach them.  This week we will discuss the tenth chapter, which is titled “The Investor and His Advisers.”  I encourage you to purchase the book (preferably by clicking the link to Amazon, because a purchase through that link will help support the club) and join in with us as we read through a chapter each week; however, even if you don’t have the book I think you will find our discussions to be very useful in your own understanding of value investing, and you can still bring a lot to the discussion from your own experiences as an investor.  Whether this is the first day you’ve ever been interested in investing, or you have decades of experience with the stock market, we’d love to hear your thoughts in the comments below!
Please feel free to leave a comment on this post with your own responses to the questions, along with any other thoughts you have, and return throughout the next couple of days to see what others have said. If you find something that has been said by another commentator interesting, feel free to respond to them with another comment.  We’ve had some great discussions throughout the book club, so keep it up!
ModernGraham’s Comments
Ben
In this chapter, Graham describes the various types of advisers to whom an investor may turn, including friends and relatives, local bankers, brokerage firms, financial services or publications, and investment counselors. Â He also provides some very entertaining commentary on some of these sources, such as when he rebukes many financial services for using technical analysis by simply saying that “we shall dismiss these with the observation that their work does not concern ‘investors’ as the term is used in this book.” Â When it comes to brokerage firms, Graham points out that any brokerage firm that utilizes commissions as its compensation will inherently be interested in increasing the investor’s frequency of trades. Â Intelligent Investors will be keen to understand this concept and take any advice from brokers with a grain of salt.
Overall, I think Graham’s biggest concept from this chapter is the notion that (1) investing is a business venture and should be approached as such, (2) when one seeks the advice of an investment adviser of any kind, the ultimate result is the investor is asking for advice on how to make money in the investment business, and (3) in no other business will a proprietor seek advice on how to profit, as it is expected that the business person is in the business because they believe they already expect to make a profit. Â I think this is a very interesting point, as it demonstrates again that if the investor wants to be successful with their investments, it is important to be actively engaged in the selection of investments. Â This is not to say that investment advisers do not have a place in an intelligent investor’s activities, but that the investor needs to be careful about the advice he seeks and knowledgeable about any biases and motives of the adviser. Â It is also very critical to understand the adviser’s background knowledge and approaches to investing.
HeatherÂ
This chapter focuses on the types of advisers that are available to people when investing. For me, the most important take away from this chapter is that you should know who your adviser is and what stake they have in the information they give you. Knowing their qualifications will help you to get an understanding of their overall skills and what methodology they will take when investing your money. Knowing if they are making a commission for sales, have stock in the company, or only make money when you do can help you figure out how genuine the advice is.
These things, however, are just one small piece of working with an adviser. Graham makes a great point on page 264 with “If the investor asks the analyst the right questions, he is likely to get the right – or at least valuable- answers.†As investors, it is our responsibility to make sure that we are asking questions of our advisers and not simply trusting that they will be investing our money the way that we want it to be invested. Advisers can be great allies when we are on the same page and working together to achieve common goals. Asking questions of your adviser can help you to learn more about investing and have an understanding of where your money is going. Asking questions can also help you figure out if you really want them to be your adviser at all.
Discussion Questions
Please leave a comment below and feel free to answer any of these questions, or just give your general thoughts.
- What quote from this chapter do you think best summarizes the point Graham is making?
- Do you rely on any investment advisers? Â To what sources do you turn in your investment research?
- If you are an investment adviser, what is your response to Graham’s points here?
- What did you think of the chapter overall?
Next Week’s Discussion: Chapter Ten
Chapter Title – Security Analysis for the Lay Investor: General Approach
When reading the next chapter, try to think about how the concepts Graham presents in the chapter could apply to your own investments, whether you consider yourself a Defensive Investor or an Enterprising Investor.
What are some other ways to participate?
If you are a blogger, you can give your thoughts in a post on your own site, link to the discussion here on ModernGraham, and I will be sure to let our readers know that the conversation is going on over at your site as well.
In addition, you can use the hashtag #MGBookClub in social media to talk about the book on Twitter or Facebook!
4 thoughts on “The Investor and His Advisers (MG Book Club Chapter Ten)”
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1. What quote from this chapter do you think best summarizes the point Graham is making?
“It is when the investor demands more than an average return on his money, or when his adviser undertakes to do better for him, that the question arises whether more is being asked or promised than is likely to be delivered.”
This is a very important point Mr Graham is making here. Statistics clearly show us that most mutual funds do no better or even worse than the market. This being the case, it is again logically concluded that index funds are the safest and cheapest way of letting others decide what to do with your investment money.
2. Do you rely on any investment advisers? Only indirectly, as I do still have some mutual funds.
3. To what sources do you turn in your investment research? First and foremost I apply the principles taught by Graham and Dodd in the Intelligent Investor and Security Analysis to the facts and figures I gleam from E-Trade research tools available to account holders, Morning Star free service, Guru Focus free service, Seeking Alpha free service, and AAII membership services.
