In June 1955, an interview with Benjamin Graham was conducted and it got published in US News & World report. I would like to share some key highlights from the interview.
Benjamin Graham mentioned that his lifetime experience showed him there was high risk in having his investments only in bonds. In 1913, the price level had tripled and at the same time, interest had gone down a lot. So the old bonds with high coupon rates that had been called, no longer exist. The result was that the investor whose investments were solely in bonds has suffered both a reduction in income return and a large reduction in the purchasing power of whatever income or principal he had.
If a man with $5000 income, with little saved, didn’t expect to accumulate much out of that income, then he shouldn’t invest in any common stocks, as what he could gain by having a common stock component in his savings isn’t large enough to warrant the amount of intelligence and character needed to carry on an investment program in common stock soundly.
His portfolio should consist of insurance and government bonds. Besides, the most possible action for the man, who wished to build up an interest in stocks out of his savings, is to follow the accumulation programs in the investment fund area (investment companies).
Ben began to cite the example of the widow who had all her money in common stocks, and was doing pretty well for a while. Then the market collapsed, she found her principal value greatly reduced. She was likely to get panicky to sell out at the bottom, or near the bottom, and had a harrowing experience as a result. It’s the same for most people; they sell stocks at low prices not because they have to but because they are scared. It was not the outer compulsion that governs it as much as the inner compulsion, drive, and inner apprehension.
To do intelligent investing, Ben Graham said that a person who was really determined to prepare himself to be an intelligent investor can do it. For example, an individual could take a correspondence course, learning the job just the way one would learn learn to play the piano. And the next best thing for him was to decide that he couldn’t get the optimum investment results without his optimum preparation. Otherwise, he could buy investment company shares on the regular basis. That was the concept of dollar-averaging.
Dollar averaging was the investment method in which he set aside regularly a fixed amount of money and invested it in common stocks generally, either in a single common stock or in the group investment through investment company shares.
By investing same amount of money regularly, let's say every three months, the investor got two advantages. First, over the years the investment reflects averaged market price rather than high market level – which was where he was likely to buy if he followed the crowd. Second, the arithmetic of dollar averaging gave the investor more shares at lower prices than at higher prices, so that the average cost was lower than the arithmetical average. If he put $1,000 in one kind of stock and the price was $10, he’d get $10 shares. If later it was $20, he’d get 50 shares. The investor bought more stocks at $10 than at $20. Consequently, the average price was less than $15
Over Ben’s past experience, the minimum time to take dollar averaging to produce results was 7 years, average 10 years, and the investor can start anytime. Even at the top of the market in 1929, the investor would have done all right by 10 years later. Nevertheless, there was still the question of whether investor should start dollar averaging when the market was is high.
For the individual of income $100,000 or above, they shouldn’t do dollar averaging, as the higher up the person is on the income scale, the more variable generally is the amount of money that they had for the investment. If they wanted to become the expert investor, they should go over into the field of interesting situations, based on their knowledge and studies. The investment can range from growth stocks, to bargain securities, to special situations.
Growth stocks are described by Ben as a stock which 1) would be expanding its business and profits at more than an average rate, and 2) would invest the large part of its profit back in the business. However, the growth stock leads into the future, and we don’t have any knowledge of the future. Someone might have a more expert guess than others, but it was still a guess. Many mistakes have been made in buying growth stocks on the theory that the future would duplicate the past.
In investing, waiting is a difficult operation itself. When the investor is waiting, he is wondering how much he’s missing, whether he’ll ever have the chance to get back at a better time. When chance does occur, he wonders when the right moment to start coming in is. All those things are difficult decisions to make. It is much easier to do the thing mechanically than it is to do it by these judgements.
When Benjamin Graham got asked how to identify underlying issues, he noted that the simplest test that he had was the value of company as a private business. If we can look at a company and say that at this price for the stock, the whole enterprise was selling at a figure which was clearly less than it would be worth to me if it were my business. In some cases, the very fact that the company was selling in the market for less than working capital alone, with no value given to fixed assets. That was the “prima face indication” that the price was too low.
Last but not least, buying on margin shouldn’t be advised unless the investor was under exceptional circumstances. For that kind of investor, he’d already been in the market and had a considerable stake in common stocks – it would be sounder to start a selling policy at this stage. It could be in upward scale, involving small amounts at present, of it he really feels apprehensive, he might sell larger. After he sold it out, he might wait a year, decide he was wrong, and then go back in the market on dollar-averaging basis. At least the investor might say he was wrong intelligently.
