Here are Lessons from Ben Graham’s Book, “The Intelligent Investor”.
Investing continues to be one of the best ways for one to grow their income over time. Ben Graham is widely known and revered for his classic book “The Intelligent Investor”. What does the book have for investors of today and the future? We look at five crucial lessons that Ben Graham shares from his rich and practical experience from the investment world.
Look At Stocks as a Business
Stocks are an ownership of a business and should be viewed as such. Fluctuations in the stock market should not sway your conviction on a business that you have chosen to hold. Instead, consider the stock as a person dubbed Mr. Market, a person who has to go through ups and downs to arrive at his or her long term premium value and price.
Be guided by the fundamentals of that business. When you make a purchase, be patient and hold the stock into the future without being swayed by price fluctuations. Remember, investing is emotional to most people. As such, you will have to literally develop a thick skin and shield yourself from emotional decision making. Feel free to sell your stock when it is too high and bank the gains. Similarly, feel free to buy a stock when it is selling at low prices as shall be reiterated in some of the paragraphs below.
Margin of Safety
Ben Graham holds that an investor should more often than not look for a Margin of Safety when he or she is investing. The concept is synonymous with risk to reward. An investor should look for cheaper stocks with a higher promise of gains. According to Ben Graham, this reduces the risk of losing money if a company does not perform. Oppositely, when the company performs, an investor stands to realize maximal gains. This approach gives investors discounted buy opportunities. An investor would have a decent margin of safety in a company whose price is three times less it value than one whose price is twice less its value.
Be a Defensive Investor
Investors should aim to be defensive. One way to achieve this is by having a diversified portfolio. For instance, an investor can have 50% stocks and 50% bonds in his or her portfolio. Importantly, the portfolio ought to be rebalanced when necessary. This means at certain times an investor can change the portfolio weighting to 65% stocks and 45% bonds. Additionaly, investors are advised to invest regularly so as to minize their exposure to bad times in the market through dollar cost avergaing, which allows for affordable and periodic investing.
Ben Graham advises investors to invest in large companies that have paid shareholders for at least the past twenty years and recorded a minimum earnings growth of 2.9% per annum for the last ten years. Most importantly, investors are advised to look for cheap assets whose market cap is at least a 1.5 multiple of the difference between their assets and liabilities.
Be an Enterprising investor
Investors are required to be patient and disciplined while at the same time, be keen to learn. Further, investors ought to look more into current valuations than future ones. Future valuations that often tend to favor growth companies than value companies should be bought at caution, because the latter present more realistic valuations. A case in point would be the high valuation of Amazon into the future against a conservative valuation of General Motors. Amazon in this case is a growth stock, while GM is the value stock. Notable, Ben Graham points that investors should seek to study and understand financial reports, he has a book towards the same course.
Risk and Reward Are Not Always Correlated
Ben Graham elucidates that an investor does not have to take a higher risk for a higher reward. The higher risks expose one to huge downsides. It is prudent to look for minimal risk for a higher reward.
Contrarily, Ben Graham in his classic master piece holds that low stock prices do not necessarily mean that their returns will be better than those on higher priced stocks.
For instance, a stock that goes for 70 cents on the dollar does not necessarily mean it is has a higher risk compared to that retailing at 40 cents on the dollar. He points out that investors should be careful to not be trapped in chasing cheap stocks without looking at the value of the same stocks. Some stocks are pricy but possess great value compared to their cheap counterparts.
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