4. If you were an investment adviser, what would be your response to Graham’s points here? He is exactly right. Advisers are in business to make money to feed their families just like all for-profit businesses and their employees are. An investment adviser is his own salesman and therefore must toot his own horn. If looking for an adviser, and one told me he was second rate to the adviser down the street, what do you think I would do – choose him for his honesty or go hire the guy who can make me the most money? Any adviser you consult will show you how he can make you money with minimum risk; but the facts speak for themselves – he will be among the small minority if he can bring you market equivalent returns year after year, but the odds are that he will not do that well. The moral of the story – buy index funds or educate yourself with the necessary skills to do your own security analysis. I do both and track who is better. If and when the time comes that I am falling behind the market I will gladly secede to all index funds.
5. What did you think of the chapter overall? Good chapter with critical truths about the reality you will never hear from an investment adviser.
1. What quote from this chapter do you think best summarizes the point Graham is making?
“Our basic thesis is this: If the investor is to rely chiefly on the advice of others in handling his funds, then either he must limit himself and his advisers strictly to standard, conservative, and even unimaginative forms of investment, or he must have an unusually intimate and favorable knowledge of the person who is going to direct his funds into other channels.â€
2. Do you rely on any investment advisers? To what sources do you turn in your investment research?
No, I do not rely on any investment advisers. I haven’t done before and I’m not planning to do it either, at least not at the moment.
Sources for my investment research are original documents in the form of annual and quarterly reports, 10-K’s and 10-Q’s and earnings calls or transcripts etc. I sometimes use Morningstar.com when I want to get a quick glance at the financials and key ratios, this without seeing the share price. I manage to do this by having the financials section key ratios page for some small or unknown company as a bookmark, and then searching the ticker field from this page, which takes me directly to the same page for the company I want to look up. Beware anchoring bias. I also use the Swedish site Borsdata.se to get a quick look at the financial numbers for companies listed in Sweden.
Also regularly follow a few investment blogs.
3. If you are an investment adviser, what is your response to Graham’s points here?
Not an investment adviser myself, so not applicable.
4. What did you think of the chapter overall?
A good walkthrough of the different kinds of advisers working in the field of investing, and also what an investor should consider when thinking about using their services.
1) What quote from this chapter do you think best summarizes the point Graham is making?
“Most stock-exchange houses, however, still adhere to the old-time slogans that they are in business to make commissions and that the way to succeed in business is to give the customers what they want… Thus it tries hard to help its customers make money in a field where they are condemned almost by mathematical law to lose in the end…â€
“…Websites like http://www.zacks.com and http://www.multex.com offer access to analysts’ research reports – but the intelligent investor should remember that most analysts do not analyze businesses. Instead, they engage in guesswork about future stock prices.â€
After having worked at some of the largest banks in the nation next to their investment representatives, I learned they know little to nothing about invests. They largely work on commission, and they are just trying to pay their bills, and that is not in the best interest of the investing public that come to them. I found one person in 11 years that I would trust, and he charges a flat fee.
The investment websites above and many more like them have shown me that they are less than useless. I can only say that I have dealt with them on a professional setting, and I would not let my family rely on them. ModernGraham is a shining light above many.
2) Do you rely on any investment advisers? To what sources do you turn in your investment research?
I do not rely on investment advisors for the stated reasons above. I consult my tax accountant on matters of that mature, and I use a trust attorney when needed.
My primary source of the hard number information is ValueLine(free with my library card) and Edgar. I use them to run my calculations. I also use TDAmeritrades tools. When big news comes out about the economy I tend to read it from the source to verify it – Bureau of Labor Stats… I regularly read investment news from many sources like Google Finance, Yahoo Finance, WSJ, CNN Money, and ModernGraham. I grab information from many other sources as well. I do not rely on any one source, but I rather see information reflected on multiple sources.
3) If you are an investment adviser, what is your response to Graham’s points here?
I am not an investment adviser.
4) What did you think of the chapter overall?
I enjoyed the chapter. It helps give you a prospective on who to trust with advice. Unfortunately, it is hard to trust anyone. I find it much better to go with index funds and to the defensive investor portfolio suggested by Graham.
The quote that best sums things up is ” When they, or nonbusiness people rely on others to make investment profits for them, they are expecting a kind of result for which there is no true counterpart inordinary business affairs.”
I do not rely on investment advisors. I do research from annual reports, industry articles, 10-ks, 10 Qs, and research websites for members such as AAII, Net Net, Guru Focus, etc. I like Yahoo Finance to obtain a quick survey of the firm.
I was an investment advisor from 1997- 2005 and I think Graham was spot on.
I liked the Chapter for its relevance. Other take aways were:
Financial services recommend buying a stock if the short term outlook for the stock is good, and selling it ifthe outlook is bad. Price is not considered. What they should be doing is determining whether the stock isa bargain at the present price considering the estimated earnings growth for the long term.
The defensive investor should only buybonds with high ratings and stocks of industry leaders that are not expensive.
The agressive investor uses his own reasoning to decide the veracity of his investment advisor’s suggestions. He will pursue an understanding of securities in the course of investing.