I [Buffett] don’t have a problem with guilt about money. The way I see it is that my money represents an enormous number of claim cheques on society. It’s like I have these little pieces of paper that I can turn into consumption. If I wanted to, I could hire 10,000 people to do nothing but paint my picture every day for the rest of my life. And the GDP would go up. But the utility of the product would be zilch, and I would be keeping those 10,000 people from doing AIDS research, or teaching, or nursing. I don’t do that though. I don’t use very many of those claim cheques. There’s nothing material I want very much. And I’m going to give virtually all of those claim cheques to charity when my wife and I die (cited in Janet Lowe, Warren Buffett Speaks: The Wit and Wisdom of the World’s Greatest Investor, John Wiley & Sons, 1997, pp. 165-166).

Buffett’s children will inherit only a miniscule proportion of his immense wealth. He once commented, “I want to give my kids just enough so that they would feel that they could do anything, but not so much that they would feel like doing nothing” (Charlie Rose, “An Exclusive Hour with Warren Buffett and Bill and Melinda Gates,” 27 June 2006). In June 2006, Buffett pledged to donate the vast bulk of his enormous fortune to charity. Specifically, he would eventually donate 83% of it, then worth approximately US$30.7 billion (today it’s closer to ca. US$70 billion), making it one of the largest charitable donations in history, to the Bill & Melinda Gates Foundation. Each July since July 2006, the BMG Foundation has received 5% of Buffett’s total pledge. (Significantly, Buffett’s pledge is conditional: beginning in 2009, each year the Foundation must contribute to various charitable purposes an amount that’s equal or greater than (1) the value of the previous year’s gift from Buffett and (2) 5% of the Foundation’s net assets.(3)

Benjamin Graham Was a Stoic; Value Investor Have Stoic Attributes

Benjamin Grossbaum came into this life in 1894 as a Briton; Benjamin Graham left it in 1977 as an American. He was born into Judaism but grew into Stoicism. In his autobiography (Benjamin Graham: The Memoirs of the Dean of Wall Street, McGraw-Hill, 1996), he recalled that he “embraced stoicism [by which he meant Stoicism] as a gospel sent to him from heaven.” The main components of his “internal equipment” included a “certain aloofness” and an “unruffled serenity.” His immersion in classical literature, mathematics and philosophy – Columbia University offered him academic posts in all three fields, which he declined in order to work in Wall Street – he once remarked, helped him to view financial markets and matters “from the standpoint of eternity, rather than day-to-day.” Graham’s son said of his father: “Maybe people who go into investing are especially well-suited for it [as he was] if they have that distance or detachment.”(4)

Graham as a “Stoic Contrarian”

Graham didn’t propose that a stereotypically stoic – that is, cold and unemotional – temperament is a necessary condition of success as an investor. He did, however, imply that the investor should strive to be “inversely emotional” (the term is Jason Zweig’s rather than Graham’s; see “If You Think Worst Is Over, Take Benjamin Graham’s Advice,” The Wall Street Journal, 26 May 2009). Neither in the specific context as an investor nor in the broadest setting as a parent, partner, employer-employee, etc., can or should you stifle all of your emotions. But as an investor, Graham emphasised, you should reason – that is, neither enthuse nor panic – your way to the valuation of individual securities and overall markets.

The more you do so, the greater is the degree to which you’ll attenuate precisely those passions (in this term’s Stoic sense) that the crowd perversely regards – particularly towards the crest of a boom and the nadir of a bust – as “good.” These passions – recall our definition – include impulsive buying or selling, suspension of doubt and disbelief, unbridled optimism (during the boom) and black pessimism (during the bust), following the herd (up during the boom, down during the bust), etc. Moreover, the more you control these passions the more you’ll develop and recognise as virtues those attitudes and behaviours that the crowd typically regards as “bad.” These include prudence, independence of thought and action, doubt of authority, willingness to ignore and defy the crowd, etc.

Graham showed that the emotions and actions that the crowd mistakenly regards as desirable and profitable are actually – as Stoics understood long ago – self-destructive passions and vices; similarly, the mindset and conduct that the crowd wrong considers risky are in fact conservative. In particular, it’s typically good news when the prices of stocks – including those you own – falls; and if their prices rise, it’s generally bad news. How did Graham justify this recasting of reactions to events? “Basically,” he said in an oft-quoted but seldom appreciated passage of The Intelligent Investor,

Price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.

