Benjamin Graham’s investment principles, laid out by the investor and teacher nearly 100 years ago, still apply to this day. However, investors often misinterpret these principles, which means they are often misused and used in a way that leads to errors.
Indeed, many investors spend too much time concentrating on Graham’s models for finding value stocks and his templates for finding undervalued securities, such as the net net value investing method. Concentrating on these templates is a huge mistake in my view as it focuses on a long-gone market situation and overlooks the investor’s most valuable lessons around investing in businesses you know well, which appear undervalued and fall within your circle of competence.
Graham's models are still relevant
Investors tend to concentrate too much on Graham’s valuation models because they’re looking for easy templates to speed up the investment process.
I know this because I have been guilty of this in the past. I believed that by following Graham’s templates, I would be able to beat the market investing in deep value stocks. That didn’t happen. I didn’t realize that when Graham pioneered these ideas, he had no competition. Other investors just didn't know where to look for information like he did. Today there are hundreds of websites looking for these securities and hundreds of thousands (possibly millions) of investors around the world trying to follow the same roadmap and beat the market.
Still, that does not mean that Graham’s advice on how investors should think about the market and design a process that works for them should be ignored. This is something Warren Buffett (Trades, Portfolio) covered all the way back in 1995 at the Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) annual meeting. One shareholder asked the Oracle of Ohama if he thought that Graham would invest in high-growth tech stocks, and this was how Buffett replied:
“I think that the principles — I think Ben Graham’s principles — are perfectly valid when applied to high-tech companies. It’s that we don’t know how to do it, but that doesn’t mean somebody else doesn’t know how to do it. My guess is that if Bill Gates (Trades, Portfolio) were thinking about some company in an arena that he understood and that I didn’t understand, he would apply much the same way of thinking about the investment decision that I would. He would just understand the business. I might think I understand Coca-Cola or Gillette. And he may have a — he may have the ability to understand a lot of other businesses that seems as clear to him as Coke or Gillette would seem to me. I think once he identified those, he would apply pretty much the same yardsticks in deciding how to act. I think he would act — I think he would have a margin of safety principle that might be a little different because there’s essentially more risk in a high-tech company.”
Put another way, an investor can use Graham’s principles for any investment, even to this day. While the example above might be over two decades old, it still applies. Using a margin of safety to value a stock and compute the value of its future earnings is still very relevant, and perhaps even more so in an uncertain economic climate.
Other Graham principles that should always apply include thinking about stocks as businesses and taking advantage of market volatility. The market is the servant of the investor.
Investors should not let market movements influence their decisions, mainly because the market does not care what you think. Letting yourself be influenced by something that has no emotions and does not care about you will only end in disaster.
Graham also made it clear that he believed there was a clear definition between the investor and the speculator. Investors buy and hold companies, while spectators gamble on the direction of share prices. Once again, these principles still apply to this day.
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