Zweig: WWGD? (What Would Graham Do?)

Writing sixty years to the day after Benjamin Graham’s classic The Intelligent Investor was published, Jason Zweig says that Graham would be cautious amid a market like this one.

“Today the market seems to be in just the kind of mood that would have worried Mr. Graham: a jittery optimism, an insecure and almost desperate need to believe that the worst is over,” writes Zweig, whose commentary accompanied the 2003 version of Graham’s famous book. “[Graham] almost invariably read the enthusiasm of others as a yellow caution light, and he took their misery as a sign of hope.” Today, with the market’s 10-year P/E ratio having risen from 13.1 to 15.5 since March — the sharpest, fastest rise in 25 years — Zweig says investors should be seeing a yellow caution light.

“Mr. Graham worked diligently to resist being swept up in the mood swings of ‘Mr. Market’ — his metaphor for the collective mind of investors, euphoric when stocks go up and miserable when they go down,” Zweig says. “His knack for inverting emotions helped him see when markets had run to extremes. In late 1945, as the market was rising 36%, he warned investors to cut back on stocks; the next year, the market fell 8%. As stocks took off in 1958-59, Mr. Graham was again pessimistic; years of jagged returns followed. In late 1971, he counseled caution, just before the worst bear market in decades hit.”

Zweig also gives Graham’s take on dollar-cost averaging, which is particularly relevant given all the buy-and-hold-is-dead talk. “Asked if dollar-cost averaging could ensure long-term success, Mr. Graham wrote in 1962: ‘Such a policy will pay off ultimately, regardless of when it is begun, provided that it is adhered to conscientiously and courageously under all intervening conditions,'” Zweig states.

But that last part is key, Zweig says, explaining that Graham said a dollar-cost-averager had to “be a different sort of person from the rest of us … not subject to the alternations of exhilaration and deep gloom that have accompanied the gyrations of the stock market for generations past. This, I greatly doubt.”

Zweig’s conclusion: “To be an intelligent investor, you must cultivate what Mr. Graham called ‘firmness of character’ — the ability to keep your own emotional counsel. Above all, that means resisting the contagion of Mr. Market’s enthusiasm when stocks are suddenly no longer cheap.”

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