Benjamin Graham mentioned that his lifetime experience showed him there was high risk in having his investments only in bonds. In 1913, the price level had tripled and at the same time, interest had gone down a lot. So the old bonds with high coupon rates that had been called, no longer exist. The result was that the investor whose investments were solely in bonds has suffered both a reduction in income return and a large reduction in the purchasing power of whatever income or principal he had.
If a man with $5000 income, with little saved, didn’t expect to accumulate much out of that income, then he shouldn’t invest in any common stocks, as what he could gain by having a common stock component in his savings isn’t large enough to warrant the amount of intelligence and character needed to carry on an investment program in common stock soundly.
His portfolio should consist of insurance and government bonds. Besides, the most possible action for the man, who wished to build up an interest in stocks out of his savings, is to follow the accumulation programs in the investment fund area (investment companies).
Ben began to cite the example of the widow who had all her money in common stocks, and was doing pretty well for a while. Then the market collapsed, she found her principal value greatly reduced. She was likely to get panicky to sell out at the bottom, or near the bottom, and had a harrowing experience as a result. It’s the same for most people; they sell stocks at low prices not because they have to but because they are scared. It was not the outer compulsion that governs it as much as the inner compulsion, drive, and inner apprehension.
To do intelligent investing, Ben Graham said that a person who was really determined to prepare himself to be an intelligent investor can do it. For example, an individual could take a correspondence course, learning the job just the way one would learn learn to play the piano. And the next best thing for him was to decide that he couldn’t get the optimum investment results without his optimum preparation. Otherwise, he could buy investment company shares on the regular basis. That was the concept of dollar-averaging.
Dollar averaging was the investment method in which he set aside regularly a fixed amount of money and invested it in common stocks generally, either in a single common stock or in the group investment through investment company shares.
By investing same amount of money regularly, let's say every three months, the investor got two advantages. First, over the years the investment reflects averaged market price rather than high market level – which was where he was likely to buy if he followed the crowd. Second, the arithmetic of dollar averaging gave the investor more shares at lower prices than at higher prices, so that the average cost was lower than the arithmetical average. If he put $1,000 in one kind of stock and the price was $10, he’d get $10 shares. If later it was $20, he’d get 50 shares. The investor bought more stocks at $10 than at $20. Consequently, the average price was less than $15
Over Ben’s past experience, the minimum time to take dollar averaging to produce results was 7 years, average 10 years, and the investor can start anytime. Even at the top of the market in 1929, the investor would have done all right by 10 years later. Nevertheless, there was still the question of whether investor should start dollar averaging when the market was is high.
For the individual of income $100,000 or above, they shouldn’t do dollar averaging, as the higher up the person is on the income scale, the more variable generally is the amount of money that they had for the investment. If they wanted to become the expert investor, they should go over into the field of interesting situations, based on their knowledge and studies. The investment can range from growth stocks, to bargain securities, to special situations.
Growth stocks are described by Ben as a stock which 1) would be expanding its business and profits at more than an average rate, and 2) would invest the large part of its profit back in the business. However, the growth stock leads into the future, and we don’t have any knowledge of the future. Someone might have a more expert guess than others, but it was still a guess. Many mistakes have been made in buying growth stocks on the theory that the future would duplicate the past.
In investing, waiting is a difficult operation itself. When the investor is waiting, he is wondering how much he’s missing, whether he’ll ever have the chance to get back at a better time. When chance does occur, he wonders when the right moment to start coming in is. All those things are difficult decisions to make. It is much easier to do the thing mechanically than it is to do it by these judgements.
When Benjamin Graham got asked how to identify underlying issues, he noted that the simplest test that he had was the value of company as a private business. If we can look at a company and say that at this price for the stock, the whole enterprise was selling at a figure which was clearly less than it would be worth to me if it were my business. In some cases, the very fact that the company was selling in the market for less than working capital alone, with no value given to fixed assets. That was the “prima face indication” that the price was too low.
Last but not least, buying on margin shouldn’t be advised unless the investor was under exceptional circumstances. For that kind of investor, he’d already been in the market and had a considerable stake in common stocks – it would be sounder to start a selling policy at this stage. It could be in upward scale, involving small amounts at present, of it he really feels apprehensive, he might sell larger. After he sold it out, he might wait a year, decide he was wrong, and then go back in the market on dollar-averaging basis. At least the investor might say he was wrong intelligently.
