5 Investment Lessons You Should Learn from Mr Benjamin Graham

May 4, 2022 Mutual Fund

It’s never too late to learn from ‘The Intelligent Investor’ – Mr Benjamin Graham.

Benjamin Graham was an investor, educator, and economist from the United States. While he is regarded as one of the most illustrious investors, his moniker is ‘Father of Value Investing’. Millions of investors worldwide have read his book The Intelligent Investor. In 1928, Benjamin Graham and David Dodd started teaching ‘value investing’ at Columbia Business School and later collaborated on the book ‘The Intelligent Investor’, in 1949.

While watching a documentary on Warren Buffett’s life, I heard of his mentor, Benjamin Graham for the first time and how he inspired Mr Buffett.

Mr Warren Buffett used to idolise Mr Graham because of his techniques for studying businesses and determining how to value them and at what price to purchase them. Graham’s investment concepts at Columbia served his students admirably, and it’s difficult to overestimate Graham’s impact on the area of professional stock analysis. When Warren Buffett was studying under Benjamin Graham at Columbia University, he learnt the key principles of investment in his class.

Well, the good news is that Mr Benjamin Graham made the same principles easily accessible for every investor by writing the classic book ‘The Intelligent Investor’.

As a big follower of Mr Buffett, I was excited to learn more about Graham, the protege’s master, and his investing principles, but I had my reservations. I was concerned that the book would be too out of date, given that it was first published in 1949, when the financial market and available instruments were significantly different from what we see today.

Nonetheless, I committed to reading through it all and came out of it with a few worthwhile nuggets or principles that are still incredibly helpful and relevant today, particularly for millennials and novice investors with a long-term investing goal.

Many sources of information may be available to you when you begin your investment journey. Nowadays, several social media channels like YouTube, fintech apps, books, and podcasts educate with investment strategies and market information. However, why not start learning the key investing lessons from what Mr Warren Buffett calls ‘the best book on investing ever written’ by his mentor Mr Benjamin Graham.

Here are the 5 Investment lessons from the book that you should learn:

1. Always prepare for the Mr. Market

“The intelligent investor should recognise that market panics can create great prices for good companies and good prices for great companies” – Mr Benjamin Graham.

Mr. Market, as Graham likes to call it, is a very bipolar market. At moments when you least expect it, he is unpredictable, unreasonable, and volatile. Every day, ‘Mr. Market’ appears, offering to purchase or sell his shares at a different price.

According to Graham, individual investors must approach Mr. Market with patience and trust. Rather than paying attention to Mr. Market’s changing sentiments, investors should focus on the real performance of firms and the quantitative and qualitative aspects of mutual fund schemes. To put it another way, do not try to time the market.

Instead of succumbing to herd mentality and allowing Mr. Market’s predominant emotional state to influence your decision-making, an investor should examine her investments objectively. In essence, investors will never know what will happen in the future, but they should understand this, accept it, and be prepared for Mr. Market’s mood swings.

Graham claims that if you want to be a smart investor, you shouldn’t pay too much attention to price fluctuations in the market.

2. Investing is not gambling or speculating

“The individual investor should act consistently as an investor and not as a speculator” – Mr Benjamin Graham.

Mr Graham attained his outstanding success at a period when investing in equities was thought to be nothing more than an out-and-out gamble, yet he was ultimately able to do so with great returns and lower risk. Graham believed that investing should include the assurance of a return on invested capital as well as a worthwhile return over the rate of inflation.

His strategy was to challenge the commonly held belief that markets are efficient, instead promising to find undervalued assets. This is known as intrinsic value investing or value investing.

Buying stocks of undervalued companies that sell for less than their intrinsic value is the emphasis of value investing. The idea is to hold these stocks for a long time to profit from them over a longer period of time. The intrinsic value of a stock is determined by analysing its earnings, assets, and dividend payouts and then comparing it to its market price. If the intrinsic value exceeds the market value, the stock is considered cheap.

Value investors should acquire and hold such stocks for the long term or invest in mutual fund schemes that specialise in buying stocks cheap. Value investors look to buy assets at prices that are significantly lower than their true or intrinsic value. The timeless value investing concepts of Benjamin Graham give a road map to value investors.

