The Intelligent Investor: The Investor and His Advisers

intelligentThis is the eleventh in a weekly series of articles providing a chapter-by-chapter in-depth “book club” reading of Benjamin Graham’s investing classic The Intelligent Investor. Warren Buffett describes this book: “I read the first edition of this book early in 1950, when I was nineteen. I thought then that it was by far the best book about investing ever written. I still think it is.” I’m reading from the 2003 HarperBusiness Essentials paperback edition. This entry covers the tenth chapter, which is on pages 257 to 271, and the Jason Zweig commentary, on pages 272 to 279.

I found it very refreshing that in this chapter, Graham didn’t just focus on professional investment advisors when using the term “advisor.” Instead, under this umbrella, Graham included relatives, friends, local bankers, brokerage firms and other investment houses, financial service providers of all stripes, and professional finance advisors.

Why is this distinction important? We don’t just get our financial advice from “financial advisors.”

Take this blog (and countless others like it). We’re not financial advisors. I tend to think of myself as closer to the definition of “friend” than of financial advisor. I’m simply out here sharing my own reflections and experiences, letting people know where I succeed and where I fail.

Take the talking heads on CNBC. Those people may be financial advisors, but they’re speaking in a role where they’re not actually providing financial advice. They’re actually just being entertainers. Have you ever seen the disclaimer that precedes or follows any segment with Jim Cramer?

Yet there’s all this advice out there, and we do incorporate it into our knowledge, whether consciously and directly or not. The question is how can we know what knowledge is actually worthwhile and what isn’t? What advice is worth paying for and what isn’t? That’s really what Graham is seeking here.

Chapter 10 – The Investor and His Advisers
Even though this chapter is fairly long, Graham’s principles for how to deal with personal finance advisors – and personal finance advice – are pretty simple.

Be wary of all advice. You should never absolutely trust anyone with your money. Couple their recommendations with your own research and have an idea of what you want. Don’t just follow blindly with whatever an advisor says.

Avoid people who claim absurd returns. If returns seem to excessively beat the market, stay away. Almost always, it’s either a scam or it’s a person playing a very short term game that’s likely not to work next year. In either case, you don’t need their advice.

Stick with certified advisors or advisors from large, reputable houses. You’ll have to pay for both of these, of course, but the advice here is pretty good if you’re just seeking what a well-informed and cautious investor might be doing.

Truly defensive investors may not need advice at all. Defensive investors stick with high-grade bonds and common stocks of large, stable corporations and are likely to want to know exactly what they’re buying. In that case, you should be doing the research yourself – advisors might only be helpful in special situations (like a giant windfall, for example).

Make your advisors prove themselves to you. Just because someone has some impressive accomplishments in their past doesn’t mean that they’re guaranteed to be a great advisor. Be limiting in your trust until they show you repeatedly that they’re providing great advice for you.

Commentary on Chapter 10
Zweig puts more of a modern spin on Graham’s advice in the commentary. He seems to be even less inclined to recommend financial advisors than Graham is, arguing that one should only hit a financial advisor if you’ve tried things yourself and are experiencing waters that are far more turbulent than you’d like.

Zweig’s mantra? Research, research, research. Find out everything you can about your potential advisor before you even begin taking advice. Google them, find out about any complaints (using, and ask around about them.

When you decide to give one a shot, don’t just dive into their advice. Zweig offers two long pages of questions you might want to ask a new advisor in order to get to know where they stand on things.

The biggest flag of a good advisor (from Zweig’s perspective) is interest in your specific situation. Are they asking about your budget? Your goals? Your frustrations? Your psychological makeup (asking about how you handle conflicts)? A good advisor will want to know all of these. If they’re not asking, they don’t care, and that’s dangerous.

Next Friday, we’ll take a look at Chapter 11: Security Analysis for the Lay Investor: General Approach.

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