The 1929 crash was a defining moment for Benjamin Graham. His brief track record before the crash earned 25% returns for his clients, beating the Dow by 5%. But leverage got the best of him in 1929.
His fund lost 70% from 1929 to 1932 versus the Dow’s 80% loss — one of the worst ways to beat the market. The loss had a dramatic effect on his views toward investing.
It also meant he went unpaid during the period. His fee structure was set up so that he only got paid if his clients made money. To supplement his lack of income, Graham took a book deal to write Security Analysis. It was the first book to lay out a framework for sound investing.
Graham made his clients whole by 1935 but he emerged from the crash a much more conservative investor. He swore off leverage and made risk — losing money — his top priority.
In 1949, he wrote The Intelligent Investor, which laid out three important concepts. His parable of Mr. Market taught that you can use market fluctuations to your advantage or your peril if you get too caught up in it. His concept of margin of safety adds a layer of protection from unexpected risks in investing. The third is a bit more obvious but worthy of a reminder. Investing is about buying pieces of a business not pieces of paper.
Graham’s returns following the crash were roughly 20% (from 1936 to 1956). He was largely done with investing by the late 1950s, having moved on to other interests. In his mind, he had successfully solved the puzzle.
Few people are as widely published as Benjamin Graham. He was first published in 1917 for The Magazine of Wall Street and he continued to update his two classics throughout his life.
The one thing that always stands out is Graham’s ability to condense big ideas into a few simple sentences. So I thought I’d share some of the more helpful ideas from some of his works. Here’s Graham:
On Advice to a Young Analyst
I would tell them to study the past record of the stock market, study their own capabilities, and find out whether they can identify an approach to investment they feel would be satisfactory in their own case. And if they have done that, pursue that without any reference to what other people do or think or say. Stick to their own methods. That’s what we did with our own business. We never followed the crowd, and I think that’s favorable for the young analyst. If he or she reads The Intelligent Investor — which I feel would be more useful than Security Analysis of the two books — and selects from what we say some approach which one thinks would be profitable, then I say that one should do this and stick to it… And if you start on a sound basis, you are half-way along. — Source
On Mistakes
The chief hazard of a careful common-stock program is not that it may bring unexpected losses, but that its profits will turn the investor into a speculator greedy for quicker and bigger gains — and therefore headed for ultimate disaster. — Source
***
My experience teaches me that by far the largest losses have been sustained by investors through buying securities of inferior quality under favorable general conditions. These prove to be “fair-weather investments” only, and at the first breath of adversity their prices tend to collapse. (It is then that the disgusted holder sells them out — often at ridiculously low figures — to shrewd and sophisticated operators.) Next to this, as a source of loss, is the purchase of really good common stocks at the inflated values engendered in the upper reaches of a bull market. It is difficult to say exactly when the market level first moves into a dangerously high area. But your own experience is undoubtedly broad enough to tell you — at some stage of the proceedings — that the stock market’s enthusiasm is outstripping its prudence. — Source
***
Individual investment policies are often greatly influenced by the real or fancied need for a certain rate of return. Many people put some of their funds in lower-grade bonds and in preferred stocks, “to sweeten the yield” of their entire portfolio. My long experience leads me to warn strongly against this practice. It is bad business for the rank-and-file investor to trade quality for yield; even if the overall result happens to work out all right. Such securities are peculiarly subject to market vicissitudes, and to corresponding chills and fevers in the minds of their owners. Nearly all of them sell at big discounts at various times in their history. They may then present good opportunities for shrewd bargain-hunters — but that very fact is an argument against their purchase in ordinary times, and at full prices, by the lay investor.
Let me adapt an old investment saying to this type of securities: To the extent they help you eat better they are likely to make you sleep worse. — Source
***
The accepted argument in favor of ultra-conservatism — that the stockholders must ultimately reap the benefit — fails to take the time element into account. According to this view, it is immaterial to a shareholder whether his equities take realizable form in one year or ten. Nothing could be more fallacious; for in this respect stocks are identical with bonds, the return from which is invariably calculated on an annual basis. Hence, in a real sense delay means loss; and to the extent that a stockholder’s reward is postponed, its value to him is diminished. — Source
***
It is easy, of course, to pick out good companies, companies that are better than other companies. But that is not the same thing as picking out good stocks to buy at their current prices. The reason should be obvious. The good companies sell at high prices in relation to what they show, and the companies that are not so good sell at low prices in relation to what they show. And which one is the better one to buy cannot be decided in any simple, offhand manner such as saying it is always better to buy your jewelry at Tiffany’s than at Macy’s. That may or may not be true. — Source
***
To what extent shall we endeavor to anticipate what the stock market is going to do? My own views on this subject are pretty well known to all of you. I am not going to elaborate them. I believe that the endeavor to anticipate what the stock market is going to do is not on the whole a satisfactory activity. It is successful at times and it is unsuccessful at other times, but on balance it does not pay. I am an exponent of the philosophy that the main objective of common stock investment should be pricing, not timing; and by pricing I mean the endeavor to buy securities at prices which are attractive, letting timing take care of itself. — Source
On Asset Allocation
Not long ago I was told of a counsel being given by a large Wall Street banking firm to the effect that an investor is foolish to own any bonds at all, since all he can expect from them is a decrease in the value by reason of inflation. This may seem like good advice to those familiar only with the history of the past 12 years, but to one like myself, who has experienced personally the ups and downs of the past 47 years and has studied those of many decades previously, this counsel seems to be short-sighted and rash.
My motto would be taken from my favorite poet, Virgil. It has only three words: “In utrumque paratus” — “Ready for either event.”
