1. Margin of Safety

Explanation: The margin of safety principle emphasizes investing in securities priced significantly below their calculated intrinsic value. This creates a buffer against errors in judgment or unexpected market events.

Implementation: Determine the intrinsic value using various valuation methods such as discounted cash flows (DCF) or net asset value calculations. Only buy when the market price is a certain percentage below this intrinsic value to ensure a margin of safety. This is why we typically don’t buy overvalued stocks even though they may be the talk of the party.

2. Intrinsic Value

Explanation: Intrinsic value is the true value of a company based on its fundamentals, rather than market sentiment. Benjamin Graham’s approach to investment analysis involves rigorous evaluation of a company’s earnings, assets, dividends, and overall financial health.

Implementation: Analyze financial statements, look at metrics like price-to-earnings (P/E) ratios, price-to-book ratios, and free cash flows. Consider long-term earnings growth rates and historical performance to estimate a realistic intrinsic value. We love to buy stocks and bonds when they are selling significantly less than what they are worth.

3. Mr. Market

Explanation: This metaphor illustrates the stock market as a business partner with extreme mood swings. Mr. Market offers to buy or sell stocks at different prices, often influenced by irrational behavior.

Implementation: Use the volatility of market prices to your advantage. When Mr. Market is overly pessimistic, buy undervalued stocks; when excessively optimistic, consider selling or avoiding overvalued securities. This helps you make decisions based on rational analysis rather than emotional responses. Easy to understand but hard to do, but we try to be disciplined.

4. Long-Term Perspective

Explanation: Graham advocated a patient investment strategy, where investors should be prepared to hold onto their investments and allow them time to appreciate.

Implementation: Establish an investment horizon of several years. Avoid the temptation to react to short-term market fluctuations. Focus on the underlying performance of the businesses you own rather than daily price changes. Phil Fisher once stated that if you choose the stock that you buy correctly, the time to sell is seldom. We agree with Phil, and we don’t trade in the market very often.

5. Defensive and Enterprising Investors

Explanation: Graham differentiated between the two types of investors. Defensive investors seek safety and steady returns with minimal effort, while enterprising investors are active in searching for undervalued securities, often doing deeper analysis. We are a combination of both defensive and enterprising investor.

Implementation: Defensive investors might create a diversified portfolio of established blue-chip stocks and bonds. In contrast, enterprising investors might engage in value investing with more rigorous research and stock-picking strategies, possibly in small-cap or distressed companies.

6. Diversification

Explanation: Graham advised investors to diversify their portfolios to spread risk. Proper diversification can protect against the volatility of individual stocks.

Implementation: Include a mix of asset classes, sectors, and geographic regions in your portfolio. However, avoid excessive diversification — owning too many stocks can lead to average returns and dilution of your expertise. Warren Buffett says diversification is for those who don’t know what they are doing. We diversify, understand what we are doing, but don’t over-diversify.

7. Avoid Speculation

Explanation: Graham made a clear distinction between investing (which involves careful analysis) and speculation (which often relies on trends or market psychology).

Implementation: Base your investment decisions on fundamental analysis rather than market trends or hype. Stick to companies you understand well and whose valuations you can justify. I tell many clients on numerous occasions, “How do I spell the word NO?”

8. Emotional Discipline

Explanation: Successful investing also requires emotional resilience. Investors often face market pressures that can lead to impulsive decisions driven by fear or greed.

Implementation: Create a disciplined investment strategy and stick to it, regardless of market conditions. Use techniques such as setting criteria for buying and selling and maintaining a rational mindset during market fluctuations. I try not to get emotional with my investments, only my kid.

9. Value Over Growth

Explanation: Graham believed that growth stocks could become overvalued, and that true investment opportunities lie in undervalued securities. Amen to that one!

Implementation: Focus on fundamental analysis and look for “cigar butt” investments – businesses that may have reasonable future growth but are trading for much less than they are worth today. Prioritize companies with strong fundamentals over market fads.

10. Continuous Learning

Explanation: Investing is a dynamic field; continual learning is vital to staying informed about new methodologies, market trends, and shifts in the economic environment. This is why I continually go to school. I am constantly learning and evolving, and school makes me a better investor. This is also why I have been a dedicated teacher at UCLA for over 25 years.

Implementation: Read books, articles, and research papers about investing. Attend seminars, follow market news, and learn from your own investment experiences. Be prepared to adapt your strategies based on new information and insights. Take lots of classes and try to read a book a week.                                 

By adhering to these tenets, investors can develop a disciplined, rational approach to investing that prioritizes long-term success over short-term speculation. Ben Graham’s insights remain relevant today and continue to guide both novice and experienced investors in navigating the complexities of the financial markets.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by BFSG), will be profitable or equal any historical performance level(s). Please see important disclosure information here.