The following is an exert from Benjamin Graham’s “The Intelligent Investor”. If you would like a copy, compliments of Income Solutions, please e-    mail [email protected] and we will arrange a book to be sent to you. 

Can you beat the Pros at their own game?

Recognise that investing is about controlling the controllable. You can’t control whether the stocks or funds you buy will outperform the market today, next week, this month, or this year; in the short run, your returns will always be hostage to Mr. Market and his whims. But you can control:

• Your brokerage costs, by trading rarely, patiently, and cheaply
• Your ownership costs, by refusing to buy funds with excessive annual expenses
• Your risk, by deciding how much of your total assets to put at hazard in the stock market, by diversifying, and by rebalancing
• Your tax bills, by holding stocks for at least one year and, whenever possible, for at least five years, to lower your capital gains liability
• And most of all, your own behaviour.

If you listen to financial TB, or read most mark columnists, you’d think that investing is some kind of sport, or a war, or a struggle for survival in a hostile wilderness. But investing isn’t about beating the others at their game. It’s about controlling yourself at your own game. The challenge for the intelligent investor is not to find the stocks that will go up the most and down the least, but rather to prevent yourself from being your own worst enemy – from buying high just because Mr. Market says “buy!”  And from selling low just because Mr. Market says “Sell!’.

If your investment horizon is long – at least 25 to 30 years – there is only one sensible approach: Buy every month, automatically, and whenever else you can spare some money. The single best choice for this lifelong holding is a total stock-market index fund. Sell only when you need the cash.

To be an intelligent investor, you must also refuse to judge your financial success by how a bunch of total strangers are doing. You’re not one penny poorer if someone in Dubique or Dallas or Denver beats the S & P 500 if you don’t. No one’s gravestones reads “HE BEAT THE MARKET”.

I once interviewed a group of retirees in Boca Raton, one of Florida’s wealthiest retirement communities. I asked these people – mostly in their seventies – if they had beat the market over their investing lifetimes. Some said yes, some said no; most weren’t sure. Then one man said, “Who cares? All I know is, my investments earned enough for me to end up in Boca.”

Could there be a more perfect answer? After all, the whole point of investing is not to earn more money than the average. But to earn enough money to meet your own needs. The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioural discipline that are likely to get you where you want to go. In the end, what matters isn’t crossing the finish line before anybody else, but just making sure you do cross it.

Your Money and Your Brain

Why, then, do investors find Mr. Market so seductive? It turns out that our brains are hardwired to get us into investing trouble; humans are pattern-seeking animals. Psychologists have shown that if your present people with a random sequence – and tell them that it’s unpredictable – they will nevertheless insist on trying to guess what’s coming next. Likewise, we “know” that the next roll of the dice will be a seven, that a baseball player is due for a base hit, that the next winning number in the Powerball lottery will be 4-27-9-16-42-10 – and that this hot little stock is the next Microsoft.

Groundbreaking new research in neurosciences shows that our brains are designed to perceive trends even where they might not exist. After an event occurs just two or three times in a row, regions of the human brain called the anterior cingulate and nucleus accumbens automatically anticipate that it will happen again. If it does repeat, a natural chemical called dopamine is released, flooding your brain with a soft euphoria. Thus, if a stock goes up a few times in a row, you reflexively expect it to keep going – and your brain chemistry changes as the stock rises, give you a “natural high”. You effectively become addicted to your own predictions.

But when stocks drop, that financial loss fires up your amygdala – the part in the brain that processes fear and anxiety and generates the famous ”fight or flight” response that is common to all cornered animals. Just as you can’t avoid flinching if a rattlesnake slithers onto your hiking path, you can’t help feeling fearful when stock prices are plunging.

In fact, the brilliant psychologists Daniel Kahneman and Amos Tversky have shown that the pain of financial loss is more than twice as intense as the pleasure of an equivalent gain. Making $1,000 on a stock feels great – but a $1,000 loss wields an emotional wallop more than twice as powerful. Losing money is so painful that many people, terrified at the prospect of any further loss, sell out near the bottom or refuse to buy more.

Quote from earlier in the book: If you burn your tongue on a hot milk, you will begin to blow on your cool yoghurt.

That helps to explain why we fixate on the raw magnitude of a market decline and forget to put the loss in proportion. So, if a TV reporter hollers, “The market is plunging – The Dow is down 100points!” most people instinctively shudder. But, at the Dows recent level of 8,000, that’s a drop in just 1.2%. Now think how ridiculous it would sound if, on a day when its 81 degrees outside, the TV weatherman shrieked, “The temperate is plunging – it’s dropped from 81 degrees to 80 degrees!” That, too, is a 1.2% drop. When you forget to view changing market prices in percentage terms, it’s all too easy to panic over minor vibrations.