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Investing principles from Benjamin Graham: The Father of Value Investing

Benjamin Graham was a British born economist, professor, and investor who taught at Columbia University. He was also a mentor to some of the most famous investors of the 20th century, including Irving Khan, John Templeton, & Warren Buffett. Buffett called him "the second most influential figure in his life, only after my father". His research in securities is fundamental to modern-day valuation concepts used by stock analysts worldwide. Hence, he is rightly referred to as "The father of value investing".

Investment Philosophy

His two publications can best describe Graham's philosophy in neoclassical investing – 'Security Analysis' in 1934 and 'Intelligent Investor' in 1949. Both books laid down the fundamentals of value investing by:

-   Explaining the differences between investing and speculating

-   Buying of undervalued stocks with a potential to grow over time

-   Picking stocks with a long-term horizon

-   Looking out for creative accounting methods followed by certain corporations to make their Earnings per Share (EPS) look more attractive

-   Advocating companies to pay dividends to shareholders than retaining all their earnings

Graham's methods followed strictly in today's world might seem outdated, with Warren Buffett famously stating in an interview in 1988, "Boy, if I had listened only to Ben, would I ever be a lot poorer". However, his contributions to the fundamentals of finance, investment, and risk cannot be overstated. 'Intelligent Investor', his second publication, is still on the mandatory reading lists of almost all prestigious institutions globally.

Additional Read: 5 Financial Planning Tips for Young Professionals

Learnings

If the greatest investors of the 20th century treated Graham as a mentor and teacher, we must learn a few things from him:

   1. Buy-and-hold investing: The fundamental tenets of value investing is that one must buy and hold for the long-term. In both his books, Graham encourages people to identify Stocks for the long term by finding companies trading below their intrinsic value (which he called 'margin of safety') and letting the market do the rest of the work. Benjamin Graham bought stocks only when they were available below 2/3 of their intrinsic value. This margin of safety minimizes the downside risk of his investments.

   2. Avoid speculating temptation: The thumb rule of value investing is to preserve capital and minimise losses. Hence, Graham recommends that people should distribute their wealth (25-75%) into Bonds depending on the market conditions, which prevents them from making unprofitable trades via speculating. "People who invest make money for themselves; people who speculate make money for their brokers" – Intelligent Investor

   3. Cost averaging: An investor is always worried about buying big plenty of stocks at the peak of their price. Hence, to combat this risk, Graham introduced dollar-cost averaging – purchase equal dollar amounts of investment at periodic intervals. This helps take advantage of price dips and market highs. The modern-day Systematic Investment Plan is created on the same fundamentals of cost averaging over the long term.

   4. Investor Psychology: Graham once famously said, "an investor's chief problem and even his worst enemy is likely to be himself." Often, an investor's biggest challenge is to battle the thoughts in their head. Thoughts that include, but not limited to:

  • Do I sell?
  • Do I hold?
  • I'm not seeing any returns. What do I do now?
  • My portfolio is in red. Was this a mistake?

Having doubts is a part of the journey and completely normal. But trusting the process and keeping emotions out of it is what truly separates a great investor from others.

Additional Read: How to Use Mutual Fund Investment for Financial Planning

   5. Investor Activism: Graham advocated having a sense of ownership in the company. He questioned the decisions made by companies' managements, advocating for higher dividends paid out to shareholders. He also questioned the management's creative accounting practices to show inflated numbers (especially EPS). "You will be much more in control if you realise how much you are not in control."- The Intelligent Investor says.

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