In his book The Intelligent Investor, Graham describes several strategies that investors can use to maximise their success in the stock market. Here, we list three of our biggest learnings from the master of value investing. Known as the father of security analysis and revered even by the biggest gurus of value investing, Benjamin Graham’s ideas and methods on investing are well documented in his books Security Analysis (1934) and The Intelligent Investor (1949), which are also two of the most famous investing texts ever written.
In his books, he laid down some solid strategies for building a good portfolio. How you implement these strategies depends on the kind of portfolio you want to build. However, the basics lessons remain the same and relevant for all investors, even six decades after the book was first published.
Here is a list of our biggest takeaways from his teachings.
1. Develop sound investment principles
According to Graham, “An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.” Be it highlighting the need of keeping the margins of safety or finding intrinsic value, Graham’s approach is methodical. Basically, he believes in having investment principles.
We believe, developing sound investment principles is a necessary condition for sustained investment success. Principles are rules that govern decision making and guide through uncertainty. They are permanent and universal in nature. So, underlying investment principles need not change over time or across geographies. For example, “value equals expected discounted payoff” is the central principle of asset valuation. A set of principles creates a compass and helps an investor choose rationally when confronted with conflicting information.
2. Be an independent thinker
In his book Security Analysis, Graham writes, “You are neither right nor wrong because people agree with you.”
For us, active investing is about beating the benchmark, also known as, the market average. It’s hard to do so if one submits to the herd instinct and behaves like the majority, which in all likelihood, must be close to average behaviour. Average behaviour is precisely what needs to be avoided. In a herd, emotional and reckless actions spread via imitation and contagion. Instead, do your own analysis, think independently about the opportunities the market presents to you, and have the courage to be different.
The ability to think for yourself is one of the most critical skills that an investor needs to develop for long-term success in the stock market.
3. Maintain emotional discipline
Graham writes, “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 sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market.” He also uses a brilliant metaphor of Mr Market, who’s mood swings between optimism and pessimism, to point out the importance of discipline and focus on fundamentals.
We are convinced, that without the conscious mental effort to develop sound principles and a good investment strategy, emotions may take control. In investing, emotionalism is dangerous and objectivity valuable. Here, discipline means forcing oneself not to do what emotions would have one do, preventing us from becoming part of the psychological crowd that makes emotional decisions. Discipline to follow the plan helps maintain objectivity. In many cases, a failure to follow a well-defined strategy is a major cause why the portfolio never reaches its full long-term return potential.