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The Myth of Wall Street and Ben Graham on The Power of a Simple and Consistent Approach

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Everyone enjoys a good story. Whether reading a book, watching a movie, or talking with friends, stories are a great way to share, learn, and connect.

 But when it comes to investing, the stories we believe—the stories told in the financial media and by Wall Street—often lead us astray.

 The entire purpose of a good story is to trigger an emotional response, but emotionally responding when it comes to money is counterproductive.Newspaper_guy.png

The Wall Street Story

The Wall Street investing culture is based on two stories. First, they sell the myth that you (each and everyone one of you) can be a wildly successful trader. All it takes is a brokerage account, some smarts, and a little hard work. Next, they sell the myth of the expert. With the right amount of knowledge you, or some expert out there, can predict the future.

However, these stories simply aren’t true. 

Ben Graham, Warren Buffett’s mentor, wrote about the myth of the successful trader way back in 1951—And it’s just as true now as it was back then. 

"It is fortunate for Wall Street as an institution that a small minority of people can trade successfully and that many others think they can. The accepted view holds that stock trading is like anything else; i.e., with intelligence and application, or with good professional guidance, profits can be realized. Our own opinion is skeptical, perhaps jaundiced. We think that, regardless of preparation and method, success in trading is either accidental and impermanent or else due to a highly uncommon talent." 

Wall Street benefits from this myth, so, of course, it's in their best interest to perpetuate it. As we’ve written before, Wall Street exists for one reason: to make money. The more you trade, the more money that flows straight into its coffers. 

The other myth Wall Street perpetuates is the myth of the expert forecaster. If only you gain access to the right person, with the right forecast, you too can know the future and profit from it! 

Here is Graham again on experts and forecasting: 

"They tend to take the market and themselves too seriously. They spend a large part of their time trying, valiantly and ineffectively, to do things they can't do well."

 What things exactly? 

"To forecast short- and long-term changes in the economy, and in the price level of common stocks, to select the most promising industry groups and individual issues--generally for the near-term future." 

So if Wall Street’s story that forecasts can lead to superior investing is false, what’s an investor to do? 

All the evidence points to having a good system and sticking with it.

A Good System: Simple and Deliberate

Just to put the following advice into perspective, Ben Graham wrote the book on security selection with the 1934 book "Security Analysis." This book, which is currently in its 6th edition, laid the groundwork for much of the security analysis industry. He recommended a process whereby a good analysis and deep fundamental investigation into individual companies could identify superior stocks and, therefore, profit.  

This was Graham’s background; he made his reputation based on security selection—one of the stories that Wall Street is still selling today. 

And yet, by the 1970’s he had the following to say about active management, or selection individual stocks: 

“in the light of the enormous amount of research now being carried on, I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost.”  

Instead of individual stock selection and trading he recommends a more simple system to building a portfolio. His approach: 

"Essentially, a highly simplified one that applies single criteria, or perhaps two criteria…that relies for its results on the performance of the portfolio as a whole--i.e., on the group results--rather than on the expectations for individual issues."

 And, on the importance of consistency: 

"Their [common stocks] investment value and average market price tend to increase irregularly but persistently over the decades…However, most of the time common stocks are subject to irrational and excessive price fluctuations in both directions, as the consequence of the ingrained tendency of most people to speculate or gamble--i.e., to give way to hope, fear and greed.

Conclusion

In summary, don’t fall for the Wall Street story. It’s a story designed to separate you from your money. 

Being a successful trader, attempting to pick the best stocks, and basing investment decisions on a prediction of the future may sound exciting, but it simply doesn’t work. 

Instead, as Ben Graham suggests, what makes you a successful investor is a having a system in place and being consistent. 

A handful of factors worth considering exists when making an investment decision. Examine them. Then realize it takes time for investing to work. Be deliberate and stick with your strategy and reap the rewards sometime in the future. 

 

If you’re an employee of Intel, fight back against the false story Wall Street is selling.  Attend our upcoming webinar “Navigating the Intel Retirement Plan.”

You’ll learn how to take control of your retirement by putting in place and Simple and Consistent process to get the most of the investment options inside the Intel retirement plans. After attending:

  • You will understand the importance of setting an allocation that is right for you
  • You will be able to discern between the actively managed and index funds offered
  • You will know how to reduce the investment costs that can stifle your gains'
  • You will know what to look for when assessing fund performance.

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Cordant, Inc. is not affiliated or associated with, or endorsed by, Intel.

Published on February 18, 2016

Isaac Presley, CFA

Isaac Presley, CFA

Isaac Presley is Director of Investments for Cordant, a wealth management firm serving current and former Intel employees. To learn more, you can read Isaac's full bio.

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