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Robert Stephens, CFA
Robert Stephens, CFA
Articles (358) 

Is Benjamin Graham’s Advice on Value Investing Still Useful?

Could a more modern investment strategy be more profitable?

June 12, 2020 | About:

Benjamin Graham is known as the father of value investing. His views on the subject helped to shape the strategies of a generation of value investors, including Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) Chairman and CEO Warren Buffett (Trades, Portfolio).

Some investors may feel that the economy and technology have moved on considerably since Graham's day. As a result, they may argue that a more up-to-date investment style is required to capitalize on fast-moving stock markets.

However, in my view, Graham's focus on being disciplined, using other investors’ weaknesses to your advantage and obtaining a margin of safety are just as relevant today as they ever have been.

Self-discipline

The stock market has experienced a high degree of volatility in the past few months. For instance, the S&P 500 declined 34% to reach a three-year low in March before experiencing a market rally that produced a 40% rise.

During periods of high volatility, some investors may become fearful about the performance of their portfolios. This may lead them to avoid purchasing stocks in an effort to avoid losses.

A more effective strategy is to focus instead on company fundamentals. During volatile periods, quality businesses can trade with attractive valuations. This may mean there are buying opportunities for investors who can maintain a disciplined mindset when apportioning their capital for the long term.

As Graham once said, "Investing isn't about beating others at their game. It's about controlling yourself at your own game.”

Margin of safety

The stock market’s performance over the past few months provides evidence that predicting its short-term movements is impossible, except by chance.

Therefore, even though technology has improved dramatically over the past few decades, the large number of variables that affect stock prices mean that a margin of safety is just as important as ever.

A margin of safety provides a buffer zone for investors in case the business in question experiences challenging trading conditions.

Benjamin Graham required a margin of safety when buying stocks throughout his career, and did not attempt to forecast short-term price movements, saying, "The function of the margin of safety is, in essence, that of rendering unnecessary an accurate estimate of the future."

Human nature

Graham’s value investing philosophy is also highly relevant today because human nature is a constant. Investors have always overreacted to positive and negative stock price movements and are likely to continue this trend over the long run.

Value investors can take advantage of the overreactions of their peers through buying when sentiment is at its weakest and selling when it is at its strongest.

For instance, some sectors are unpopular among investors at the moment. They include resources companies and leisure businesses that face uncertain futures due to a weak economic outlook. Buying quality companies operating in those sectors while they offer margins of safety could lead to high returns in the long run.

As Graham once said, "Though business conditions may change, corporations and securities may change, and financial institutions and regulations may change, human nature remains the same.”

Disclosure: The author has no position in any stocks mentioned.

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Rating: 5.0/5 (8 votes)

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Comments

superguru1
Superguru1 - 3 weeks ago    Report SPAM

FAANGM are the great value stocks of today. Buffett's largest value investment is APPLE for a reason. He regrets not buying Amazon and MSFT. Microsoft he could not buy becuase of his friendship with Bill Gates (Trades, Portfolio).

The margin of safety is in the moat, solid balance sheets, profit margins and the growth potential of these businesses.

Watchdog
Watchdog premium member - 2 weeks ago

I agree with the author that the principles of value investing as taught by Graham and others are just as relevant today as they have always been. Adhering to these may not lead to rewards in the short run but in the long run. In the short term it might even look like value investing is "dead" since overpriced popular stocks tend to become even more overpriced in this market and stocks unloved by the market may keep their low pricing for quite a while. However I am quite sure that the current distortions in market valuations sooner or later will revert to more reasonable relations. For a value investor (as opposed to the momentum investor) it just takes rationality, patience and time to suceed over the long term.

superguru1
Superguru1 - 2 weeks ago    Report SPAM

May be stock unloved by market for last 12 years are unloved for a reason?

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