Why 'The Intelligent Investor' Still Matters in a Fast-Paced Market With Jason Zweig (EP.178)

0:28We all need to make smart decisions with our money. conversation featuring the one and only Jason Zweig, arguably the greatest financial writer alive. You may know Jason from his column, The Intelligent Investor in the Wall Street Journal. And I have to read a little of his bio. He's just done so much. Prior to joining the journal, Jason helped Nobel laureate Daniel Kahneman write his massive bestselling book, Thinking Fast and Slow. Before that, Jason was a senior writer for Money Magazine and a guest columnist for Time Magazine and CNN.com. Jason is the author of a couple of my favorite books, one being Your Money and Your Brain, which is on the neuroscience of investing, as well as The Devil's Financial Dictionary, a satirical glossary of Wall Street that honestly just makes you laugh out loud all the time.

1:12But today, we are talking about his role as the editor of Benjamin Graham's investment classic, The Intelligent Investor, a book Warren Buffett has described as, quote, by far the best book about investing ever written, end quote. This episode marks the release of the third edition of The Intelligent Investor. And in this special episode, we're recording on the floor of the New York Stock Exchange. So you're going to hear a little bit of sound in the background. But I honestly couldn't think of a better place to be speaking with Jason on why the core principles of The Intelligent Investor remain essential in navigating today's financial markets.

1:49As always, you can find resources, links, everything mentioned in the show notes at thelongterminvestor.com. And if you haven't already, be sure to subscribe to the show because next week, part two of this conversation is just as great as this one. But enough of me. Let's get to it. Here is my conversation with Jason Zweig.

2:13Jason Zweig, thank you so much for joining me here on The Long Term Investor. It's my pleasure, Peter. Thanks for having me. And we're in a special location in the New York Stock Exchange, which I think embodies so many different emotions when you're on the floor, when people see it in pictures. The third edition of The Intelligent Investor has just been released. What do you think it is about a place like this that embodies some of the timeless lessons and some of the philosophy that Benjamin Graham gave to us all so many years ago? Well, I guess the place I would start, Peter, is that it's a lot quieter here than it used to be.

2:47In fact, it's quieter here today than it was in 1914 when Benjamin Graham first came to work on Wall Street. There's less physical human activity on the floor of the New York Stock Exchange in 2024 than there was 110 years ago. Think about that. So what that tells me is that, of course, the volume of trading in stocks has exploded thousands fold. More shares trade probably in a minute than traded in a month when Benjamin Graham was here. Still, what investors need to do, I think, is ask themselves, what is the purpose I'm trying to achieve? why am I an investor? And the chances are it should have very little to do with the daily comings and goings of the stock market behind us.

3:47Well, and it's funny, less people on the floor, but maybe more market participants than ever before. Totally. And so much is even I'm looking up ahead and I see the colors and I see the tickers moving across the screen. I wonder what makes this book still relevant to investors today in a world that so much has changed? Yeah, so I would argue it's more relevant than it's ever been. Graham originally wrote the book in 1949. He died in 1976. He's been gone almost a half century. The last edition of the book came out in 2003. But just pause for a moment and think about it. We live in an age where it's never been easier to invest.

4:33You can invest with a single swipe of your index finger. So it's never been easier to invest. And it's never been harder to invest intelligently because you can invest with the swipe of your index finger and because your phone is constantly buzzing and beeping with alerts. And because the movement of stock prices has come to personify the market, and it's gotten very difficult to remember that those digits that are moving like the reels on a slot machine on your phone represent an ownership stake in an actual underlying business. It's not just blips on a computer screen or something that goes ding or generates confetti on your phone.

5:23So more than ever, investors need rules and policies and procedures that can keep them focused on their long-term goals in a world that is just intoxicated with the short term. Timeless wisdom that you offer here. And it's a really big responsibility, I imagine, to be tasked. It's an honor, but it has to also be somewhat of a burden to update such a important and popular text. When you Google best investing books, this comes up every time. If it's not number one, because somebody's paid to sponsor above it, it's just basically always up there. Amazon, for those of us listening, if you do it, this is going to be the book that comes up.