As a Stoic, Graham was indifferent to – but nonetheless alert to the opportunities presented by – markets’ short-term ups and downs. A sudden and sharp decrease of prices provides an opportunity to buy more stocks at cheaper prices. Under these circumstances, the chance rises that the value of what you receive exceeds the price you pay. An substantial increase of prices, on the other hand, mitigates and perhaps precludes this opportunity – and thus increases the risk that the price you pay exceeds the value you receive. “If you are shopping for common stocks,” he counseled, “choose them the way you would buy groceries, not the way you would buy perfume.”

From the 1930s to the 1970s, Graham steadfastly resisted the often volatile, usually unpredictable and always seductive mood swings of “Mr Market” – his metaphor for the attitudes and actions of the mass of speculators who erroneously regard themselves as investors. The longer and the further the prices of stocks and bonds rise, he observed, the more confident (and eventually euphoric) Mr Market tends to become. As a result, investors become overconfident, trade too much and tend to bet too heavily upon particular stocks or market sectors. Conversely, the longer and further the prices of stocks fall, the more despondent (and eventually depressed) market participants become. At both extremes of valuation they abandon reason, embrace passion – and thereby succumb to vice. Graham almost invariably regarded the crowd’s enthusiasm as a yellow caution light (and sometimes as a flashing red light); equally, he took heart from their dashed expectations and regarded their misery as a sign of hope. Hence his contrarian counsel: investors should zig when the crowd zags, and vice versa.

Graham’s Stoic ability to recast and indeed invert his emotions and reactions – that is, to become “inversely emotional” – helped him to detect when the crowd’s opinions and actions had become extreme. Late in 1971, for example, he counseled caution – just before the worst bear market in decades. At its nadir, in mid-1974, he delivered a speech entitled “Renaissance of Value” (republished in Barron’s on 23 September 1974 and in Janet Lowe’s book The Rediscovered Benjamin Graham in 1999). In that address he correctly forecast a period of “many years” during which “stock prices may languish.” Then he startled his listeners: low prices are good rather than bad news: “the true investor would be pleased, rather than discouraged, at the prospect of investing his new savings on [the] very satisfactory terms [prevailing during a bear market].” Graham’s conclusion disconcerted his audience even further: investors worthy of the name would be “enviably fortunate” to benefit from the “advantages” of a long bear market.

The investor, in short, must strive to ensure not just that his reason masters his emotions; he must also be inversely emotional. Graham successfully practiced what he preached: but can the average investor become Stoic enough to imitate Graham? In some contexts, Graham wasn’t sure; in others, he stated forthrightly that he didn’t think so. One example summarises his view. When markets are ebullient, commentators often assert – typically without reasoning or evidence – that “buy and hold is dead.”(5) In particular, a growing number assert that dollar-cost averaging is foolish.(6) Asked in 1962 if dollar-cost averaging could ensure long-term investment success, Graham wrote: “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.” However, the practitioner must “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.” He who dollar-cost averages must be (perhaps unconsciously) Stoic. But can he? “This,” Graham concluded, “I greatly doubt.”

We shouldn’t interpret this conclusion negatively. It doesn’t mean that nobody can resist the crowd’s passions. If anything, Graham is optimistic: some people can. Even better, and as Warren Buffett stressed in his Foreword to The Intelligent Investor, the adoption of Graham’s philosophy, temperament and operations doesn’t require great intelligence. Only some people can adopt Graham’s mindset and methods because just a few can be bothered to try; but if you put your mind to it, Graham implies, it’s more likely that over time you’ll invest successfully.

To become an intelligent investor, you must cultivate what Graham called “firmness of character.” By this phrase he means the Stoic fortitude and self-control that’s necessary to defy Mr Market when his moods become extreme – that is, both when stocks are unreasonably dear and when they are unduly cheap. When stocks are expensive, you must ignore the crowd’s optimistic behavior (namely its overconfidence and frenzied purchases) and either sit tight or sell; and when stocks are unreasonably cheap, ignore the crowd’s pessimism – particularly its panic-stricken sales – and either sit tight or buy. Just as Stoics resorted to reason to overcome passion, Graham emphasised the ability, through analysis, cautiously to estimate the value of individual stocks and overall markets.