Own common stocks, if you wish, in order to protect yourself against serious further erosion of the dollar and in order to participate in the excitement of our spectacular bull market. But be sure you own enough bonds to safeguard both your financial strength and your peace of mind against the inevitable day of reckoning for the now happy breed of stock market speculators. — Source
***
As a further reason for diversification of investments between bonds and stocks, there is the unbalanced state growing out of the multiplication of cash and bond elements in our total economy. Cash and bonds represent at best intangible or indirect claims upon the wealth of this country. Common stock ownership, if properly assumed and administered, represents a relatively tangible interest in the national wealth. Even in the philosophical sense it would appear wise for the investor to put his affairs in such shape so that he owns both direct and indirect claims against our tangible, productive facilities. — Source
On Value Investing
I had the pleasure last week of talking to a group of ladies only for the first time in my career. Trying to bring this subject home to them by some analogy with a feminine quality, I pointed out to them that there were two ways of buying stocks: either on the basis that they buy groceries, or on the basis that we men buy perfume for them. When you buy stocks on the grocery basis you try to get adequate quality at a reasonable price. When you buy on the perfume basis you try to buy the stock which is most popular and which gives the most prestige; you pay comparatively little attention to price; in some respects, the more the price you pay the better you seem to like it. I suggested to the ladies that if they would take the grocery approach to the selection of securities they would probably do a very substantially better job in investments than we men do, because they are more likely to see, appreciate and take advantage of a true bargain whenever they see one. — Source
***
All experienced investors know that earning power exerts a far more potent influence over stock prices than does property value. The worth of a business is measured not by what has been put into it, but by what can be taken out of it. — Source
***
We have always considered the value of the business to a private owner as a significant element in appraising a stock issue. We now have a parallel figure for security analysts to think about: the price that might be offered for a given company by a would-be acquirer. — Source
***
The true measure of common stocks values, of course, is not found by reference to price movements alone, but by price in relation to earnings, dividends, future prospects, and, to a small extent, asset values.
Present concepts of common stock valuation turn largely on estimating average future earnings and dividends and applying thereto a suitable capitalization rate or multiplier. Since these elements are all matters of prediction or judgment, there is room for a wide difference of informed opinion as to the proper value for a single stock or group of stocks at any time. Uninformed or speculative opinion will, of course, cover an even wider range as the market swings from the depth of pessimism to the heights of optimism. — Source
***
In a substantial percentage of issues the book value figures have no worthwhile connection with the investment value of the shares. — Source
On Mr. Market
In my experience marketability has proved of dubious overall advantage. It has led investors astray at least as much as it has helped them. It has made them stock-market minded instead of value-minded. I have a puritanic vision of the true investor as someone who is entirely disinterested in what the stock market does except on two sorts of occasions that meet his convenience. The first occasion is when the market obligingly permits him to buy a group of common stocks at less than their indicated value; the second is when with usual courtesy it permits him to sell…those that are of no importance to him. True, he may sometimes dispose of an investment at a loss. But that should not be because the market price went down; it should be because things went badly for the company and the true value of the shares declined below the price he paid for them.
On Margin of Safety
The concept of buying securities at less than their indicated value includes what I have always regarded as the most dependable assurance of success in every form of investment — whether it be bonds or stocks — and that is the concept of margin of safety. In bonds, as you are aware, you want to buy bonds which cover their interest charges with a goodly margin, because that indicates that even though things may not work out so well in the future, your bond will remain a sound bond. The same concept can be applied to common stock investment, and I think you will find if you study the subject, that it has stood up extremely well over the last 50 years. When you have such a margin on a common stock purchase, then if things do not work out as well as you expect them you still have a cushion to absorb this disappointment. You can end up, if not with a profit, at least with no loss. But that can not be done when you are operating in the stock market either on the basis of anticipating what the market is going to do very soon, or on the basis of how the company is going to fare over the next few years. If you are wrong on either of these approaches then you are almost sure to lose money, because you have no margin of safety to fall back upon. — Source
On Growth Stocks
There is undoubtedly an organic but inverted relationship between the growth stock concept and the theory of undervalued securities. The attraction of growth is like a tidal pull which causes high tides in one area, the assumed growth companies, and low tides in another area, the assumed nongrowth companies. We can measure, in a sense, scientifically the distorting effect of this influence by using as our standard the minimum business value of enterprises in the nonfavored group. — Source
***
True, there is safety in growth, and some of us will go so far as to declare that there can be no real safety except in growth. But these sound to me more like slogans than scientifically formulated and verified propositions. Again, in the growth field the element of selectivity is so prominent as to place diversification in a secondary and perhaps dubious position. A case can be made for putting all your growth eggs in the one best or a relatively few best baskets. — Source
***
A word should be added here about technology. Most of the high-multiplier stocks have been “technological issues” — e.g., computers, photographic processes, electronics. But technological change is one of the most speculative elements in the valuation picture. What it gives to one company it is likely to take away, at least in part, from others, which may have been last year’s technological favorites. The high multipliers can be justified only by very long-term projection of future growth and maintained earnings; but technology itself, with the rapid changes it brings about, implies the opposite of dependable long-term expectations for any of its products or processes, and even for any enterprise largely controlled by technological factors. — Source
Last Call
- Panic Selling Quantified – B. Ritholtz
- Petrified in a Bear Market: Until You See an Exit Sign – Klement on Investing
- How People Think – M. Housel
- The Need for an Investment Premise – Safal Niveshak
- When the Optimists are Too Pessimistic – Of Dollars and Data
- Feedback: Information as a Basis for Improvement (pdf) – M. Mauboussin
- Marks Memo: The Pendulum in International Affairs (pdf) – H. Marks
- Russia in Ukraine: Let Loose the Dogs of War! – Musings on Markets
- Lessons From 19 Years in the Metaverse – Atlantic
- 10 Frank Lloyd Wright Houses Worth Visiting Across the U.S. – Afar