3. Always Invest with a Margin of Safety

“Successful investing is about managing risk, not avoiding it” – Mr Benjamin Graham

Mr Graham advocated for a method of investing that provides the investor with a decent margin of safety. Graham consistently emphasised the importance of buying investments with a margin of safety and at a discount to their true or intrinsic worth.

Investors must maintain a margin of safety due to their emotional nature, inability to anticipate the future, and the volatile nature of the equity markets. The most important approach to include a margin of safety in your investment portfolio is to invest in mutual fund schemes that look for undervalued stocks.

Probably one of Graham’s most valuable risk-mitigating pieces of advice to investors is maintaining margin of safety while investing, which can also be achieved by diversifying portfolios and maintaining low debt-to-equity ratios. Graham encourages investors to seek out some margin of safety that they can use to protect themselves from unforeseen or unfortunate events.

The important takeaway is that by buying low or at a discount, investors can take advantage of any upside once the market re-evaluates to its fair value, but they can also protect their downside if things don’t go as planned. Warren Buffet’s main investment rule of not losing money traces its origin back to Graham in many ways,

The reason this works as a risk-mitigation strategy is that it is a lot harder to recover your losses when you buy a stock highly overvalued near its peak over one that is undervalued or trading sideways which may see a small decline in the short term. Investing is built on estimates and uncertainty. A wide margin of safety ensures that the effects of good decisions are not wiped out by errors.

4. Aim for a long-term approach

“In the short term, a market is a voting machine; in the long term, it is a weighing machine.” – Mr Benjamin Graham.

There are always going to be macroeconomic events influencing the dynamic market conditions, which indicates that the sky is falling and that now is a terrible time to invest. Over the short term, you have no way of knowing what markets will do, considering the uncertainty of events. However, over the long term, the market will revert to the mean and reflect intrinsic value.

Graham provides another important takeaway which is Asset allocation. Appropriate distribution of assets across equity and fixed-income products are important for principal protection over the long term and makes sure one has easy access to capital when needed.

You may consider investing in assets that will be in huge demand over the long term, buy them, and hold on to them. In a nutshell, it is intelligent investing. And in some cases, an investor can take on a combination of both approaches. They may allocate a percentage of their portfolio to what they consider safer or longer-term investments and also reserve a small portion to riskier or speculative assets only if you could stomach that risk.

5. Learn from your mistakes

“Letting losses run is the most serious mistake made by most investors.” – Mr Benjamin Graham

During the stock market crash of 1929 and the accompanying Great Depression, Mr Graham lost much of the money he had amassed. Graham learned a painful lesson about risk, but instead of quitting investing like many others, he wrote Security Analysis, which described his methodologies for analysing and pricing assets.

He achieved this by purchasing the stocks of companies whose shares were trading at a large discount to their liquidation value. Graham claimed to have averaged roughly a 20% yearly return over his many years of money management, notwithstanding the hardships of the Great Depression.

Investors frequently make the mistake of skipping the more critical step of researching and analysing a company’s financial statements and projections before investing. Don’t invest in something you don’t understand just because others are doing it or telling you to.

Undoubtedly, gains and losses are a part of the investment journey. This means that if you’re not careful, you could make some serious investment mistakes that can impact the value of your portfolio. Your investing blunders obstruct future decisions, and a disturbed mind might lead to even more costly errors.

Investing, in particular, demands a commitment of time, effort, and patience. However, I’ve noticed that first-time investors are far too eager to get into the game. They do not make a commitment to learn from their mistakes, and as a result, they keep on repeating them. In fact, learning from your mistakes when your investment capital is modest is preferable rather than later, when you have a large corpus.

As a result, the lessons in ‘The Intelligent Investor’ by Mr Benjamin Graham are still relevant in today’s environment. He is a true pioneer in the financial analysis sector because of his strategy of buying low-risk stocks with great return potential. Our world has evolved dramatically in recent decades, but the market remains the same volatile beast. With that in mind, Graham’s counsel is still valid, just as it was in the 1940s.

Another crucial lesson that every investor must understand is the importance of arming themselves with financial knowledge. Financial literacy is a valuable life skill that helps investors grasp the fundamentals of investing and financial planning. If you are financially knowledgeable, you will better understand the investment lessons and implement them in your investment journey.

This article first appeared on PersonalFN here