A Dozen Things I’ve Learned from Benjamin Graham about Investing

1. “The last time I made any market predictions was in the year 1914, when my firm judged me qualified to write their daily market letter based on the fact that I had one month’s experience. Since then I have given up making predictions.” You will not outperform the market in making macroeconomic forecasts. This series of blog posts makes that same point over and over. The record of the great investors in this series demonstrates that there is a way to outperform the market without doing any macro forecasting.

2. “Abnormally good or abnormally bad conditions do not last forever.” The market will be cyclical even though you can’t beat the market with macro forecasts. While it is in those swings that opportunity is created, it is by ignoring the temptation to make macro forecast that these great investors find success. Yes, markets will swing up and down. No, you do not need to forecast those swings to be a successful investor.

3. “The disciplined, rational investor … searches for stocks selling a price below their intrinsic value and waits for the market to recognize and correct its errors. It invariably does and share price climbs. When the price has risen to the actual value of the company, it is time to take profits, which then are reinvested in a new undervalued security.” When you focus on intrinsic value you need not time how and when the market inevitably swings. By focusing on the micro (e.g., the value of individual company or bond), the macro takes care of itself. By understanding the simple system you need not understand the complex adaptive systems in which it sits.

4. “The function of the margin of safety is, in essence, that of rendering unnecessary an accurate estimate of the future.” Everyone makes errors and mistakes and so having insurance against those mistakes is wise. With a margin of safety you can be somewhat wrong and still make a profit. And when you are right you will make even more profit than you thought. Finding a margin of safety is not a common event so you must be patient. The temptation to “do something” while you wait is to hard for most people to resist. The best investors are those who have a temperament which is calm and rational. Excitement and expenses are the investor’s enemy.

5. “Market quotations are there for [your] convenience, either to be take advantage of or to be ignored.” This is consistent with Buffett’s point that one should value the market for its pocketbook not its wisdom. That the bipolar Mr. Market can offer you liquid is wonderful. That the market is somehow wise at any given point is a bad bet since that happens relatively rarely as it swings back and forth.

6. “The speculator’s primary interest lies in anticipating and profiting from market fluctuations. The investor’s primary interest lies in acquiring and holding suitable securities at suitable prices.” and “An investment is based on incisive, quantitative analysis, while speculation depends on whim and guesswork.” If you are trying to predict the behavior of a crowd you are a speculator. Great masses of people have a strong tendency to herd which inevitably produces swings in prices. By focusing on value instead of price the intelligent investors can find profits over the long term. ”In the short run, the market is a voting machine but in the long run it is a weighing machine.”

7. “Investment is most intelligent when it is most businesslike. It is amazing to see how many capable businessmen try to operate on Wall Street with complete disregard of all the sound principles through which they have gained success in their own undertakings. ” A share of stock is partial ownership of a business. Too many investors abandon all that they have learned in business.

8. “It is bad business to accept an acknowledge possibility of a loss of principal in exchange for a mere 1 or 2% of additional yearly income. If you are willing to assume some risk you should be certain that you can realize a really substantial gain in principal value if things go well.” It is only acceptable to undertake a risky investment if you are properly compensated for that risk. Too often investors take on “return free risk.”

9. ”There are two requirements for success in Wall Street. One you have to think correctly; and secondly you have to think independently.” This is consistent with Howard Mark’s point that to beat the market you must occasionally take a position that is contrary to the market and you must be right about that view. Following the crowd in all cases guarantees that you will not outperform the market, especially after fees and costs.

10. “To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.” Buying an index fund is easy and smart for a know-nothing investor (dumb money becomes smart when it buys a low fee index fund). Beating the market as a know-something investor (generating alpha after fees and costs) is hard.

10. ”It is undoubtedly better to concentrate on one stock that you know is going to prove highly profitable, rather than dilute your results to a mediocre figure, merely for diversifications sake.” This is ideas advanced by Charlie Munger including: (1) if you are a know something investor, you must do an opportunity cost analysis when decided whether to buy a given stock and (2) closet investors are fooling others and maybe themselves too. http://25iq.com/charlie-munger-book-to-date-chapters-1-5/

11. “Exactly the same mathematical advantage which practically assures good results in the investment field may prove entirely ineffective where luck is the overshadowing influence.” This is consistent with Michael Mauboussin’s point that the investor’s focus should be on the right investing process not the investing result in a given case. Luck, both good and bad, happens. http://25iq.com/2013/07/11/a-dozen-things-ive-learned-from-michael-mauboussin-about-investing/

12. “The investor’s chief problem – and even his worst enemy – is likely to be himself.”



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