Known as the father of value investing, Benjamin Graham was an American financial analyst and investor of global renown. Value investing entails investing in securities which seem to be underpriced and holding on to them til they attain a valuation in line with the stock’s fundamentals.
Born on 9th May 1894 in London, Benjamin’s one of the students at Columbia Business School where he taught investing for several years was none other than Warren Buffet. His books Security Analysis (1934), which was written with David Dodd, and The Intelligent Investor (1949) are regarded among the best books on investments.
Benjamin began his career at Wall Street following his graduation from Columbia University. He went on to found Graham-Newman Corp.
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Difference between Investment and Speculation
From Benjamin, we can know the clear demarcation between investment and speculation. In one place it is written in the book Security Analysis that “An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.” He also believed that investing should entail the assurance of a return on invested capital and also worthwhile return over the inflation rate. Benjamin urged the participants in the stock market to first make a fundamental difference between investment and speculation.
Many people entering the share market to make a fortune or a decent side income should check from these wise words whether they are engaging in investment operations or mere speculation. The latter can reap you a windfall but can also make you a pauper quickly but serious investment is likely to yield you long-term gains.
One of the quotes of Benjamin reads, “I don’t think the objective of investment should ever be to take a risk in order to get a return. I think the objective of shrewd investment should be to find opportunities which offer a larger return than the average, combined with adequate safety.”
These wise and pragmatic words do have the capacity to inspire millions of investors to combine large returns with great safety despite the market fluctuations.
Margin of Safety
One of the fundamental lessons of Benjamin Graham is to invest with a margin of safety. This translates to investing in a security at much discount to its intrinsic value. This can give the investor the potential to earn high returns and lower the risk of investment.
Another way of achieving margin of safety while investing can be through diversifying portfolios and maintaining low debt-to-equity ratios. The investment guru urged investors to have margin of safety to safeguard themselves from unforeseen setbacks.
Not Moved by the Market
Volatility in the stock market is only to be expected. In this regard, one of Benjamin’s sound advice is to not let market fluctuations induce poorly thought out investment decisions. Instead, his advice of using market’s volatility to make logical buying and selling of stocks that is buying when the price is reasonable or low and selling when the price of the stock is too high or overvalued can be helpful for many investors.
He believed that stock owners shouldn’t be concerned with erratic fluctuations in stock prices but instead should focus on the true value of stocks, which is likely to be reflected in the long-term.
Benjamin voiced that individual investors should approach the market with patience and trust. Instead of focussing on market’s changing sentiments, investors should focus on the real performance of companies whose shares they had bought or thinking about buying. This is an extremely sound advice for people willing to invest in stocks.
Pragmatic Investment
Another piece of pragmatic advice from Benjamin is to distribute one’s investment portfolio evenly between stocks and bonds as a means to preserve capital in case of market downturns while still attaining capital growth through bond income. Today investors can follow this investment principle of Benjamin to have a secured financial feel even during downturns.
Active and Passive
The investment wizard also made a clear distinction between active or enterprising investors and passive or defensive investors and prescribed different investment guidelines for them. He said that it was essential to know what kind of trader or investor one is before she or he enters the market.
Active investors spend considerable time and energy on researching stocks they classify as potential investments. The defensive investor or the passive investor doesn’t want to spend much time and effort in investing and they generally go for conservative investments that don’t demand too much research and effort.
According to Graham, investors should take risks on the basis of the amount of intelligent effort they are willing to give in. This advice is also very much relevant for today’s investors, many of whom are hoping for lucrative returns without adequate investment in time and effort.