Several disciplined approaches to investment, of which “buy and hold” is one, tend strongly over the long term (that is, ten years or more) to generate decent results. The difficulty is not the particular approach per se: the problem is that over the short term – that is, over periods of less than five years – investors constantly switch from approach A to B to C, and then back to B and A, etc. Since 2000, for example, a buy-and-hold approach has required that investors suffer through one mark-to-market loss of 30-50% (in 2001-2003) and a second MTM loss (in 2008-2009) of approximately 50%.

Over the very long-term (20 or more years), buy-and-hold investors have fared well – particularly when they’ve combined buying-and-holding with the astute selection of stocks. But for many, the short-term losses of the past decade have been intolerable. These losses have caused “investors” to abandon the buy and hold approach at exactly the wrong time (i.e., towards the nadir of a bear market). In John Hussman’s words (“The Road to Easy Street,” 22 July 2013),

Just as day follows night, buy-and-hold strategies reach the peak of their popularity at market tops, because those are the points where every effort in recent memory to sell or reduce risk has apparently failed. Conversely, buy-and-hold strategies are most reviled at bear market troughs, when the full weight of losses is felt. I have no argument at all with investors whose strategy adheres to a disciplined buy-and-hold, diversified across asset classes, over the full course of the market cycle. In contrast, I have great concern about investors who discover buy-and-hold at the top, and adhere to it only long enough to abandon it at the bottom. The most important part of a buy-and-hold discipline is the commitment to remain passive even as it experiences massive interim losses. Look, kid, I never said this was easy. The road to easy street runs through the sewer.

Of Ancient Banishments and Modern Bear Markets

As punishments for a variety of offences, real and supposed, Roman emperors regularly exiled some their subjects. Stoic philosophers were highly likely to suffer banishment. Of the four which I’ve cited most (Marcus Aurelius, Epictetus, Rufus Musonius and Seneca), only Marcus avoided exile – but then, an Emperor is hardly likely to banish himself! Epictetus and Seneca were exiled once and Musonius twice. Other and less prominent Stoics also endured exile; and at least two caused such offence that their rulers executed them.

Stoics weren’t particularly subversive – Emperors routinely banished and executed philosophers of all descriptions, and indeed people from most walks of life. A Stoic’s attitude towards banishment resembles Benjamin Graham’s attitude towards a real or apprehended bear market. It’s true, acknowledged Seneca in his letter To Helvia, that his exile deprived him of his friends, family, property and favour of his Emperor. And it’s true that a bear market can deprive you of wealth you mistakenly believed was yours. Equally importantly, however, exile could not deprive Seneca of his – and a bear market cannot deprive you of your – most valuable possessions: reason and virtue. If before our banishment (or if during the bull market) we are virtuous, then exile (the bear market) cannot harm us. If before our banishment we aren’t virtuous, on the other hand, then exile will deprive us of what we mistakenly regard as valuable. Only if we lack virtue, said Epictetus in his Discourses, will banishment make us miserable. Seneca added: “it is the mind that makes us rich; this goes with us into exile, and in the wildest wilderness, having found there all that the body needs for its sustenance, it itself overflows in the enjoyment of its own goods.”

In his Lectures, Musonius contends that exile – and by extension a bear market, recession, etc. – can change people for the better. Banishment usually obliges people to curtail their indulgent and luxurious living, and has thereby often improved their health. So, too, it seems, have financial bear markets and economic slumps.(7) Exile has also transformed ordinary people, such as Diogenes of Sinope, into philosophers. If it prompts him to understand the errors of his ways and to repent for his financial sins, the bear market might be just what’s required in order to transform the speculator who mistakenly thinks he’s an investor into a genuine investor. Seneca spent his time in exile reading, writing and studying. Graham participated in the bacchanalia of the late-1920s, lost heavily in 1929-1932 and spent his “exile” from fame and fortune writing Security Analysis (1934).

