The Smart Investor
Imagine: an investment banker comes to your door hawking a growthy, private, low-cost, fintech startup. An insurance venture!
You tell her "No thanks. I don't really like insurance companies," and try to get back to grading papers or reading classic literature or whatever hobby.
"It's a can't miss opportunity!" she pushes.
"I heard everyone else on the Street turned it down already?" you say.
"OK. OK. Maybe that's true. But it’s a big opportunity! It would take about 25% of your money to get it across the finish line!" she replies.
"Well, I like to diversify. I really only make investments of, maybe, 5% or so of my money at a time," you retort, moving to close the door and get back to your books.
"But, you would own a majority of the company and would be Chairman of the Board!" she continues.
"I don't usually even like to talk to management of my investments, much less run them," you say.
"So, can I count you in?" she closes.
You sigh, "it's financial company, which I don't like. Everyone else turned it down. I would have to invest 25% of my money. I'd have to run the thing…you sonofabitch, I'm in!"
Was this an intelligent investment?
Book Value
Ben Graham wrote the book on investing: The Intelligent Investor. It's a classic of finance filled with simple rules like:
invest in companies (not tickers),
diversify,
invest with a margin of safety,
emotions will cloud your judgement.
He wrote for a broad audience. Much is still applicable today.
Writer Morgan Housel makes a distinction between intelligence and smarts. His gist is that "intelligence" covers things that show up in school: test scores, reading comprehension, etc. Like Graham's Intelligent Investor, “intelligence” is rational, thoughtful, calculating. Smarts, on the other hand, is more about understanding people — the people that actually operate out in the world. They're sometimes messy, erratic, full of emotion, complex.
Housel made this point to argue that one of the traits of great investors is to keep their investors in on the process: explaining what they do and why and in a way that is actually accessible (life goals for LCM). Smarts — having the emotional chops to understand human behavior and the sometimes chaotic outcomes of that complex behavior — also applies to the investing process.
Graham has this covered too. The Intelligent Investor uses cold math to make decisions, sure, but Ben also encourages the stock market hero to be “patient,” “disciplined,” to “harness emotions,” and “think for yourself.”
Smarts are central for him — in both directions: keeping you from the poor house and in making brave investment decisions about the future.
Between the Lines
Graham followed his own cold, calculating advice most of the time, as has his protégé, Buffett, and several generations of successful investors, but even Ben ended up making "smart" investments when the opportunity was right. He adapted to the chances in front of him.
In 1948 he invested in the growthy private insurance company, GEICO. It made up 25% of his portfolio from the jump. It broke the rules he laid out in The Intelligent Investor. It also made him more money than all his other investments combined. It was a smart investment.
Graham didn't abandon all his Intelligent Investor principles, though. He purchased GEICO at a reasonable price for an insurance company — he could shutter the business and sell the pieces for more than he paid for it. The “smart” part mixed two human ingredients:
Ben recognized that insurance companies were out of favor, keying on the opportunity from the poor judgement of others, and
He adapted to a situation outside his usual book of business — a private, fast-growing insurance company where he would be directly involved and where he would park a quarter of his portfolio.
Like Graham, you shouldn’t outsource critical thinking as an investor by identifying as a "value investor" or a "growth investor." Many investors today delegate thinking to these and other cults like "crypto" or more benign ones like "energy," "tech" or some other silo in an effort to mimic intelligence.
The trick is to balance intelligence and smarts in a portfolio. Some investments are all smarts. Some investments take more intelligence. Most are some combination of the two. A portfolio should balance them somehow, but exactly how will vary one situation to the next.