One of our favorite investors is Benjamin Graham (1894-1976). Ben was a Columbia University professor and lifelong friend, and teacher of Warren Buffett. After college, Warren worked for two years at Ben Graham’s firm, Graham-Newman. Warren’s son is even named “Howard Graham Buffett.”

Ben is considered the father of value investing. He created the Chartered Financial Analyst designation in 1965 and was instrumental in drafting the Securities Act of 1933. He spoke multiple languages, and even wrote a Broadway play. He split his time between France and the U.S.

He is known for writing two classic investing books, Security Analysis in 1934 (with David Dodd) and The Intelligent Investor in 1949. Warren Buffett describes The Intelligent Investor as the best investment book ever written. Warren encourages everyone to read Chapter 8 (Market Fluctuations) and Chapter 20 (Margin of Safety) annually.

Here are six ideas from The Intelligent Investor, that are as relevant as the day they were written:

1. SPECULATORS AND INVESTORS

   

Ben distinguished between those who “speculate” and those who “invest.” Here is how to tell the difference:

“The most realistic distinction between the investor and the speculator is found in their attitude toward stock-market movements. The speculator’s primary interest lies in anticipating and profiting from market fluctuations. The investors primary interest lies in acquiring and holding suitable securities at suitable prices.”

2. SEPARATE YOUR SPECULATIONS FROM YOUR INVESTMENTS

Want to take a chance and buy a stock based on a hot tip? Realize you are speculating and keep it in a “play” account and separate it from your retirement account.

“If you want to speculate do so with your eyes open, knowing you will probably lose money in the end; be sure to limit the amount at risk and to separate it completely from your investment program.”

3. STOCK MARKET PREDICTIONS

Have you ever read an article by an economist or investment firm predicting the pending stock market crash? How about CNBC’s talking heads? Were you scared into acting? The quote below is like Warren Buffett’s typical response about the market’s direction: “I have no idea.”

“The investor can scarcely take seriously the innumerable predictions which appear almost daily and are his for the asking. Yet in many cases he pays attention to them and even acts upon them. Why? Because he has been persuaded that it is important for him to form some opinion on the future course of the stock market, and because he feels that the brokerage or service forecast is at least more dependable than his own.”

4. BE A BUSINESS OWNER

A dramatically rising or falling stock market catches daily headlines. What should you do with your 401(k) or IRA? Ben encourages us to view your stocks as pieces of companies and not shares traded on a stock exchange. In fact, he says to never buy a single company share if you wouldn’t buy the whole company. Consider yourself first and foremost a business owner. So when the market starts moving:

“Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.”

5. MARKET VOLATILITY

Volatility is a given in the stock market. It subsides for a while, but soon returns. When investing in the stock market, expect it.

“In any case the investor may as well resign himself in advance to the probability rather than the mere possibility that most of his holdings will advance, say, 50% or more from their low point and decline the equivalent one-third or more from their high point at various periods in the next five years.”

6. REBALANCING

We have long been a “rebalancing” proponent. That is, set predetermined levels when you will sell stocks and buy bonds or sell bonds and buy stocks.

“…we favor some kind of mechanical method for varying the proportion of bonds to stocks in the investor’s portfolio. The chief advantage, perhaps, is that such a formula will give him something to do. As the market advances he will from time to time makes sales out of his stockholdings, putting the proceeds into bonds; as it declines he will reverse the procedure. These activities will provide some outlet for his otherwise too-pent-up energies. If he is the right kind of investor he will take added satisfaction from the thought that his operations are exactly opposite from those of the crowd.”

 

 

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