9 Things I’ve Learned from Benjamin Graham about Investing
1. The last time I made any market predictions was in the year 1914, when my firm judged me qualified to write their daily market letter based on the fact that I had one months experience. Since then I have given up making predictions.
You will not outperform the market in making macroeconomic forecasts. Yes, markets will swing up and down. No, you do not need to forecast those swings to be a successful investor.
2. Abnormally good or abnormally bad conditions do not last forever. The market will be cyclical even though you can’t beat the market with macro forecasts.
While it is in those swings that opportunity is created, it is by ignoring the temptation to make macro forecast that these great investors find success.
3. The disciplined, rational investor searches for stocks selling a price below their intrinsic value and waits for the market to recognize and correct its errors. It invariably does and share price climbs. When the price has risen to the actual value of the company, it is time to take profits, which then are reinvested in a new undervalued security.
When you focus on intrinsic value you need not time the market. By focusing on the micro (e.g., the value of individual company or bond), the macro takes care of itself.
4. The function of the margin of safety is, in essence, that of rendering unnecessary an accurate estimate of the future.
Everyone makes errors and mistakes and so having insurance against those mistakes is wise. With a margin of safety you can be somewhat wrong and still make a profit. And when you are right you will make even more profit than you thought. Finding a margin of safety is not a common event so you must be patient. The temptation to do something while you wait is to hard for most people to resist. The best investors are those who have a temperament which is calm and rational.
5. Market quotations are there for [your] convenience, either to be take advantage of or to be ignored.
This is consistent with Buffett’s point that one should value the market for its pocketbook not its wisdom.
6. The speculator’s primary interest lies in anticipating and profiting from market fluctuations. The investor’s primary interest lies in acquiring and holding suitable securities at suitable prices. An investment is based on incisive, quantitative analysis, while speculation depends on whim and guesswork.
If you are trying to predict the behavior of a crowd you are a speculator. Great masses of people have a strong tendency to herd which inevitably produces swings in prices. By focusing on value instead of price the intelligent investors can find profits over the long term. In the short run, the market is a voting machine but in the long run it is a weighing machine.
7. Investment is most intelligent when it is most businesslike. It is amazing to see how many capable businessmen try to operate on Wall Street with complete disregard of all the sound principles through which they have gained success in their own undertakings.
Ultimately a share of stock is partial ownership of a business. Too many investors abandon all that they have learned in business.
8. It is bad business to accept and acknowledge possibility of a loss of principal in exchange for a mere 1 or 2% of additional yearly income. If you are willing to assume some risk you should be certain that you can realize a really substantial gain in principal value if things go well.
It is only acceptable to undertake a risky investment if you are properly compensated for that risk.
9. The investors chief problem and even his worst enemy is likely to be himself.