A tribute to Benjamin Graham's philosophy on value investing…
As the widespread of the coronavirus is capturing the public’s attention and affecting more and more the overall economy, it is time to take a rest and think about one’s values and principles.
What are the keys to successful investments that can stand the test of time? According to Warren Buffett, Benjamin Graham’s book “The Intelligent Investor” is the most important book about value investing.
“I read the first edition of this book early in 1950, when I was nineteen. I thought then that it was by far the best book about investing ever written. I still think it is.
To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework. This book precisely and clearly prescribes the proper framework. You must supply the emotional discipline.” (Warren Buffett)
Graham’s book covers not how you can beat the market but how to successfully prevail in it:
- how you can minimize the odds of suffering irreversible losses?
- how you can maximize the chances of achieving sustainable gains?
- how you can control the self-defeating behavior that keeps most investors from reaching their full potential?
Here is a short summary of the core principles, which stand the test of time:
- A stock is not just a ticker symbol!!! It is an ownership interest in an actual business, with an underlying value that does not depend on its share price. Or does the company change when the share price changes? A share price has always two components to it: a speculative and an intrinsic. Rather think about the company in its market capitalization.
- The market is a pendulum that forever swings between unsustainable optimism (which makes stocks too expensive) and unjustified pessimism (which makes them too cheap). Or in other words, a company or the stock market is always either undervalued or overvalued. An intelligent investor is “a realist who sells to optimists and buys from pessimists” (Jason Zweig). You have to be realistic about the
- The future value of every investment is a function of its present price. The higher the price you pay, the lower your return will be. Buy cheap and sell expensive.
- No matter how thoughtful you are about your investments, the only true risk that you can not eliminate is the risk of being wrong. That’s why you have to be careful and always use a “margin of safety” when investing. You cannot go every time all in and you have to insure yourself against the hiccups of the market.
- The only one that stands between you and your financial success is you. You have to develop your critical abilities to always question the authority, institutions and “common” sense. On the one hand, you have to become a critical thinker and on the other hand, you have to become more disciplined. This game is not about the brain but character. Always remember in the end, “how your investments behave is much less important than how you behave” (Jason Zweig).
It simply means being patient, disciplined, and eager to learn; you must also be able to harness your emotions and think for yourself.