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The investor and his advisers

Graham's test for whose advice to trust, what good advisers actually do, and Zweig's "trust, then verify".

FinanceGraham ch. 10About 4 min: 2 reading, 2 practiceUpdated

General education, not financial advice.

After this lesson you can
  • State Graham's basic rule for relying on advice
  • Describe what Graham said well-established advisers do and don't promise
  • List the situations in which Zweig thinks help is worth having, and how to check an adviser
The Intelligent Investor: Benjamin Graham's ideas: lesson 11 of 24
  1. Graham ch. 1
  2. Investment versus speculation 4 min
  3. Graham ch. 2
  4. Inflation and the investor 4 min
  5. Graham ch. 3
  6. A century of market history 5 min
  7. Graham ch. 4
  8. The defensive investor's portfolio 4 min
  9. Graham ch. 5
  10. Defensive investors and stocks 4 min
  11. Graham ch. 6
  12. What the enterprising investor avoids 4 min
  13. Graham ch. 7
  14. What the enterprising investor does 5 min
  15. Graham ch. 8
  16. Mr. Market 5 min
  17. Living with fluctuations 5 min
  18. Graham ch. 9
  19. Investing in funds 5 min
  20. Graham ch. 10
  21. The investor and his advisers 4 min
  22. Graham ch. 11
  23. Security analysis for the lay investor 4 min
  24. Graham ch. 12
  25. Per-share earnings and their traps 4 min
  26. Graham ch. 13
  27. Comparing four companies 4 min
  28. Graham ch. 14
  29. The defensive investor's screen 4 min
  30. Graham ch. 15
  31. The enterprising investor's screen 7 min
  32. Graham ch. 16
  33. Convertibles and warrants 6 min
  34. Graham ch. 17
  35. Four extreme case histories 7 min
  36. Graham ch. 18
  37. Eight pairs of companies 7 min
  38. Graham ch. 19
  39. Shareholders, managements and dividends 5 min
  40. Graham ch. 20
  41. Margin of safety (1): the idea 5 min
  42. Margin of safety (2): in practice 7 min
  43. Graham appendix 1
  44. The superinvestors of Graham-and-Doddsville 6 min
  45. Graham postscript
  46. Graham today 7 min

Try first

You haven't learned this yet, so guess. Guessing before you read helps the explanation stick. Nothing here is scored.

Pairs with Graham, The Intelligent Investor, revised edition with commentary by Jason Zweig (HarperBusiness, 2003), chapter 10, "The Investor and His Advisers"

What it is

Graham notes something odd about investment advice: in most businesses you ask experts for help, but you don't expect them to tell you how to make a profit. In investing, people do.

His basic rule. If you rely mainly on others' advice, then either:

  • you and your advisers stick strictly to standard, conservative investments, or
  • you know the person directing your money unusually well and favourably.

You can judge less conventional suggestions only once you know enough to judge them yourself, and at that point you've become an enterprising investor.

What good advisers do. Graham describes the well-established, fee-charging investment counsel firms of his day as modest in their promises: careful, conservative and competent rather than brilliant. Perhaps their chief value, he says, is shielding clients from costly mistakes. That is as much as a defensive investor has the right to expect.

Quick check

Tap an answer to check it.

  1. According to Graham, what is the chief value of a good investment adviser?

    Show answer

    Shielding clients from costly mistakes. Careful, conservative and competent; protection against mistakes.

Why it matters

Advice can help, but Graham questions whether anyone can reliably deliver more than an average return on request. Graham's rule keeps you from being sold unconventional ideas you can't judge.

Zweig lists signs that help really is worth having: big losses (worse than the market's), budgets that don't add up, chaotic portfolios (many holdings that all move together), and major life changes, such as becoming self-employed or helping ageing parents.

Worked example

Trust, then verify (Zweig, borrowing Ronald Reagan's phrase), plus his questions for an interview. Before hiring an adviser:

  1. Ask people you trust for a referral.
  2. Search the adviser's name and firm for complaints, fines or disciplinary action.
  3. Check the adviser's record with the relevant official regulator.
  4. Ask how they are paid, and what they would recommend for someone like you.

None of this guarantees a good adviser, but it filters out many bad ones. (In the U.S., the SEC's Investor.gov has a tool to look up an investment professional's background.)

Common mistake

Expecting an adviser to deliver above-average returns. If you demand more than an average return, or an adviser promises it, then, as Graham puts it, the question arises whether more is being asked or promised than is likely to be delivered.

Key terms

investment counsel
a professional adviser paid a fee to manage or advise on investments
due diligence
checking someone's background before trusting them
conflict of interest
when an adviser's pay depends on what they recommend
defensive investor
Graham: should stick to standard, conservative investments when relying on advice

Practise the key terms

Tap a card to turn it over. 4 cards.

FrontBack
investment counsela professional adviser paid a fee to manage or advise on investments
due diligencechecking someone's background before trusting them
conflict of interestwhen an adviser's pay depends on what they recommend
defensive investorGraham: should stick to standard, conservative investments when relying on advice

Practice

Sort it

In Zweig's list, a reason that help may be worth having?

  1. Your portfolio lost far more than the market

    Show answer

    A good reason to seek help. Big losses.

  2. You can never save on a regular schedule

    Show answer

    A good reason to seek help. A busted budget.

  3. You want someone to promise you'll beat the market

    Show answer

    Not one of his reasons. No adviser can reliably promise that.

  4. You've become self-employed and need a retirement plan

    Show answer

    A good reason to seek help. A major change.

  5. All 20 of your holdings rise and fall together

    Show answer

    A good reason to seek help. A chaotic, undiversified portfolio.

Quick quiz

Tap an answer to check it.

  1. Graham's rule for an investor who relies on advice:

    Show answer

    Stick to standard, conservative investments, unless you know the adviser unusually well. You can't judge unconventional ideas without the knowledge to do it.

In short

  • Relying on advice? Stick to conservative investments, or know your adviser very well.
  • Good advisers are careful, conservative and competent; their chief value, Graham suggests, is protecting you from mistakes.
  • Zweig: help is worth having after big losses, with budget trouble, chaotic portfolios or major life changes.
  • Trust, then verify: check an adviser's background before handing over money.

Mastery check

Answer without looking back. Score 80% or more and the lesson is marked done. Your result is kept only in this browser.

Check yourself

Answer in your head first, then open the answer. Nothing is saved.

  1. Why does Graham find investment advice unusual compared with other business advice?

    Show answer

    People expect investment advisers to tell them how to make a profit, which ordinary business advisers aren't expected to do.

  2. Name two of Zweig's signs that you might need help.

    Show answer

    Any two of: big losses, a budget out of control, a chaotic portfolio, a major life change.

  3. What does "trust, then verify" mean for choosing an adviser?

    Show answer

    Start from a trusted referral, then check the adviser's record, complaints and pay before relying on them.

Further reading

  • Benjamin Graham, The Intelligent Investor, revised edition with commentary by Jason Zweig (HarperBusiness, 2003), chapter 10.
  • On this site: Paying for advice.
  • Investor.gov, the U.S. SEC's investor site, including a search for an investment professional's background (a U.S. example).