One of Graham's most powerful insights is this :
What does Graham mean by those words "basic advantage"? He means that the intelligent individual investor has the full freedom to choose whether or not to follow Mr. Market. You have the luxury of being able to think for yourself.
The typical money manager, however, has no choice but to mimic Mr. Market's every move-buying hight, selling low, marching almost mindlessly in his erratic footsteps. Here are some of the handicaps mutual-fund managers and other professional investors are saddled with:
- With billions of dollars under management, they must gravitate toward the biggest stocks-the only ones they can buy in the multimillion-dollar quantities they need to fill their portfolios. Thus many funds end up owning the same few overpriced gaints.
- Investor tend to pour more money into funds as the market rises. The managers use that new cash to buy more of the stocks they already own, driving prices to even more dangerous heights.
- If fund investors ask for their money back when the market drops, the managers may need to sell stocks to cash them out. Just as the funds are forced to buy stocks at inflated prices in a rising market, they become forced sellers as stocks get cheap again.
- Many portfolio managers get bonuses from beating the market, so they obsessively measure their returns against benchmarks like the S&P 500 index.
If a company gets added to an index, hundreds of funds compulsively buy it. (if they don't, and that stock then does well, the managers look foolish; on the other hand, if they buy it and it does poorly, no one will blame them.)
- Increasingly, fund managers are expected to specialize. Just as in medicine the general practitioner has given way to pediatric allergist and the geriatric otolaryngologist, fund managers must buy only "small growth" stocks, or only "mid-sized value" stocks, or nothing but "large blend" stocks.
If a company gets too big, or too small, or too cheap, or an itty bit too expensive, the fund has to sell it-even if the manager loves the stock.
So there's no reason you can't do as well as the pros. What you cannot do (despite all the pundits who say you can) is to "beat the pros at their own game." The pros can't even win their own game!
Why should you want to play it at all? If you follow their rules, you will lose-since you will end up as much a slave to Mr. Market as the professionals are.
- The Intelligent Investor, Benjamin Graham
- The Intelligent Investor, Benjamin Graham
