We all look for good investment opportunities and principles to make our investment successful. Over time, there had been many who suggested different theories and frameworks for successful investments. Benjamin Graham is one of those legends in the investing field known for ‘Value Investing’. He suggested a few strategies that outstand even in the 21st century guiding investors like you and me to navigate the unpredictable nature of the financial landscape. So keep reading till the last word as this article will help you understand Graham’s investment philosophies one by one and have long-term success.
Who is Benjamin Graham?
Before you implement someone’s suggestion in your investment strategies, you want to know the person, right? Well, Benjamin Graham is not just an author or a teacher, he was an extremely successful investor in the previous century. His written books are considered the prerequisites for any investor even though they are highly complex. And one more surprising piece of information why you should listen to this long-gone legend, he was a direct teacher and investment mentor of Warren Buffet! Convinced enough? Let’s get started!
Investment Strategies by Benjamin Graham
The study has found 6 strategies which should guide you to improve your investment decisions.
Determine What Type of Investor You Are
Graham suggested that as an individual you must determine whether you are an investor or not. He divided stock buyers into 2 types: 1. The investors and 2. The Speculators. The speculators look at a stock as a piece of paper and they do not care much about anything but short-term return from the investment. Conversely, the investors mainly buy stock to be a part of the company. They value the company and consider the stocks as their own business. So as a player in the investment landscape, you should determine who you are. Are you an investor or a speculator?
Make Sure of The Margin of Safety
The stock market is extremely volatile making the price of stocks fluctuate. So, while making the purchasing decision you must understand the intrinsic value of the stocks. You can do that by fundamental analysis of the company, examining the company’s financial statements and prospects. By identifying the intrinsic value, investors can purchase a stock at a discounted price. Graham suggested that if you make sure of the margin of safety by estimating a conservative intrinsic value when the condition of the company improves you will be profitable easily as the market re-evaluates fair price. In case, the company does not improve you can still save your core investment. This makes the investors conservative, reducing their risk. Margin of safety is one of the best investment strategies by Benjamin Graham.
Investment in Undervalued Companies Can Make You Profitable
According to Graham, investors should look for companies that are undervalued in the market because of market sentiment, economic conditions, company-specific events, or temporary setbacks. You can evaluate by assessing the company’s growth prospect and comparing it with similar players in the same industry. By identifying undervalued companies and investing in them at lower than a fair price, investors should wait for the market to correct its price to the true value. Investing in undervalued companies can bring high returns for investors. However, you should note down that the market might not re-evaluate the company’s true value immediately.
Do Not Run From Market Volatility, Make a Profit From It
Graham opined that volatility is a normal behavior of the stock market and every investor need to have the patience and courage to deal with it. Investment means you are also taking the risk of the business, so do not run in times of stress or downturn. Instead, clever investors capitalize on these downturns as opportunities. Graham described this situation with a metaphor where he characterized the stock market as a whimsical character named Mr. Market. So, Mr. Market is someone who quotes a high price for a product out of euphoria and the next day, he reduces the price out of depression. That is how the stock market works. Graham suggested that you as an investor should not let Mr. Market manipulate your investment decisions. Rather, in times of downturn you purchase more shares and sell them when the price is too high. Utilizing market volatility will unlock high profits for you.
Diversify your Investment Portfolio
We all are aware of not putting all of our eggs in the same basket metaphor. This is what Graham emphasized in investment. He suggested that investors diversify their risks across companies and industries to avoid the effect of a single investment’s poor performance on their overall wealth. Diversification makes the portfolio profitable, balanced, and excessively risk-free.
For example, you have seen huge potential in the agricultural sector in recent years. So you invest 90% of your savings in the agriculture industry across different companies. But in the following year due to natural calamities, the overall production of the firms decreases and a few became bankrupt. Imagine how it would impact your wealth. There’s a high chance that you will lose all of your investment. But if you diversified into other industries, at peat you could have saved a minimum portion of the money.
However, Graham also warned that spreading your portfolio into too many industries could dilute potential returns. So keep your portfolio diversified into a limited number of sectors to keep it balanced and profitable simultaneously.
Make Long-Term Investments and Keep Patience
In a world where we look for shortcut success, Graham always succeeded with a patient and long-term investment philosophy. He discouraged speculation and short-term trading as it does not align with value investing. In his books and other publications, he showed the futility of market speculations. He recommends that investors should adopt a disciplined strategy, holding onto quality investments for longer periods to maximize their wealth.
Graham’s philosophy aligned with value investing, where investors seek out undervalued securities with strong fundamentals and patiently wait for the market to recognize their true worth. By investing for the long term, investors can benefit from the power of compounding returns and allow time for their investments to reach their intrinsic value.
Conclusion
Benjamin Graham’s suggestions and strategies are timeless. Even in this modern era, investors go through each of his statements and try to take them as guidance. By incorporating the strategies we discussed today, you can take more informed choices in your investment decision. Remember, you do not have to follow all of these rules while making investment decisions. When the strategy matches your context, take it as a guide to better understand the outcome. Hope this article helped you see more in the investment landscape.
References
- Investopedia: https://www.investopedia.com/articles/basics/07/grahamprinciples.asp
- Forbes: https://www.forbes.com/sites/investor/2023/03/15/ideas-from-benjamin-graham-the-father-of-value-investing/
I am a finance enthusiast who writes well-researched articles and blogs on business analysis, the financial service industry, and marketing analytics. My writings result from accurate market data and the application of my profound theoretical knowledge about business.