Lessons from Benjamin Graham

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When I was growing up in 1997 in a South Carolina town (population 2,070ish, plus two stop lights), every year around this time my class would be asked to write essays on people we admire—people who have influenced us and helped shape our world.

The answers were generally our mothers or fathers, with an occasional Michael Jordon, Mia Hamm, Britney Spears or, for those who sat in the back of the class, Kurt Cobain, thrown in the mix (it was the 90s, after all).

It might be force of habit, but once the weather starts cooling off, I begin to think about people who have had an impact on my world. This year, beyond friends and family, I began to think about someone who has had a major impact on my—and probably everybody else’s—life as a financial professional.

Benjamin Graham. The one who is called the “Father of Value Investing” or, by me (being the financial geek that I was and continue to be) “the Michael Jordan of Investment.”

Graham, who was born in 1884 and died in 1976, documented his ideas and methods on investing in his books Security Analysis (published in 1934) and The Intelligent Investor (published in 1949), which has sometimes been called the “Bible of Value Investing” and is still considered to be one of the seminal texts on investing for the modern era.

Warren Buffett himself said that The Intelligent Investor changed his life. “If I hadn’t read that book in 1949, I’d have had a different future,” Buffett said in a Business Insider article. High praise, indeed.

His philosophy is so second-nature these days, it’s hard to believe it was once revolutionary. His concept was value investing, the principle that any investment should ultimately be worth more than what the investor paid for it.

The lessons I’ve learned from Graham are lessons I both practice and preach.

Look for investments thought to be undervalued. Simply put, buy $100 worth of assets for $50.

Understand the “margin of safety,”—the difference between the stock’s current market price and its intrinsic value.

Understand the health of the business you’re investing in—its earnings, dividends and assets.

Understand market volatility and profit from it. It’s not a question of whether the stock will fluctuate. It will. The trick is how you respond. Invest in the business, not just its current value. When you value invest, you will stop worrying about the market.

Understand what kind of investor you are: enterprising or defensive. Will you commit to the research, monitoring and attention to your portfolio or is your chief emphasis on the avoidance of serious mistakes or losses?

Over the years, market developments have borne out the wisdom of Graham’s basic principles. His core tenets of value investing remain relevant today. Here are some of my favorites. The pages noted refer to The Intelligent Investor, Fourth Edition.

  • “Experience teaches that the time to buy stocks is when their price is unduly depressed by temporary adversity. In other words, they should be bought on a bargain basis or not at all.” (p. 98)
  • “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.” (p. 524)
  • “This may be set down as a fundamental law of the stock market – that the enterprising investor concentrate on the larger companies that are going through a period of unpopularity.” (p. 63)
  • “Any approach to moneymaking in the stock market which can be easily described and followed by a lot of people is by its terms too simple and too easy to last.” (p. 195)
  • “Much bad advice is given free.” (p. 270)
  • “To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.” (p. 524)
Harper Tucker
Harper Tucker is chair of the Financial and Legal Innovation Practice and vice-president of Authority Marketing for ForbesBooks and Advantage Media Group.

 

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