Guru Speak: Some More Excerpts from Benjamin Graham’s Writings

Continuing on the topic of investing wisdom from Benjamin Graham, here are a few more excerpts from the Master’s writings.

1. On Portfolio Policy: We are thus led to put forward for most of our readers what may appear to be an oversimplified 50-50 formula. Under this plan, the guiding rule is to maintain as nearly as practicable an equal division between bond and stock holdings. When changes in market level have raised the common-stock component to, say 55%, the balance would be restored by a sale of one-eleventh of the stock portfolio and the transfer of the proceeds to bonds. Conversely, a fall in the common-stock proportion to 45% would call for the use of one-eleventh of the bond fund to buy additional equities.

2. On The Defensive Investor and Common Stocks: No one has yet discovered any other formula for investing which can be used with so much confidence of ultimate success, regardless of what may happen to security prices, as Dollar Cost Averaging. (Quoted by Graham from another study)

3. On Portfolio Policy: Investment policy depends in the first place on a choice by the investor of either the defensive (passive) or enterprising (aggressive) role. There is no room in this philosophy for a middle ground, or a series of gradation, between the passive and aggressive status. Many, perhaps most, investors seek to place themselves in such an intermediate category; in our opinion that is a compromise that is more likely to produce disappointment than achievement.

4. On Market Fluctuations: In any case, the investor may as well resign himself in advance to the probability rather than the mere possibility that most of his holdings will advance, say 50% of more from their low point and decline the equivalent one-third or more from their high point at various periods in the next five years. A serious investor is not likely to believe that the day-to-day or even month to month fluctuations of the stock market make him richer or poorer.

5. On Market Fluctuations: It is for reasons of human nature, even more than by calculation of financial gain or loss, that we favor some kind of mechanical method for varying the proportion of bonds to stocks in the investor’s portfolio. The chief advantage, perhaps, is that such a formula will give him something to do.

6. On Market Fluctuations: A true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would be spared the mental anguish caused to him by other persons’ mistakes of judgment.

7. On Investment Advisers: If the reason people invest is to make money, then in seeking advice they are asking others to tell them how to make money. That idea has some element of naiveté.

8. On the Central Concept of Investment: In the old legend the wise men finally boiled down the history of mortal affairs into the single phrase, “This too will pass.” Confronted with a like challenge to distill the secret of sound investment into three words, we venture the motto, Margin of Safety.


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