What psychological biases did Graham emphasize as potentially leading investors to failure?

Here is the translation:

No problem, this is a fascinating topic. Benjamin Graham is essentially the father of value investing. What's remarkable is that decades before the term "behavioral finance" became popular, he already had profound insights into the relationship between human weaknesses and investing.

In his view, the greatest risk in investing is not the market itself, but the investor. He specifically highlighted several psychological biases that trip up ordinary people:

1. The Biggest Enemy: The Emotional "Mr. Market"

This is Graham's most famous analogy, pinpointing the core psychological problem in investing.

• What is the issue? Imagine you have a business partner named "Mr. Market." He comes to you every day offering to either buy your stocks or sell you more at a specific price. The problem? Mr. Market is emotionally unstable, a classic case of bipolar disorder.

  • In a frenzy (manic): He becomes wildly optimistic, offering ridiculously high prices as if bad news doesn't exist.
  • In despair (depressed): He becomes intensely fearful, seemingly convinced the world is ending, and offers to sell valuable assets for "peanuts."

• How do we get fooled? The biggest mistake ordinary investors make is treating Mr. Market like an oracle and letting his emotions dictate their actions. When he gets excited, we rush in, afraid of missing out (which is buying high); when he panics, we get scared and sell our good assets cheaply to him (which is selling low). The result? Always buying high and selling low.

• Graham's Remedy: The intelligent investor should treat Mr. Market as an exploitable, emotionally erratic servant, not a guiding master. His quotes are merely opportunities to transact. When he offers a "peanut" price for something you believe is worth "gold," buy it decisively. When he offers an "outrageous" price, consider selling it to him. Your decisions should be based on your assessment of the asset's intrinsic value, not Mr. Market's mood of the day.

2. The Innate Impulse to Speculate

Graham strictly distinguished between "investment" and "speculation," believing that confusing the two is a major source of loss.

• What is the issue?

  • Investment: Based on thorough analysis, aims to ensure principal safety and achieve satisfactory returns. Simply put, you want to be a shareholder sharing in the profits of a company's growth.
  • Speculation: Involves buying and selling based on predictions of market price movements, hoping for quick profits. Essentially, you're betting on price changes, no different from gambling at a casino. Human nature includes an urge to gamble, seeking short-term, exciting thrills. Seeing others profit from a hot stock fuels the FOMO (Fear of Missing Out) impulse: "I can do that too!"

• How do we get fooled? Many people think they are "investing," but are actually engaging in "speculation." They don't care if the company makes money or its products are good; they only care if the stock price will rise tomorrow. Susceptible to market noise and rumors, this behavior often turns them into "lambs to the slaughter."

• Graham's Remedy: Be clear! What's your actual purpose in the stock market? If you aim to invest, analyze businesses diligently like a business owner. If you must speculate, Graham didn't forbid it entirely but stated: Strictly separate the money allocated for speculation from your investment capital, and only speculate with a small, definitely affordable amount. Never invest with the mindset or capital reserved for speculation.

3. Overconfidence & The Illusion of Predicting the Future

• What is the issue? People tend to overestimate their own judgment. After reading a few research reports or hearing some 'expert' opinions, we convince ourselves we can predict market trends, industry futures, or the price of a specific stock.

• How do we get fooled? Overconfidence blinds us to risks and discourages preparing for the worst. When our predictions inevitably go wrong, we get caught off guard, leading to huge losses (e.g., betting heavily on a single stock only to be blindsided by a "black swan" event).

• Graham's Remedy: Introduce a core concept: "Margin of Safety." This is arguably the cornerstone of Graham's philosophy. It means the price you buy at must be significantly lower than your calculated intrinsic value. If you think something is worth $10, ideally buy it when it drops to $5 or $6. This price difference ($4-5) is your "safety cushion." Its purpose is to hedge against your potential errors and unpredictable future risks. It's fundamentally a form of humility in investing: acknowledging you might be wrong and recognizing the future is unknowable.

4. Herd Mentality

• What is the issue? Following the crowd feels safer. When everyone is bullish on an industry or stock, it's difficult to think independently; we instinctively reason, "So many people are buying, it must be right." Conversely, during market panic and mass selling, fear also drives us to follow suit, even if our company's fundamentals haven't changed.

• How do we get fooled? Herd mentality makes us abdicate independent judgment, handing decision-making power to the irrational crowd. History repeatedly proves that crowds in financial markets are often most enthusiastic at the top and most fearful at the bottom. Following the herd almost guarantees the outcome of buying high and selling low.

• Graham's Remedy: "You are neither right nor wrong because the crowd agrees or disagrees with you. You are right because your data and reasoning are right." This is key. The intelligent investor must have the courage for counterintuitive thinking: staying vigilant when the market is euphoric and seeking opportunity when it is gripped by pessimism. Warren Buffett's famous line, "Be fearful when others are greedy, and greedy when others are fearful," perfectly embodies this Graham principle.

To Sum Up:

The psychological biases Graham emphasized are all interconnected:

Overconfidence makes us believe we can succeed at speculation. Due to herd mentality and FOMO, we get caught up in Mr. Market's frenzies, abandoning independent thought. When the market reverses, Mr. Market's panic drags us down, causing losses.

Thus, Graham's wisdom shines as brightly today as it did nearly a century ago. Stocks, companies, and sectors change, but the greed, fear, and irrationality of human nature are almost constant. Therefore, perhaps the first lesson of investing isn't learning to analyze financial statements, but learning to understand and control the person in the mirror.