Graham and His Acolytes as “Stoic Optimists”

Stoics recognised that few people could become sages; similarly, Graham was pessimistic regarding everyman’s ability to master his passions. Should we therefore conclude that he was a pessimist with respect to the individual’s ability to manage his financial affairs? I don’t think so. Stoics denied that everybody could become a sage; equally clearly, they affirmed that anybody – if he (or she) put his mind to it – could become more virtuous. Similarly, although Graham in effect denied that anybody could invest as well as he (or his most famous and successful acolyte, Warren Buffett) could, he readily acknowledged that anybody – if he was willing to put his shoulder to the wheel – can invest more successfully.

“Stoic optimism” has another facet. In “Can the Dow Go Lower? I Hope So” (The Wall Street Journal, 20 November 2008) Jason Zweig described it:

Let’s get this straight, folks. I’m not an optimist or a bull, at least not the way most investors usually use those terms. I would not be a bit surprised if the stock market fell another 20% or so from here. But stocks are already on sale – and further markdowns are good news, not bad, for anyone who is not retired or about to be. Since most of us have many years of saving and investing ahead of us, it is in our best interests for the fire sale to last longer and for the discounts to get deeper. As risky assets keep getting cheaper, we get to buy them at prices low enough to take most of the risk out of the equation [italics added].

Warren Buffett has expressed similar sentiments. In Berkshire Hathaway’s Annual Report (1997), he described this inverted form of optimism:

A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves.

But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the “hamburgers” they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.(8)

Zweig continued:

If the history of the financial markets and the psychology of investing have anything to teach us, it is that present emotion and future returns are inversely correlated. Today’s feelings of pain and fear are the building blocks for tomorrow’s wealth. Eras of good feeling are terrible times to buy stocks. The corollary is that perceived risk and actual risk tend to be polar opposites.

When did your house feel like the safest investment? Just as its appraised value hit an all-time high, of course. The Dow felt safe when it was at 14,000, and it feels risky as hell now that it is clinging to the edge of 8,000 with its fingernails. That’s perceived risk: low when prices go up, and high when prices go down. You feel it in your guts and your bones. The pain of seeing every dollar you had in stocks get bashed down to 60 cents screams out to you that stocks have never been riskier. But your perception of risk is a lousy indicator of the actual presence of risk. The Dow was vastly more dangerous at 14,000 than it is around 8,000. Most of the risk of holding stocks has been wrung out of them by their fall in price. … So far as I’m concerned, those are reasons to be cheerful. I’m not a Pollyanna optimist; I guess I’m the Cassandra kind. So, if I am an optimist, it’s not because I see stocks rising any time soon. It’s because I have already seen them falling before our very eyes.

Conclusion: “This, Too, Shall Pass”

Investing simply isn’t, as Jason Zweig sagely puts it on p. 229 of The Intelligent Investor, “about beating others at their game. It’s about controlling yourself at your game.” It’s much more like golf than tennis. Hence “A disciplined stoicism, or some approximation of it, is the most effective psychological posture as an investor” (see Martin Conrad, “The Money Paradox,” Barron’s, 31 December 2011). Graham’s Stoicism, particularly with respect to the inevitable – and sometimes sharply downward – fluctuations of securities and markets, is easy to understand but difficult to practice: prepare calmly for the worst; then, whatever happens, maintain an unruffled attitude. Whether or not you approach it Stoically, your results as an investor stem primarily from your principles and processes and only secondarily from your intelligence and formal education. Investors worthy of the name, in other words, don’t “target returns” – instead, they pursue certain virtues. In particular, they seek true assumptions, valid logic and reliable evidence; and they know that actions that stem from these virtues will, over time, beget good results.

Stoics show that if you adopt a sound set of philosophical, spiritual and other principles to guide your actions, decision-making becomes relatively straightforward, calm and rational: to choose among the options available to you at a particular point in time, you identify and select the one that’s most likely to attain the goals that your philosophy emphasises. On the other hand, if you possess neither a philosophy of investment nor a belief system of life, then – particularly during panics and bear markets – emotion rather than reason will guide your thoughts and deeds, you’ll likely be unaware of your options, your choices will become fraught and will probably alter in response to each change of the wind. Under these circumstances, your results will likely exacerbate your initial difficulties. Ultimately, be it in investing or life more generally, we all pursue what – mistakenly or otherwise – we regard as truly valuable. But only some do so consciously; and only a few have carefully considered what they seek.

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* Chris Leithner grew up in Canada. He is director of Leithner & Co. Pty. Ltd., a private investment company based in Brisbane, Australia.