Benjamin Graham on Financial Advisors

The first investment book I ever read was Benjamin Graham’s The Intelligent Investor. This is one of a handful of books you hear mentioned over and over again when you ask investors to name the best investing books of all-time. The edition I read was annotated by Jason Zweig, which was very helpful because he was able to provide context around many of the subjects that were included in the original version which was written in the 1950s.

I recently came across an old piece that Zweig wrote for the CFA Institute that outlined some of the lessons learned from that experience. Zweig touches on Graham’s five kinds of brilliance:

  1. Intellectual brilliance
  2. Financial brilliance
  3. Prophetic brilliance
  4. Psychological brilliance
  5. Explanatory brilliance

One of the more fascinating anecdotes Zweig talks about that I had never heard before is that before graduating from Columbia University Graham had already received offers to stay on as a professor in three different subject matters — english, philosophy and mathematics. Graham was a true Renaissance man.

And then there’s the fact that he more or less came up with the idea for the CFA program, which is now the gold standard in portfolio and investment management as far as higher education goes.

But the thing that has always impressed me when reading Graham’s work is how far ahead of his time he was in talking about investor behavior and human psychology in terms of the role they play in shaping how markets and investors generally work:

Graham’s insights into human behavior are remarkable. He made quite clear that the central difficulty of investing, both for retail and for professional investors, is that we are all our own worst enemy. We buy high; we sell low. We do the worst possible thing at the worst possible time because we are most certain that we are right just when we are most likely to be wrong. And Graham understood that we act this way because of the way we are designed.

Zweig then goes on to talk about how Graham’s insights are relevant for financial professionals in dealing with their clients:

Graham also understood an important and subtle point for investment professionals who are assisting individual investors—the importance of focusing not on what people ought to do to get optimal results but, rather, on what they can do. The best investing advice is not theoretically ideal but psychologically practical.

Throughout the book, he made similar points that are psychologically insightful. For example, when he was talking about his market-timing formula, he admitted that the formula was not all that good. He admitted how difficult it is for an investor to know with any degree of certainty that stocks are indeed overpriced. But he also knew that an investor would never go broke using the formula, and as he put it: “The chief advantage, perhaps, is that such a formula will give [the investor] something to do” (2003 edition, p. 197). Graham understood that investors need something to do. Psychologists refer to it as the “illusion of control.” It is why we blow on the dice when we are playing craps. It is why we push the elevator button nine times after we have pushed it the first time; we think we can make the elevator arrive more quickly if we keep pushing that button.

There are three ways to look at an investor’s risk profile:

  1. How much risk they are able to take (current financial situation)
  2. How much risk they need to take (require rate of return to reach goals)
  3. How much risk they are willing to take (appetite for risk)

It’s that last one — an investor’s appetite for risk — that Graham was touching on here. It’s not enough as an advisor or portfolio manager to say, “Think long-term and stay the course.” Words alone aren’t going to keep someone invested. There have to be behavioral checks and balances in place to ensure that clients can and will stick with their portfolios and plans. There are a number of ways you can do this:

  • Diversification
  • A risk management strategy
  • A rules-based approach
  • Intelligent communication
  • Portfolio design
  • Setting the right expectations

This is the whole point of Graham’s concept of margin of safety — you have to leave room for error, both in terms of your investing decisions and your behavioral actions.

Managing other people’s money is about more than merely investment or portfolio management — it’s also about managing their emotions. Graham understood this better than anyone. It’s a timeless lesson.

Lessons and Ideas from Benjamin Graham (CFA)

Further Reading:
Benjamin Graham: Father of the Efficient Market Hypothesis?

Now here’s what I’ve been reading this week:


This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

The Compound Media, Inc., an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here:

Please see disclosures here.