Warren Buffett is widely regarded as one of the greatest investors of all time, but if you ask him who he thinks is the greatest investor, he might mention one person: his teacher Benjamin Graham.Graham is an investor and investment mentor, and is generally considered the father of securities analysis and value investing.
His investment philosophy and methods are detailed in his books “Securities Analysis” (1934) and “Smart Investor” (1949), which are the most famous investment books of all time.These texts are generally considered essential reading material for any investor, but they are not easy to read.
In this article, we will condense Graham’s main investment principles and give you a good start in understanding his philosophy of success.
Principle #1: Always invest with a margin of safety
The margin of safety refers to the principle of buying securities at a price lower than their intrinsic value. This is considered not only to provide opportunities for high returns, but also to minimize the downside risk of investment.In simple terms, Graham’s goal is to buy $1 worth of assets for 50 cents. He did very, very well.
For Graham, the value of these commercial assets may be because of their stable profitability or simply because of their liquid cash value. For example, it is not uncommon for Graham to invest in stocks whose current assets (net of all debts) on the balance sheet exceed the company’s total market value (Graham’s followers are also referred to as “net”). This means that Graham is actually acquiring the company for nothing. Although he has many other strategies, this is Graham’s typical investment strategy.
This concept is very important to investors because once the market inevitably reassesss the stock and increases its price to its fair value, value investing can provide substantial profits. If things don’t go according to plan and business stagnates, it can also provide adverse protection. Purchasing the safety net of the basic business at a price well below its value is the central theme of Graham’s success. When choosing carefully, Graham discovered that further declines in these undervalued stocks rarely occur.
Although many of Graham’s students successfully used their own strategies, they all shared the main idea of the “margin of safety”.
Principle #2: Expect volatility and profit from it
Investing in stocks means dealing with volatility. Smart investors will not seek to exit during periods of market pressure, but will see the economic downturn as an opportunity to find quality investments. Graham used the metaphor of “Mr. Market” to illustrate this point. “Mr. Market” is every investor’s imagined business partner. Mr. Market provides investors with daily quotations, and he will buy out or sell their business shares according to the quotations. Sometimes, he will be excited about the prospects of the business and offer high prices. At other times, he was frustrated with the prospects of the business and offered low prices.
Because the stock market has the same sentiment, the lesson here is that you should not let Mr. Market’s opinions dominate your own emotions, or worse, guide you to make investment decisions. Instead, you should form your own estimate of the business value based on a reasonable and reasonable review of the facts.
In addition, you should only buy when the price offered is reasonable, and sell when the price is too high.In other words, the market will Volatility can be severe at times, but don’t worry about volatility, but use it to get bargains in the market or sell when your holdings are overvalued.
Here are two strategies Graham suggested to help mitigate the negative effects of market volatility:
1) Average dollar cost
The average dollar cost is achieved by regularly purchasing an equivalent dollar investment.It takes advantage of falling prices, meaning that an investor does not have to worry about buying his or her entire position at the top of the market. Average dollar cost is an ideal choice for passive investors, which relieves them of the responsibility of choosing when and at what price to buy a position.
2) Invest in stocks and bonds
Graham suggested that one person’s investment portfolio be equally divided between stocks and bonds as a way to protect capital during a market downturn while still achieving capital growth through bond income.Remember, Graham’s philosophy is to protect capital first, and Then Try to make it grow. He suggested investing 25% to 75% of the investment in bonds, and adjusting it according to market conditions.This strategy has an additional advantage, which can keep investors away from boredom, which can lead them to participate in unprofitable transactions (that is, speculation).
Principle 3: Know what type of investor you are
Graham recommends that investors understand their investing self. To illustrate this point, he clearly distinguished the various groups operating on the stock market.
Active and passive investors
Graham referred to active and passive investors as “aggressive investors” and “defensive investors.”
You have only two real choices: the first choice is to make a serious commitment in time and energy to become an excellent investor who equates the quality and quantity of hands-on research with expected returns. If this is not what you want, then settle for passive (and possibly lower) returns, but with much less time and work. Graham subverted the academic concept of “risk = reward”. For him, “work = reward”. The more work you put in, the higher your return should be.
If you have neither the time nor the willingness to conduct high-quality research on your investment, then the investment index is a good choice. Graham said that defensive investors only need to buy the same amount of 30 stocks in the Dow Jones Industrial Average to get an average return.Both Graham and Buffett said that even getting an average return, such as that of the S&P 500 Index, is more of an achievement than it seems.
According to Graham, the fallacy that many people believe is that if it is easy to get an average return with little or no work (through the index), then just doing a little more work will produce a slightly higher return. The reality is that most people who try to do this end up performing much worse than average.
In modern terms, defensive investors are investors in stock and bond index funds. In essence, they own the entire market and benefit from the best performing areas without having to predict them in advance. By doing so, investors can actually guarantee market returns and avoid below-average performance by letting the overall results of the stock market determine long-term returns. According to Graham, defeating the market is easier said than done, and many investors still find that they have not defeated the market.
Speculators and investors
Not all people in the stock market are investors. Graham believes that it is important for people to judge whether they are investors or speculators.The difference is simple: investors view stocks as part of the business, while shareholders are the owners of the business, while speculators believe that they are playing expensive pieces of paper with no intrinsic value. For speculators, value depends only on what someone will pay for the asset.
To paraphrase Graham, there is smart speculation and smart investment; the key is to make sure you understand what you are good at.