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Part I showed that despite their confident assertions about future developments, prices, etc., at least some advisers and brokers actually have feet of clay. It thus outlined a paradox. In Ben Graham’s words, “if the reason people invest is to make money, then in seeking advice they are asking others to tell them how to make money. That idea has some element of naïveté … [and] it is when the investor demands more than an average return on his money, or when his adviser undertakes to do better for him, that the question arises whether more is being asked or promised than is likely to be delivered.”
In the aftermath of the mania of the late 1990s, many individual investors have learnt that the incentives of advisers and brokers and the material self-interest of investors need not coincide. This, alas, is not news. Graham’s view, expressed in The Intelligent Investor, was that “in the past Wall Street has thrived mainly on speculation, and stock-market speculators as a class were almost certain to lose money. Hence it has been logically impossible for brokerage houses to operate on a thoroughly professional basis. To do that would have required them to direct their efforts toward reducing rather than increasing their business.”
Further, “most stock-exchange houses … still adhere to the old-time slogans that they are in business to make commissions and that the way to succeed in business is to give the customers what they want. Since the most profitable customers want speculative advice and suggestions, the thinking and activities of the typical firm are pretty closely geared to day-to-day trading in the market. Thus it tries hard to help its customers make money in a field where they are condemned almost by mathematical law to lose in the end.”
Individual investors must thus exercise caution and the principle of caveat emptor (“let the buyer beware”). The intelligent investor, says Graham, “should be wary of all persons, whether customers’ brokers or security salesmen, who promise spectacular income or profits. This applies both to the selection of securities and to guidance in the elusive-and perhaps illusive-art of trading in the market … Thus the security buyer who wants to avoid being influenced by speculative considerations will ordinarily have to be careful and explicit in his dealings with his customer’s broker; and he will have to show clearly, by word and deed, that he is not interested in anything faintly resembling a stock-market ‘tip.’”
Accordingly, in response to the claim of a broker (such as the one described in Part I) that “each and every one of the following stocks has multiple drivers and/or features which have the potential for generating significant market interest in the company’s stock – both initially and ongoing … When these certain events occur, [their] share prices will escalate accordingly the intelligent investor might well laugh and reply: “I’m an investor, not a speculator. I’m interested in tangible businesses and hard numbers about their results – not in trading pieces of paper and soft words about stock prices. And speaking of short-term price fluctuations, on what basis do you presume to predict them? Your breezy confidence implies that you’ve read neither William Sherden’s The Fortune Sellers: The Big Business of Buying and Selling Predictions (John Wiley & Sons, 1999, ISBN: 0471358444) nor Burton Malkiel’s A Random Walk Down Wall Street (7th ed., 2000, W.W. Norton & Company, ISBN: 0393320405)–both of which dispute – and probably refute – claims that any individual can predict these things. Besides, if you were able consistently to foresee price movements, you’d be famous, retired and living in the lap of luxury!” In Graham’s perhaps-optimistic words, “Once the customer’s broker understands clearly that he has a real investor on his hands, he will respect this point of view and co-operate with it.”
 
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