6:05What do you feel like is the process for you to look at the past edition, to look at what has changed, to make updates. Can you walk us through a little bit of that experience? Yeah, sure. So I edited the revised edition that came out in 2003. And the publisher and Graham's estate, his family, gave me very specific marching orders, which was leave his original text completely intact, change nothing, but provide annotations like footnotes, notes. Not that many people remember all the railroad stocks of the 1920s or the mania stocks of the 1960s. So I had to footnote all of those things to explain them.

6:51And then for each of Graham's chapters, I wrote an accompanying chapter commentary, bringing it up to date. And then primarily taking into account the dot-com boom of the late 1990s that went bust in 2000. So for this edition, what I decided I should do is reread all of Graham's chapters and never look at anything I wrote. So what I did was, although I do most of my research online and I'm not really paper-based, I printed out each of Graham's chapters and read each of his chapters. And I never looked at a word I had written because it's now over 20 years ago. So I started completely from scratch using his text as my base and saying, all right, if I'd never written about this before, what would I say about this now?

7:49And so to some extent, I took the dot-com bubble of 1999 and 2000 into account, but much less than in the last edition. And instead, I talked about the financial crisis of 2008-9, about the COVID crash, and then the meme stocks of 2020 and 21. And then, of course, the big decline in 2022. and I wanted to bring all of those newer events into the book to inform how people should think about their decisions today. Well, there literally is not a better person to be tasked with it and you did a brilliant job. I remember my original introduction to the world of Jason Zweig was from the second edition and as I think I mentioned to you earlier at the start of my career is just about the time you'd started at the Wall Street Journal.

8:43And yet I just knew you as the guy who revised and edited The Intelligent Investor. So reading this time through, though, it had been 15, 16, 17 years since I had read the last edition. The thing that still sticks out today is Mr. Market and how powerful of a narrative that is in rereading a lot of the classic texts in the past year or so myself. You see Mr. Market being referenced. I'd love if you could just Explain Mr. Market to us. Explain how he still manipulates us today, just as he has in the past. Yeah, well, so he's right here behind us, Peter. All around us. Yes. So Mr. Market is this imaginary figure that Graham wants us all to think about.

9:27And the easiest way to think about him is to imagine that you own a small business. Maybe you have a video game production company. Maybe you own a dry cleaner or a bicycle repair shop or an accounting firm or a law firm or a registered investment advisor. That seems relatable for me, at least. There you go. And what Graham says is every day your next door neighbor, Mr. Market, shows up and he knocks on your door and he says, I'd like to buy your business. But some days he's in an incredibly euphoric mood and he offers you way more than you know your business is worth. Other days he's miserable.

10:16He's depressed. It's as if somebody died in his family and he offers you a fraction of what your business is worth. And what Graham wants us to think about is why in the world would we feel that we have to do business with that man? Some days he knocks on our door and he offers us a price that's reasonable. But a lot of other days his price is way too high or way too low. If it's too low, we shouldn't sell to him. And if it's too high, we certainly shouldn't buy his business. And there's a reason why that metaphor is so powerful, because it really personifies how you should think about the financial markets.

11:04But it's not how most people do think about it. Most people think that market prices are there to provide them with information. And what Graham says is, no, it's a service, but it's there only when it serves your interests. The rest of the time, you can and you should ignore it. I love what you just framed up there at the end, that everyone thinks price has information in it. Maybe it's because we ram market efficiency down people's throats, but that isn't necessarily the same thing. one of the basic advantages is, as Graham discusses and you highlight throughout the book, is the fact that you don't have to be a price taker or pay attention to Mr.

11:48Market. Can you talk a little bit about that? Yeah. So one of the phrases I developed in the book, Peter, is the difference between options and obligations. And by options, I don't mean options contracts. I don't mean stock options or index options. I just mean choices. If I give you the option to do something, you have the choice to do it. And what Graham wants us to realize is that market prices give us the option to trade. They do not confer an obligation to trade. And I think many people confuse the option to trade with the obligation to trade. Like if they see a price, they feel they have to act on it.

