Ben Graham & Bull Market Brains – A wealth of common sense

Bear markets make you feel dumber than you really are.

It’s almost impossible to avoid feeling like a know-it-all when things are up, and a know-nothing when things are down.

That’s human nature.

Benjamin Graham started his investment partnership in the Roaring Twenties with $400,000 in client money and his own capital. In just three years, he turned $400,000 into $2.5 million. Much of it was Graham’s own money, from a combination of savings and the management fees he earned.

This magical feat happened to coincide with a stock market collapse.

Unfortunately, like most people, Graham did not see the Great Depression coming. He repeatedly tried to reach the bottom, with disastrous results.

Michael wrote about what happened in Big mistakes:

In 1930, thinking the worst was over, Graham went all in and then some. He used margin to take advantage of what he thought would be great returns. But the worst wasn’t over yet, and when the Dow Jones collapsed, Graham had his worst year ever, losing 50%. “He was personally wiped out in the crash. After dodging the 1929 catastrophe, he was lured back into the market before the final bottom.”

By 1932, the $2.5 million had dwindled to just $375,000.

In his memoirs Graham wrote about how his early successes influenced his mentality before the disaster:

At thirty-one, I was convinced that I knew everything—or at least knew everything I needed to know about making money in stocks and bonds—that I had Wall Street on my tail, that my future was as limitless as my ambitions, that I was destined to enjoy great wealth and all the material pleasures that wealth had to offer. I thought about owning a big yacht, a villa in Newport, racehorses. I was too young to realize that I had developed a serious case of pride.

The good news is that Graham was able to turn the tide. He did not receive a salary until all his investors were healed. Despite his setbacks during the Great Depression, his long-term track record was impressive, while his impact on investor education continues today.

One of my favorite investment books of all time is What I Learned Losing a Million Dollars by Brendan Moynihan.

Moynihan tells the story of Jim Paul, a country boy from Kentucky who went from dirt poor to millionaire trader on the Chicago Mercantile Exchange in just a few years.

This is how Moynihan describes the story in the introduction:

One of the premise of this book is that the rise causes the fall; winning causes losing. You can’t really be prepared for disaster without it being preceded by success.

It is extremely difficult to understand these dynamics as a young person who has experienced some level of success in the markets. Moynihan explains:

If you start from scratch and achieve a series of successes, you prepare yourself for the coming failure, because the successes lead to a variety of psychological distortions. This is especially true if you unknowingly broke the rules of the game and still won. Once that happens to you, you think you’re somehow special and exempt from following the rules.

There are a lot of of people who created a lot of of money in this bull market.

So many investors have made life-changing amounts of money. This is something wonderful.

But it’s important that you don’t let success in the markets go to your head. This cycle will not last forever. Making money won’t always be that easy.

The market will make you feel stupid again at some point… even if it isn’t true.

Further reading:
The curse of the young millionaire