Benjamin Graham, legendary value investor & tutor of Warren Buffet.
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Benjamin Graham. Renowned value investor, and author of The Intelligent Investor.
The book was originally written in 1949 and described by Warren Buffet as the best book about investing ever written. Buffet himself was tutored by Graham at the Columbia University and later worked for his brokerage company, Graham-Newman Corporation.
Essentially written about the difference between investment and speculation, we explore and summarise the key aspects of the book. Let’s take a look.
Graham says to be an intelligent investor you must be patient, disciplined and keen to learn new things. You must also be able to control your emotions and think for yourself.
Graham is keen to establish the difference between investors and speculators, and according to him intelligent investing consists of three things.
1) A thorough analysis of the company’s fundamentals
2) Protecting against severe losses.
3) Not anticipating extraordinary results but aiming for adequate performance.
Graham points out that for an intelligent investor, money is not made by simply ‘following the market’ or buying because the price has gone up. He argues the exact opposite is true, suggesting that stocks become more riskier the more the price increases, and, stocks become less risky the more the price decreases.
An investor believes the market price is judged on established standards of value, like the PE ratio for example. Whereas a speculator bases all their judgement on market price.
An excellent way to check if the market trend is swaying your judgment is to ask yourself if you would invest in a stock without seeing a chart….
It is also important to note that unlike the speculator the intelligent investor is not looking for quick gains, rather sustainable long-term investment goals that are not subject to the markets short term volatility.
At the time of writing the updated version of the intelligent investor, it was 1973 and Benjamin Graham managed to predict the bear market through to the end of 1974. Wall street eventually lost 37% of its value.
The Benjamin Graham formula suggested the ‘rule of opposites’ which suggests that the more enthusiastic investors or speculators become in the long run the more certain they are likely to be proved wrong in the short run.
The singular truth however is the market teaches us that the future is unpredictable, and the more certain people are about the future the more surprised they become when it proves otherwise.
The key is to remain humble, expect the unexpected and therefore maintain a good risk profile.
The aggressiveness of your portfolio depends on the type of investor you are.
The ’active’ or ‘enterprising’ type requires continual research of stocks, bonds and mutual funds. It requires time and energy.
The ‘passive’ or ’defensive’ type requires a fixed portfolio that runs autonomously regardless of the situation. Minimal time or effort is usually required.
Both approaches are equally good choices, but your success will be determined by selecting the one which suits your personality the best. This will ensure the longevity of the approach and keep your emotions in check.
The defensive investor takes a low-risk, long term approach to investing, and Graham advises this investor type to allocate 50% of their capital into bonds or an index fund depending on market conditions. The other 50% into individual stocks.