12:34And what he wants us to realize is if we see a price, then that gives us an obligation to think about it, but not necessarily to act on it. Do you think there are, I mean, this is maybe like the original behavioral finance book in many ways. Do you feel like there are any unique behaviors that have presented themselves among humanity, among investors today that aren't really addressed in the original text that are worth noting? Well, I thought about that a lot. And I guess I'd answer it on two levels. It sure feels that way. I think it feels that way to most people and it feels that way to me.

13:15But when I think about it, I think that's wrong. So here we are on the floor of the New York Stock Exchange. And I'll give you a pop quiz and I'm not trying to embarrass you. But what was the annual turnover rate of the New York Stock Exchange in 1901? Oh, my gosh. I would think it's in the teens, maybe. Yeah, that's what most people would guess. But if I remember right, not that I was here in 1901. I think it was 300%. Oh, wow. Until the late 1990s, there had never been a higher rate of annual portfolio turnover on the New York Stock Exchange than there was at the beginning, at the turn of the 20th century, 1901, 1902, 1903.

14:00And that's because American society was permeated with bucket shops. People were churning stocks like mad. It was the beginning of a new century. Optimism ran wild. And the gambling instinct sort of moved from the racetrack to the stock market. And people gambled like crazy buying and selling stocks. and a 200 % turnover rate basically means that people would hold a stock for a few months at a time, two or 300 % turnover rate. And when you put it that way and you realize that the gambling instinct is part of what makes us human, the fact that we now express our gambling instinct on our phones through brokerage apps or through sports betting apps.

14:57It's a new manifestation of an old inherent aspect of human nature. I think that's how I would put it. Well, I'm going to dig more into human nature a little bit later in our conversation, especially when we're talking about your written work in Your Money and Your Brain, but a little teaser for people to keep listening along with us. One of the things that I find interesting when people talk about Benjamin Graham, at least in the circles that I run in, maybe not socially, but professionally, trust me, my social group doesn't talk about Benjamin. Mine doesn't either. They don't want to hear anything I have to say really about anything finance-wise.

15:35Candidly, they just want me to do pizza reviews on Instagram of all things. But Warren Buffett calls this the greatest book ever. Benjamin Graham was Warren Buffett's teacher. He's often considered the father of value investing. And I think what a lot of people who are really well-read will realize that Benjamin Graham, near the end of his career, said, hey, like the stock picking stuff, this is too hard. There's too much competition out there. The thing that I only more recently learned from a conversation I heard of yours was just being reminded how often he was updating the equations he used in the book itself.

16:08Maybe you could talk a little bit about what it is that he contributed on the security analysis side. I heard that you dodged a bullet in having to update security analysis yourself. Yes. But that was considered the Bible for people here on the trading floor. What has changed that made Benjamin Graham realize? And then I think you realize it's just such a hard game to play and maybe one not worth playing. Yeah, so I think it's important to bear in mind that there could have been more than one reason why Ben Graham hung up his spurs. I mean, if you think about professional athletes, they usually retire because they've lost their game, right?

16:53Or they lost their mojo. In Graham's case, first of all, he'd been managing money for something on the order of 40 years. but I think it's important to realize he was a very unusual character. You can make a strong case that Graham was by any measure one of the most brilliant people of the 20th century. And I think one reason he stopped investing professionally is because he was bored. I think he had run out of questions that interested him. He probably still didn't have all the answers, but I think he felt he knew all the questions. And so he just like washed his hands of it and quit. Kind of like Shakespeare going off to Stratford and living another whatever it was, 20 or 30 years.

17:48And like an athlete retiring in his prime. He wasn't that old. He still remained interested in the financial markets. But he put most of his money in municipal bonds, actually. Although at the very end of his life, he became a pioneer of what today we would call smart beta or factor investing and built portfolios of dozens of stocks that shared common statistical characteristics. They were basically value portfolio. He was trading the value factor. Sure. And I don't mean trading rapidly, but he was building portfolios of statistically attractive stocks rated on the value factor. But you could also tell his heart wasn't really in it.

