Successful investors are stoics – Part 1
What mindset underlies successful investment? How does an investor worthy of the name cope emotionally with sudden and sharp falls, as well as extended contractions, of individual stocks’ prices and market indexes’ levels? How does she prevent bull markets from inflating her ego and corroding her discipline? The answer to these questions is fundamental and (to many) counter-intuitive and even bewildering: successful investment is primarily a matter of character and only secondarily of intelligence. Philosophically, successful investors are – at least to some extent and often without realising it – Stoics (as opposed to stoical).
Warren Buffett agrees. In his Preface to the 1973 and subsequent editions of Benjamin Graham’s classic, The Intelligent Investor, he wrote:
To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework. This book precisely and clearly prescribes the proper framework. You must supply the emotional discipline [italics added].
So did Benjamin Graham. In an interview in the early 1970s (“An Hour with Mr Graham,” reprinted in Janet Lowe, The Rediscovered Benjamin Graham: Selected Writings of the Wall Street Legend, John Wiley & Sons, 1999), he stated:
There are two requirements for success in Wall Street. One, you have to think correctly; and secondly, you have to think independently … The main point is to have the right general principles and the character to stick to them …
Perhaps because neither The Intelligent Investor nor Security Analysis used the term, and also because these days few people would properly understand it if they had, few people recognise the considerable extent to which Stoicism influenced Graham – and how much successful investment presupposes Stoicism. This ancient philosophy mitigates the influence of passion upon thought and action. (Stoics’ definition of “passion,” it’s important to add and as we’ll see, differs greatly from the contemporary one.) Stoics possess the emotional self-control that underpins reasonable actions – including responses to unexpected developments. By embracing reason and reducing vices’ scope to overwhelm it, a Stoical approach helps the investor to think and act sensibly – and thus successfully. “Individuals who cannot master their emotions,” goes one insight commonly attributed to Graham, “are ill-suited to profit from the investment process.”
What Is Stoicism?
These days, “stoical” typically means indifferent to “bad” emotions (such as anger, envy or guilt) or events (like the death of a family member) as well as “good” actions (for example, generosity, forgiveness or repentance) or milestones (the birth of a child, etc.). The stoic allegedly represses all feelings. This modern usage, to which I’ll refer with a lower-case “s,” first appeared in the late-16th century. The term’s ancient usage (which I’ll denote with an upper-case “S”) is quite different.
Stoicism is a school of Hellenistic philosophy. Although its pedigree is Greek, we must view it through Roman lenses. (No complete work survives from its first two phases. Moreover, Romans wrote the only texts that survive from its third phase.) Zeno of Citium (now Larnaka) in Cyprus founded Stoicism. In Athens in the third century BC, Zeno taught philosophy at the Stoa Poikile (“painted colonnade” or “painted porch”). Three propositions encapsulate its ethics:
- errors of judgment produce destructive emotions, and these emotions beget further errors of judgment;
- a sage (i.e., person of “moral and intellectual perfection”) neither commits such errors nor suffers such adverse emotional consequences; accordingly,
- nobody can match but everybody can and should emulate the sage.
Stoicism isn’t an abstract system of idle speculation: it’s a practical guide to productive action. From the start, it was popular in Athens; later, it spread across ancient Greece; eventually, it became the foremost philosophy of the educated élite throughout the Hellenistic world and the Roman Empire. Marcus Aurelius (121-180, Emperor 161-180) was perhaps its most influential and certainly its most prominent adherent.
Stoics promote a life of harmony with one’s true self, whom the individual can to some extent know; this is because such a life is in harmony with logos over which one might partly understand but certainly cannot completely control. As Marcus Aurelius expressed it,
If you work at that which is before you, following right reason seriously, vigorously, calmly, without allowing anything else to distract you, but keeping your divine part pure … ; if you hold to this, expecting nothing, but satisfied to live now according to nature, speaking heroic truth in every word that you utter, you will live [contentedly]. And there is no man able to prevent this.
Ben Graham agreed. “Have the courage of your knowledge and experience,” he urged in The Intelligent Investor:
If you have formed a conclusion from the facts and you know your [reasoning] is sound, act on it – even though others may hesitate or differ. (You are neither night nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.) Similarly, in the world of [investment], courage becomes the supreme virtue after adequate knowledge and a tested judgment are at hand.
Sounds Great, But How?
Whenever some internal thought or external event occurs – which is almost constantly – Stoics ask themselves: “is it within or beyond my control?” They readily concede only sometimes can you influence what does and doesn’t happen to you. They hasten to add that anybody can usually, at least to some extent, influence how she reacts to life’s real and imagined triumphs and vicissitudes. Epictetus is more forthright: he emphatically rejects the contention (as William Ernest Henley’s poem, “Invictus,” expressed it) that we are masters of our fates and captains of our souls. Instead, we are merely actors in a drama that others – namely the Fates – have written.
