Warren Buffet, largely regarded as the greatest investor of all time, said of Ben Graham "I
attended Colombia University’s business school in 1950-51 not because I cared
about the degree, but because I wanted to study under Ben Graham."
Ben Graham's family immigrated from London in 1894. Graham grew up poor because of the death of his father, and an economic crisis in 1907. He displayed brilliance in academia and was offered a teaching position at Columbia University. He probably would have preferred studying and teaching there but due to the lingering pain of the economic need to support his mother and family, he instead applied his brilliant mind to investing. He was almost wiped out by the crash of 1929 but survived and brought with him the lesson he learned from those experiences. His writing combines a serious sober perspective with mental agility. The work that he did in business has benefited countless investors and added soberness and stability to the financial world ever since
According to Buffet there are three important lessons that were established reading Graham's most popular and fundamental work The Intelligent Investor. Basic number one: Stocks are tiny pieces of businesses. This may seem obvious but people often don't look at the underlying business when they are investing in stocks. They aren't just ticker symbols! They are real live companies that have people have put their blood, sweat and tears into building and maintaining. If they are truly growing, it's because smart, dedicated, hard working people are going in day after day and making things happen. To understand stocks you must understand the people and numbers behind them. There are other ways to invest, you can invest in real estate or land, but when you are buying stocks you are buying businesses. If you wouldn't buy a business maybe you should think twice about buying stocks.
Two: Mr Market. Ben Graham came up with the metaphor Mr. Market. He's this crazy bipolar guy who generally feels optimistic and occasionally gets very depressed. You can't predict what he'll do next and you DO NOT want to get sucked into his mania! What this means is in the stock market it's impossible to predict short term changes because the people buying and selling them are un-predictable. Predictions are difficult and timing things perfectly might as well be impossible. Instead of trying to time your purchases, you should look at the price you are paying. As with anything you buy, look for bargains and keep your own costs down. To determine price Graham suggested looking at Price to Earnings Ratio and Book Value which are still a decent place to start. He said not pay more than 15 Price to Earnings Ratio but look for between 5 and 10, for book value don't pay more than 1.5 times book value but look for less than 1. The companies should also be large, about 1.5 billion and have paid a consistent dividend for 10+ years.
Three:Only purchase if you have a large safety cushion. Graham called this cushion a margin of safety. I think many people (myself previously included) have the false notion that to make more money investing you have to take more risks, which is completely the opposite with value investing. As with many things, to do better at it you have to put more time and effort into it and know your limitations, not take more risk. This cushion also includes reducing your risk in other ways, like not using money you will need any time soon. Graham also recommends holding 10 to 30 companies, essentially not putting all your eggs in one basket. He also recommends having bonds be make up 25-50 percent of your stocks partly for the emotional stability that it will add to your investments.
Warren Buffet, who I'll talk about him more in later posts, has since refined much of Graham's thinking, but I think we still owe a lot to this guy.
http://seekingalpha.com/
http://www.multpl.com/shiller-pe/table
http://www.libertyinvesting.com/blog/
http://www.shillerfeeds.com/
berkshirehathaway.com/letters/letters.html
http://warrenbuffettresource.wordpress.com/
Some other quotes I thought were important from the book:
“One fairly dependable sign of the
approaching end of a bull swing is the fact that new common stocks of small and
nondescript companies are offered at prices somewhat higher than the current
level for many medium sized companies with a long market history.” P. 143
“An enterprising investor is not one who
takes more risks than average or who buys ‘aggressive growth’ stocks; an
enterprising investor is simply one who is willing to put in extra time and
effort in researching their portfolio.” p.159
“Concentrate
on the larger companies that are going through a period of unpopularity…First
they have resources in capital and brain power to carry them through. Second,
the market is likely to respond with reasonable speed to any improvement
shown.” p.163
“The aggressive investor must have a
considerable knowledge of security values, enough to warrant viewing his
security operations as equivalent to a business enterprise. There is no room
for middle ground between passive and aggressive status… The majority of
investors should be defensive.” p. 176
The
longer the bull market lasts the more severely investors will be affected with amnesia; after five years or so, many people no longer believe that bear
markets are possible. p.190
“The
true investor scarcely ever is forced to sell his shares, and at all other
times he is free to disregard the current price quotation. Thus the investor
who permits himself to be stampeded or unduly worried by unjustified market
declines in his holdings is perversely
transforming his basic advantage into a basic disadvantage. That man would
be better off if his stock had no market quotations at all for he would then be
spared the mental anguish caused him by other
persons mistakes of judgment.” p
203
Price fluctuations have only one signal to
the true investor: they provide him an opportunity to buy wisely when prices
fall sharply and to sell wisely when they advance a great deal. “The
speculator’s primary interest lies in anticipating and profiting from market
fluctuations. The investor’s primary interest lies in acquiring and holding
suitable securities at suitable prices.” p 205
Would you allow a lunatic come by at least
5 times a week to tell you that you should feel exactly the way he feels? Yet
millions of people let Mr. Market tell them how to feel and what to do despite
the fact that from time to time he gets nuttier than a fruitcake. The cheaper
stocks got, the less eager people become to buy them because they are imitating Mr. Market instead of thinking for themselves. By refusing to
let Mr. Market be your master, you transform him into your servant. After all
when he seems to be destroying value, he is creating them elsewhere. p 215
4 “For anyone who
will be investing for years to come, falling stock prices are good news, not
bad since they enable you to buy more for less money. The longer and further stocks fall, and the more steadily you keep
buying as they drop, the more money you will make in the end-if you remain
steadfast until the end. Instead of fearing the bear market you should embrace
it. You should be perfectly comfortable if the market stopped supplying
prices for 10 years. ”
“You will be much more in control, if you realize how much you are not in control.” p 223
"Buying funds based purely on their past performance is one of the stupidest things an investor can do.”
