Benjamin Graham is considered to be the godfather of value investing. His books, "Security Analysis" and "The Intelligent Investor," are required reading for value investors, as they lay out his approach to analyzing securities and finding hidden value in the stock market.
However, these books were published over seven decades ago. The world has moved on significantly since Graham wrote these texts. One issue is that these books have been so widely read that there are now tens of thousands of investors worldwide following the same principles.
When Graham and later Warren Buffett (Trades, Portfolio) first started practicing value investing, the rest of the market didn't really follow any sort of strategy. Therefore it was much easier for them to find undervalued securities and take advantage of inefficient markets.
The U.S. has also shifted away from asset-heavy industries such as steel and shipbuilding, which were some of the easiest industries for finding undervalued securities, to technology stocks, where have intangible assets driving their long-term prosperity.
So, parts of Graham's teachings are now irrelevant, but some parts of his approach are still very useful in today's markets. These are still some of the most important parts of fundamental investing.
Three parts of Graham's strategy
In 1995, Buffett outlined the three critical aspects of Graham's teachings that will always be relevant to investors:
"You know, one is your attitude toward the stock market. That's covered in chapter eight of "The Intelligent Investor." I mean, if you've got that attitude toward the market, you start ahead of 99% of all people who are operating in the market. So, you have an enormous advantage.
Second principle is the margin of safety, which again, gives you an enormous edge, and actually has applicability far beyond just the investment world.
And then the third is just looking at stocks as businesses, which gives you an entirely different view than most people that are in the market."
These principles have nothing to do with valuation techniques or balance sheets. They are all about how investors view the stock market and individual securities. That's why they are timeless. No matter how the market evolves over the next five to 10 decades, they will remain relevant.
The first, as Buffett said, is to understand one's "attitude" towards the market. This requires quite a high level of emotional intelligence. Investors need to know how they behave emotionally in volatile stock markets. Once they understand this, it is easier to build an investment strategy that works to your emotional mindset.
The second approach is to use the margin of safety principle. As Buffett said in 1995, this is applicable far beyond the investment world. Graham's margin of safety was buying a stock for less than his estimate of its intrinsic worth. Investors can use exactly the same approach today. No investor wants to overpay for an asset, even growth stocks.
Waiting for the market to give you an appropriate price for the asset based on its growth potential is not something every investor has the patience to do, but those that can should do well.
The final factor blends in with the other two. Viewing stocks as businesses rather than pieces of paper or trading chips in the casino builds a different mentality around investing. I have found it encourages me to take a longer-term view of a company's potential and spend more time analyzing the proposition before jumping in and hoping that ticker on the screen goes green before the end of the day.
These are the sort of Graham lessons that are invaluable even to this day. It would be a mistake to write off these lessons just because some of his teachings are now irrelevant.
