Beginning my Apprenticeship

If sound investing as simple as studying a book while exercising a modicum of prudence, patience, and diligence, why aren't we all rich?

This is the question I seek to answer.  Welcome to my investing blog, Graham's Apprentice.

This blog is best described as a real-time, real-money experiential study in Benjamin Graham's value investing philosophy.  Using real dollars, I will create and manage a small portfolio of stocks.  These stocks will be selected strictly according to the philosophy and methodologies endorsed by Mr. Graham's famous book, The Intelligent Investor.  I may use other value investing books as references as well as whatever skills and education I have already accumulated.  Other than that, however, I consider myself "regular folk": I have only a relatively modest sum of investable funds and a full-time job as well as other commitments and pursuits.  Like you, dear reader, I cannot stare at a Bloomberg terminal all day.  Nor can I research stocks ten hours per day.  Nor do I have enough money that could singlehandedly swing a stock price.

That said, I will perform all the diligence and exercise, to the best of my ability, the sound judgment prescribed by The Intelligent Investor.  Once I've built the portfolio, I will publish my selections and track them meticulously.  All of this work will be made available to you, dear reader, completely free with no strings attached.

The Intelligent Investor, written by famed investment adviser Benjamin Graham, has been in print since 1949.  To this day, it is heralded as a "stock market bible" by nearly everyone who has read it, including Warren Buffet.  Skim the reviews on Amazon.com, and it difficult to find anybody who has something negative to say about Mr. Graham's work.  Warren Buffet himself has expounded several times over that Graham's work and philosophy has guided his (extraordinarily successful) career for over 40 years.

And yet, when I perform a simple Google search for a regular guy who has followed the acclaimed wisdom of The Intelligent Investor and become financially successful because of it, I come up empty handed.

Thus I return to my original question: if one could just study and embrace the teachings of a book that is so widely considered the most sound approach to investing for the long-term, why can't I find empirical evidence that gives credence to it?  Sure, there are people out there such as Warren Buffet and Peter Lynch who have achieved great success with the philosophy of The Intelligent Investor, but where is everyone else?  The book has been in print for over 60 years; surely others have adopted the philosophy and achieved success?

Logic dictates that it must be some combination of the following:

1. Value investing doesn't work.
• Burton Malkiel posits that consistently beating the market is an impossible endeavor and that investors should simply invest for the long-term in index funds rather than actively manage a portfolio of stocks and bonds.  This is because markets behave as a "random walk", thus making it impossible to predict outcomes with any regularity.  Furthermore, actively managed funds and portfolios incur overhead expenses and trading fees that detract from overall returns that make it even less likely to generate market-beating strategies.
• Nassim Taleb echoes a similar ideology, only with a more pessimistic twist.  He posits that participating in the stock market is a giant Monte Carlo simulation.  Statistically, there will always be a spread of winners and losers and, even over relatively long periods of time, it is a statistical inevitability that we will observe outliers who have been very lucky to have beaten the market repeatedly.  In other words, guys like Warren Buffet are not the product of hard work and prudent investment management but rather a natural, statistical outcome that could have just as easily been somebody else (probabilistically speaking).
2. Value investing only works for certain people.
• Warren Buffet takes enormous stakes in his investments.  Sometimes his holding firm Berkshire Hathaway acquires entire firms if he feels the price is right.  These actions make Mr. Buffet privy to information and data that aren't available to the general public (i.e. you and me).  While not legally classified as insider trading, his buying power gives him an inside track that allows him to capture value where small players cannot.
• The same can be said of successful investment managers such as Peter Lynch.  Mr. Lynch will physically meet with companies' management teams as part of his due diligence.  Regular folks have neither the time nor the resources to conduct their research with this sort of precision and granularity.  If the philosophy only works for those who dedicate their entire working lives to it, then for regular folks The Intelligent Investor can only best serve as an instructive resource but never as a key to building wealth through investing.
3. Value investing is a lot of work and hard work is almost never popular or desirable.
• People always want a magic bullet that grants great reward without having to put in the effort.  From diet fads to magic formula investing, the great American Dream seems to have evolved into an attitude in which we seek to achieve the greatest rewards with the least amount of effort.  Is it possible that so few people try this because true value investing requires good old fashioned hard work?
4. Value investing works just fine, but the amount of effort it requires does not sufficiently compensate most investors.
• A hedge fund manager manages hundreds of millions, sometimes billions, of dollars.  Beating the market by even 1% means a marginal payoff in the millions of dollars.  The vast majority of regular folks of course do not have millions of dollars to manage.  It could be only a few hundred, perhaps a few thousand, and the luckiest of us might have a few hundred thousand.  Even with $100,000 to invest, however, beating the market by, say, 5% results in a marginal gross profit of $5,000.  If diligent value investing requires 500 hours of effort, is it worth it?  My guess is that for most people, it probably is not.

The above list's final reason is my hypothesis.  Given my current understanding of value investing, I believe it to be a sound investment strategy for anyone who can devote the effort and maintain patience.  However, I suspect that it will not generate attractive enough returns to justify the amount of work required.

Nothing can be known, however, until I try.  My curiosity has gotten the best of me and in spite of the long hours and hard slogging ahead of me, I am determined to complete my apprenticeship under Benjamin Graham's guidance.