Fund Drawbacks
Conclusions p. 243
1.
The average fund does not pick
stocks well enough to overcome the costs of researching and picking them
2.
The higher a funds expenses,
the lower its returns
3.
The more frequently a fund
trades its stocks, the less it tends to earn
4.
Volatile funds stay volatile
5.
Funds with high past returns
are unlikely to remain winners for long
“Sector funds are the investor’s nemesis.”
The higher the growth rate you project and the longer
the future period over which you project it, the more sensitive your forecast
becomes to the slightest error. P 282
“It is undoubtedly better to concentrate on
one stock that you know is going to prove highly profitable, rather than dilute
your results to a mediocre figure, merely for diversification's sake. But this
is not done because it cannot be done dependably.” P 290
“Corporate
accounting is often tricky; security analysis can be complicated; stock
valuations are really dependable only in exceptional cases.” P 318
“Today’s investor is so concerned with
anticipating the future that he is already paying handsomely for it in advance.
Thus what he has projected with so much study and care may actually happen and
still not bring him any profit. If it should fail to materialize to the degree
expected he may in fact be faced with serious temporary and perhaps even
permanent loss.” P 345
“Surely, then, by the exercise of even a
moderate degree of skill- derived from study, experience and native ability- it
should be possible to obtain substantially better results than the DIJA.” P
376
“It is true that a fairly large segment of the stock market
is often discriminated against or entirely neglected in the standard, than the
intelligent investor may be in a position to profit from the resultant
under-valuations.” P 380
The
vast majority of people who try to pick stocks learn that they are not as good
at it as they thought; the luckiest ones discover this early on, while the less
fortunate take years to learn it.” p 396
“The speculative public is incorrigible. In
financial terms it cannot count beyond 3. It will buy anything, at any
price, if there seems to be some ‘action’ in progress. It will fall for any
company identified with ‘franchising,’ computers, electronics, science,
technology when the particular fashion is raging. Sensible investors are above
such foolishness.” P 437
“Just as the Surgeon General’s warning on
the side of a cigarette pack does not stop everyone from smoking; no regulatory
reform will ever prevent investors from overdosing on their own greed. The
circle can only be broken one investor and one financial advisor at a time.
Mastering Graham’s principles is the best way to start.” P 437
Just as a coin does not become more likely to
turn up heads after landing on tails nine times in a row, so an overvalued
stock (or market) can stay overvalued for a surprisingly long time. p. 466
“It is well established that people often
assign a mental value to stocks based largely on the emotional imagery that
companies evoke. The intelligent
investor always digs deeper.” P 474
“The market scoffs at Graham’s principles in
the short run, but they are always revalidated in the end. If you buy a stock
purely because its price has been going up –instead of asking whether the
underlying company value is increasing-then sooner or later you will be
extremely sorry.” P. 486
"Never dig so deep into the numbers that you
check your common sense at the door..." p.508
"..chief losses to investors come from the purchase
of low-quality securities at times of
favorable business conditions…the
margins of safety is always dependent on the price paid.” P 516
“A sufficiently low price can turn a
security of mediocre quality into a sound investment opportunity.” P 521
Have the courage of your knowledge and experience. If
you have formed a conclusion from the facts and if you know your judgment is
sound, act on it- even though others may hesitate or differ…In the world of
securities, courage becomes the supreme virtue after adequate knowledge and tested judgment are at hand.”
“Limit your ambition to
your capacity and confine you activities within the safe and narrow path of
standard, defensive investment. To achieve satisfactory
investment results is easier than most people realize; to achieve superior
results is harder than it looks.” P 524
“Simply keeping your holdings permanently
diversified, and refusing to fling money at Mr. Market’s latest, craziest
fashions, you can ensure that the consequences of your mistakes will never be
catastrophic.” P 531
“One lucky break,
or one shrewd decision-can count for more than a lifetime of journeyman
efforts. But behind the luck, or the crucial decision, there must usually exist
a background of preparation and disciplined capacity. Interesting possibilities
abound on the financial scene, and the intelligent and enterprising investor
should be able to find both enjoyment and profit in this three ring circus.
Excitement is guaranteed.” P534
“Without a saving faith in the future, no
one would ever invest at all.” P 535