Yet Stoics are hardly fatalistic. Regardless of his role in this drama, and whether they’re expected or unforeseen, the sage determines his reactions to events. “Man is disturbed not by things,” said Epictetus, “but by the views he takes of them. If, therefore, any be unhappy, let him remember that he is unhappy by reason of himself alone.” Marcus Aurelius added: “Get rid of the judgment, get rid of the ‘I am hurt,’ and you are rid of the hurt itself.” Epictetus concluded: “there is only one way to [joy] and that is to cease worrying about things which are beyond the power of our will.” Jim Collins and Morten Hansen grasp this idea:
Clear-eyed and stoic, [investors] accept, without complaint, that they face forces beyond their control, that they cannot accurately predict events, and that nothing is certain; yet they utterly reject the idea that luck, chaos, or any other external factor will determine whether they succeed or fail (Great by Choice: Uncertainty, Chaos and Luck – Why Some Thrive Despite Them All, HarperBusiness, 2011, p. 36).
Epictetus’s Handbook, also known as the Enchiridion, begins “Some things are up to us and some things are not up to us.” From an appreciation of this obvious truth’s implications springs the state of mind – the calm, equanimity and self-control – which Stoics seek: why let those things which are beyond your control anger or worry you? Why try to persuade people whose acts and opinions you cannot change? As Marcus tartly concluded, “Nothing is worth doing pointlessly.” Instead, concentrate your limited time and resources upon those things over which you exert influence.
Don’t fret about the countless things that always exceed your reach; instead, concentrate upon that handful of matters that sometimes lie partly within your grasp. If you busy yourself influencing the few things you can, then the countless things you cannot control will recede from your thoughts – and thus neither upset nor worry you.
Stoics counsel, in effect, that you abandon your quixotic, egotistical, exhausting and ultimately misguided and perhaps idiotic quests to change the world – which are doomed to fail because others’ intentions and deeds are beyond your control. Instead, reform and improve yourself: if others did likewise, then the world, too, might be a better place.
These days, many people passionately proclaim that they intend to “make a difference.” Very few, however, humbly volunteer (figuratively or literally) to do the dishes. Yet it’s the countless, modest and repeated acts by local platoons that truly change society for the better – and one-size-must-fit-all interventions by arrogant governments invariably wreak considerable harm (not least by exterminating individual and local initiative).
The wise man humbly recognises that he cannot affect – never mind change – countless things. Indeed, Stoics imply, the frustration of the average man in the street that he can’t or doesn’t always get what he wants, that others don’t or won’t do what he wants and that he can’t impose his desires upon everybody else, is simply disguised hubris that his thoughts somehow can or should become reality. Particularly noteworthy in this context is the obvious and unalterable reality that all things in this world are impermanent. “All things human,” wrote Lucius Annaeus Seneca, (a Roman philosopher, statesman and orator also known as Seneca the Younger) in To Marcia, “are short-lived and perishable.” Marcus Aurelius added that “the flux and change” in the world is neither accidental nor ephemeral, but is an essential and permanent part of Nature.
This insight has a vital application. At the Global Financial Crisis erupted, Jason Zweig (“Investors Dealing with a Loss of Control,” The Wall Street Journal, 7 October 2008) wrote:
As an investor, … it’s absolutely vital to separate what you can truly control from what is beyond your control. The only thing you can know for sure is that [in J.P. Morgan’s words, “prices will fluctuate”] You cannot control whether or not the market will continue to trash stocks, but you can control how you respond.
“In short,” said Zweig in his “Commentary on the Introduction” of the 2006 edition of The Intelligent Investor,
if you’ve failed at investing this far, it’s not because you’re stupid. It’s because, like Sir Isaac Newton, you haven’t developed the emotional discipline that successful investing requires. In Chapter 8, Graham describes how to enhance your intelligence by harnessing your emotions and refusing to stoop to the market’s irrationality. There you can master his lesson that being an intelligent investor is more a matter of “character” than of “brain.”
This is the first, condensed part of a two-part series (the attached pdf contains the extended version). Click FOLLOW on my profile (if you haven’t already) for notification when the second part appears.
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After concluding an academic career, Chris founded Leithner & Co. in 1999. He is also the author of The Bourgeois Manifesto: The Robinson Crusoe Ethic versus the Distemper of Our Times (2017); The Evil Princes of Martin Place: The Reserve Bank of...