What Does the Spoon in the Matrix Movie Have To Do With Value Investing?
Part I - The Early Cracks
Remember the wise observation made by James Grant, an American writer who has a knack for blending history and finance:
Progress is cumulative in science and engineering, but cyclical in finance.
Guess what? We couldn’t agree more! Right now it feels like we are in a downcycle when it comes to the public’s understanding of finance.
How did we end up here? Well, we believe the culprit is the lack of consensus on the definition of investing. If only we could all get on the same page! Fear not, though, we are on a mission to build that consensus, and we’ve set our sights on an ambitious target date of 2027.
Now, you might wonder, why is there such a lack of consensus in the first place? And how did it get worse over time? Did Ben Graham, the GOAT in finance, not educate us enough?
Well, Graham actually did a stellar job, and that’s where the conundrum lies.
Yesterday, we dropped three clues as to what the turning point might have been. So now, let’s add some cinematic flavor with one of our favorite movie scenes:
After you’ve experienced this memorable scene, we will then spill the beans on what we believe the turning point was that led to this financial conundrum.
Annnnnnnnd … drumroll please! The Oscar goes to…
“Value investing”
But wait, “How is that a problem?” you might say. “Doesn’t that beautifully capture what Graham was saying?”
Graham’s work was undoubtedly excellent, and one finance practitioner pointed something out quite intriguing in this article titled, Benjamin Graham in Perspective (PDF):
Ironically, the fading away of the old investment terminology may very well be one of Graham’s own legacies: his endeavor to more clearly define investment has helped to foster the belief that mere ownership of a few shares of stock makes one an investor—even when they were acquired as a speculation. (emphasis original)
Now, Graham was very clear that not every purchase in the stock market is an investment, so we believe that this is taking it a tad too far. Yes, we’ve got people characterizing every purchase in the stock market as an investment and every trader as an investor, but that's more to do with the whole financial ecosystem and the incentives that exist in that ecosystem than what Graham had intended.
However, the author of the aforementioned article, perhaps without realizing it, is onto something. Graham did have a habit of throwing in some unnecessary qualifiers now and then. Let’s take a look at a couple of examples. In the last chapter of The Intelligent Investor, Graham says:
Confronted with a like challenge to distill the secret of sound investment into three words, we venture the motto, MARGIN OF SAFETY.
See that “sound” there? It’s sort of unnecessary, right? If it’s investing, it’s already sound! Implying there is unsound investment when there’s no margin of safety doesn’t make sense. That is not investing to begin with, and Graham would agree.
Another example, the book’s main title: The Intelligent Investor.
If there's an intelligent investor, does that mean there's an unintelligent investor too? Who'd that be? If someone's speculating, they're not investing. Speculation may or may not be intelligent, but it's not investing. On the other hand, if they're truly investing, it's inherently intelligent!
Sure, if you read Graham’s work, even just a few chapters, you would see that his positions are crystal clear. No one can credibly use these unnecessary qualifiers against him; a holistic look would invalidate an anti-Graham stance instantly. Yet, these rare missteps may have caused some tiny cracks in finance's foundation, enough for them to grow into fault lines. And, what happens when you have fault lines? Eventually, the energy is released and they lead to a massive financial earthquake, just like the .com bubble.
But wait, the turning point was not that. The real confusion began with none other than Graham’s most famous disciple. The investor extraordinaire who arguably understood him more than anybody else. The greatest investor of the 20th century. The man who actually wrote the foreword to Ben Graham’s book, The Intelligent Investor. The man who saw right through Bitcoin and called it “rat poison squared.”
Believe it or not, the real confusion began with none other than the Oracle of Omaha himself, Warren Buffett.