18:38I mean, he did it. He found it interesting. But he had lost his zest for the game, I think, because he had done it so long and he didn't feel he could think of new questions. That's really interesting. I appreciate that perspective. And you reference the smart beta or the factor investing. Your value investing means a lot of different things to a lot of different people. Certainly, when you're value investing at the individual stock, academics will refer to value as cheap. Now, I don't know that many people who are excited to go buy expensive stocks, but let's just run with it for now. So typically speaking, the principles of value investing that Benjamin Graham explains in all of his work, do you feel like they still hold up today given the changes that the world has experienced?

19:30And by the way, take value investing to mean whatever you want in any context there. Well, yes and no. Like most things, yes. Yes. Shades of gray. No, no. I think as a philosophy and as a discipline, it makes a lot of sense. Why would you want to pay more than something is worth? People do it all the time. And of course, exactly what anything is worth is always at least partly subjective. But I think as a discipline and a philosophy, it's very attractive. It makes sense. and that's why historically it has worked over very, very long periods. However, it has not worked for the past 10 or 15 years for the most part, depending on how you define value and where you're operating.

20:23And there's an open question as to whether the world has changed. Maybe AI has changed the playing field forever. Maybe the biggest growth stocks in the technology industry are just going to keep getting bigger. It's a winner-take-all economy or a winner-take-all stock market. It certainly has been for many years now. Is that sustainable? Will that go on forever? I don't think so. But I think I've been saying that for a decade. So I would advise our listeners and viewers to take that into consideration. I mean, every value investor has said the exact same thing over and over and over again, which is, this is unsustainable.

21:16Stocks can't trade at enormous multiples of their earnings indefinitely. And every year they become more expensive and every year value stocks look less attractive. And I don't think it's likely that that will go on much longer. But it could. It's not impossible. I'm going to share my opinion, even though I usually don't in interviews, just to help bridge us to something I do want to ask. But when I think so in my day to day job, I'm happy for people to have an index portfolio. I'm happy for them to have a factor portfolio that maybe it emphasizes value, maybe it emphasizes other things like profitability or momentum, or some people believe in low volatility, whatever.

22:03When it comes down to it, there is no one strategy that works in every single period. Of course not. And for value investing, when I read the principles explained through the book, yes, Graham goes through some individual stock analysis, even in this text. And yes, a lot of the companies don't exist anymore. I was happy that Emerson Electric existed still because that's in my backyard in St. Louis. So I was happy that that one made the cut and still lives strong. But generally speaking, investors, I feel like that I work with, my job is to help them avoid mistakes and make bad decisions. And typically those stem from misunderstanding what they can control, what they really know to be investing versus speculating.

22:49Exactly. You've been observing, markets and riding on markets for decades now, not to age you. I had hair when I started. It's a badge of honor. One, what do you think your role is in helping market participants? And then two, do you think there has been any improvement in mass or in some segments versus others in how investors behave in this manner? Yeah, boy, the second part of that question is really interesting. So my role is just to get people to think. That's really all I'm trying to do. In fact, I would circumscribe it even more. I would say my role is to get one person to think. Successful.

23:32Trust me. You got me thinking. Well, yeah. Okay. Good, good. That's my goal each week in my column. I write for my high school English teacher's wife because years ago I was visiting them. They're lifelong friends of mine. And she said, oh, I read your column, but I can't understand it. And I said, well, next weekend, I'm going to try to write it so that you can understand it. And whenever I speak to her, I ask her, did you understand my column last weekend? And she usually says some of it. So eventually I'm going to write one she'll really understand. And I'm really just trying to reach one person.

24:11I want to make one person think. I want to make one person reconsider. And I want people to learn something that they hadn't thought of before. And I get a lot of feedback from people, usually angry. And what I always tell people, I say it more politely than this, but it's not my job to tell people what they want to hear. It's my job to tell them what I think they need to know. And so if I write something that doesn't agree with people's prior beliefs, they get angry. And all of the information we receive now as a society is just a gigantic confirmation bias machine. I mean, if you're a Republican, you tune out CNN.

