Benjamin Graham is known as the ‘father of value investing’. His seminal books like The Intelligent Investor and Security Analysis laid down core principles of value investing that are still hugely relevant today. This article looks at some of Graham’s key ideas on value investing like margin of safety, Mr. Market metaphor, importance of analyzing business fundamentals, controlling emotions etc. There are multiple references to ‘value investing’ and ‘graham investments’ principles outlined by Graham. These principles are meant for defensive investors looking for adequate long term returns while minimizing downside risk.
Graham emphasized margin of safety and business analysis over obsessing with stock prices
One of Graham’s main ideas was that investors should analyze companies as actual businesses rather than just as tickers or electronic blips. The future value depends on underlying business fundamentals and not daily share price changes. Graham urged investors to buy stocks only if they would be comfortable holding them even if they didn’t know the prices daily. This concept of ‘margin of safety’ meant never overpaying no matter how exciting an investment appeared. As Graham said – ‘The intelligent investor realizes that stocks become more risky, not less, as their prices rise — and less risky, not more, as their prices fall.’
Graham asked investors to be realistic and not get swayed by market manias
Graham emphasized realism and level-headed thinking in the face of market manias or panics. He likened the market to a moody partner called Mr. Market who constantly offered to buy investor’s stocks or sell his own based on wildly changing prices daily. Graham asked investors to have courage and only transact when his prices made sense per their own analysis. As Graham said – ‘The intelligent investor is a realist who sells to optimists and buys from pessimists. The intelligent investor dreads a bull market, since it makes stocks more costly to buy. And conversely (so long as you keep enough cash on hand to meet your spending needs), you should welcome a bear market, since it puts stocks back on sale.’
Graham focused defensive investors on adequate long term returns
For defensive investors, Graham suggested an emphasis on avoidance of serious losses rather than stretching for extraordinary gains. He asked such investors to place a significant amount of portfolio into high grade bonds and diversified stocks rather than speculate aggressively for big wins. The goal for such defensive investors was to achieve adequate inflation-beating long term returns while minimizing permanent loss of capital through a margin of safety.
Graham asked investors to control emotions and develop critical thinking
Ultimately Graham considered emotional control and disciplined thinking as key pillars of intelligent investing. He asked investors to develop critical thinking skills to question Wall Street facts and have the courage to go against the crowd when required. As Graham said – ‘If you become a critical thinker who takes no Wall Street “fact” on faith, and you invest with patient confidence, you can take steady advantage of even the worst bear markets. By developing your discipline and courage, you can refuse to let other people’s mood swings govern your financial destiny.’
Benjamin Graham’s principles of value investing focused on business analysis, margin of safety, emotional discipline and adequate long term returns still remain hugely relevant for defensive investors today. Concepts like controlling irrational exuberance, having courage in bear markets and developing critical thinking are timeless ideas just as applicable now as 70 years back.