24:59If you're a Democrat, you tune out Fox. And people do the same thing with information about investing. If they love growth stocks, they don't want to hear about value. If they like value stocks, they don't want to hear about growth. If they're active investors, they don't want to hear anything positive about index funds. If all they own is index funds, they think all active managers are idiots. And my job is to tell people that the world is more complicated than you think. And if something sounds too good to be true, it's not that it probably is. It definitely is. And there's something you're missing.

25:40Yes. As you mentioned there, you feel like part of your role is to help people appreciate something or see something that they didn't understand before. Do you think there is broadly something that the investor community as a whole underappreciates, either from a behavioral aspect or an investment aspect? Well, one message I've been delivering the professional investing community for a long time is that expense ratios of funds and the selection of funds and even to some extent asset allocation, all those things are matters of basis points. A few hundredths of a percentage point this way or that if you get it right or get it wrong.

26:28But the behavior of the investor, and frankly, the behavior of the investor's advisor, is a matter of percentage points. and if you chase assets that are going up and you flee assets that are going down, you're going to do damage to yourself that you will not be able to repair for years or maybe decades because they cut percentage points off your return and your wealth. And that's a message that I think a lot of investment advisors do understand, but I'm not sure that they're as good at implementing it in their own behaviors as they are in applying it to the behavior of their clients. Very well said.

27:22I network with a lot of advisors. Some I know very well, some I don't. And I do think that sometimes the individual investor who is looking for help from a professional doesn't always fully appreciate. The advisor themselves suffers from all the same behavioral shortcomings that they do on their own, investing their own money. And I'll say even myself, Jason, I own one mutual fund and it's 100 % stocks. It's globally diversified because I don't trust myself. It's very easy to manage client money, but managing your own money, now there's new emotions that come into play. You try to make, and I'd encourage anybody who's watching or listening to us, if you're doing it on your own, the key is really just to make some very, very good decisions, some well-thought-out decisions, and try to stick with those decisions as long as humanly possible.

28:12Yeah, yeah. And I want to circle back, Peter, to part two of the question you asked earlier, which we talked right over, which was, have investors gotten better at processing information and managing their own behavior? Sure. And I think the answer is no. And I think the answer to all questions like that is kind of the same, which is markets change, technology changes, investment choices change. It wasn't that ETFs are only 31 years old. There's many people listening or watching who are older than the ETF itself, who own nothing but ETFs. And if they were 30 years older, they'd have a portfolio full of all other kinds of things.

29:02So all of those things change over time. What I don't think ever changes and probably never will is human nature. We are designed by evolution to get excited when we should be skeptical and cautious and to be aggressive when we should be cautious. And then the opposite is true at the bottom of a market. When we should be stepping up to buy, our palms are sweating, our hands are shaking, we've got a headache, we feel sick to our stomach, and we can't bear the thought of buying when it's exactly the thing we should do. And I don't think that's ever going to change. And that's why the kinds of rules and policies and procedures that Graham spells out in The Intelligent Investor are so important.

29:55Because if you have those guidelines in place, then your decisions are made for you by your rules rather than you having to make ad hoc, spur of the moment, seat of the pants, impulsive decisions. Because your intuition will almost always lead you to do the opposite of what you should be doing. I'm going to paraphrase our mutual friend, Morgan Housel, a little bit on this. But when you're looking at history and you see these downturns, they looked like great opportunities. But when you're living through them in the moment or looking out ahead, they seem like risks. And yet they're really the same thing.

30:35A final question on the intelligent investor before we pivot a little to conversation. For people who buy this third edition, whether it's the first time they've read the intelligent investor of any edition or not, what do you think people are going to get out of this? What actionable items or pieces of information do you think you're going to be able to walk away with to make you a better investor? Well, I think it's very hard for any of us, Peter, to accept the most basic principle in the book, which is Graham spells it out at the very beginning in the introduction. And he uses a male pronoun because that's what they did.