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

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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.

Guru Speak: Famous Quotes by Peter Lynch

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PETER LYNCHPeter Lynch was a mutual fund manager for Fidelity Investments, famous for managing the Magellan Fund from 1977 to 1990. He often was a proponent of the theory that individuals were better placed than institutions to identify good investments. He was also author of two famous books, One Up on Wall Street and Beating the Street, which describe his theories and applications on investing. Here are a few famous words:

1. The key to making money in stocks is not to get scared out of them.

2. I think you have to learn that there’s a company behind every stock, and that there’s only one real reason why stocks go up. Companies go from doing poorly to doing well or small companies grow to large companies.

3. In this business if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten.

4. You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.

5. When stocks are attractive, you buy them. Sure, they can go lower. I’ve bought stocks at $12 that went to $2, but then they later went to $30. You just don’t know when you can find the bottom.

6. I’ve found that when the market’s going down and you buy funds wisely, at some point in the future you will be happy. You won’t get there by reading ‘Now is the time to buy.’

7. Go for a business that any idiot can run – because sooner or later, any idiot probably is going to run it.

8. The person that turns over the most rocks wins the game. And that’s always been my philosophy.

9. It’s human nature to keep doing something as long as it’s pleasurable and you can succeed at it – which is why the world population continues to double every 40 years.

10. Everyone has the brainpower to follow the stock market. If you made it through fifth-grade math, you can do it.

11. Don’t bottom fish.

12. Although it’s easy to forget sometimes, a share is not a lottery ticket… it’s part-ownership of a business.

13. If all the economists in the world were laid end to end, it wouldn’t be a bad thing.

14. Improved turnout will give parliament and government the appearance of being more legitimate.

15. People have been looking for recessions for the last five years.

16. People have all this data and they go through it and make up their minds in four seconds, … We’re forcing people to do the wrong things. They look at what’s hot. They spend so much time trying to figure out if the market is going up. That’s so unimportant. It’s about earnings. They need to follow the earnings.

17. It’s absolute crap that people need to spend 60 hours a week analyzing companies, … All you need are a few stocks to make money. If you find one stock a year, that’s plenty. When I was running Magellan I had to find one a week but that was because I had billions of dollars. The average person needs only a few good stocks in a lifetime.

18. I don’t go near the money and the money doesn’t go near me.

19. I spend about 15 minutes a year on economic analysis. The way you lose money in the stock market is to start off with an economic picture. I also spend 15 minutes a year on where the stock market is going.

Guru Speak: Timeless Wisdom from Benjamin Graham

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bengrahamBenjamin Graham, widely known as the Father of Value Investing, was a professor and an investment manager. Known as the founding father of the profession of security analysis, Graham wrote two of the most valuable books in the area of investing: “The Intelligent Investor” and “Security Analysis”. Credited by Buffett as the key influence on his investing approach, Graham is also famous for his timeless gems of investing wisdom that have stood the test of time.

1. Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble… to give way to hope, fear and greed.

2. Wall Street people learn nothing and forget everything.

3. The individual investor should act consistently as an investor and not as a speculator. This means… that he should be able to justify every purchase he makes and each price he pays by impersonal, objective reasoning that satisfies him that he is getting more than his money’s worth for his purchase.

4. I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities.

5. To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.

6. Even the intelligent investor is likely to need considerable willpower to keep from following the crowd.

7. It is absurd to think that the general public can ever make money out of market forecasts.

8. If you are shopping for common stocks, choose them the way you would buy groceries, not the way you would buy perfume.

9. Individuals who cannot master their emotions are ill-suited to profit from the investment process.

10. The underlying principles of sound investment should not alter from decade to decade, but the application of these principles must be adapted to significant changes in the financial mechanisms and climate.

11. Obvious prospects for physical growth in a business do not translate into obvious profits for investors.

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

13. Finance has a fascination for many bright young people with limited means. They would like to be both intelligent and enterprising in the placement of their savings, even though investment income is much less important to them than their salaries. This attitude is all to the good. There is a great advantage for the young capitalist to begin his financial education and experience early. If he is going to operate as an aggressive investor he is certain to make some mistakes and to take some losses. Youth can stand these disappointments and profit by them. We urge the beginner in security buying not to waste his efforts and his money in trying to beat the market. Let him study security values and initially test out his judgment on price versus value with the smallest possible sums.3

14. Most businesses change in character and quality over the years, sometimes for the better, perhaps more often for the worse. The investor need not watch his companies’ performance like a hawk; but he should give it a good, hard look from time to time.

15. Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.

16. The most realistic distinction between the investor and the speculator is found in their attitude toward stock-market movements. 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. Market movements are important to him in a practical sense, because they alternately create low price levels at which he would be wise to buy and high price levels at which he certainly should refrain from buying and probably would be wise to sell.

17. It is far from certain that the typical investor should regularly hold off buying until low market levels appear, because this may involve a long wait, very likely the loss of income, and the possible missing of investment opportunities. On the whole it may be better for the investor to do his stock buying whenever he has money to put in stocks, except when the general market level is much higher than can be justified by well-established standards of value. If he wants to be shrewd he can look for the ever-present bargain opportunities in individual securities.

Guru Speak: Walter Schloss, Truly conservative value investing

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Among the famous investors of Graham-and-Doddsville that Warren Buffett refers to as ‘super-investors’, the most conservative yet in no small measure less successful was Walter Schloss. He was perhaps the closest to what was commonly referred to as ‘cigar-butt’ investing, and someone who perhaps followed the bargain hunting principles in stock picking perfectly and over the longest period of time with highly successful results.

“Over the entire 45-year period from 1956-2000, Schloss and his son Edwin, who joined him in 1973, have provided their investors a compounded return of 15.3% per year…Every dollar a fortunate investor entrusted with Schloss at the start of 1956 has grown to $662 by the end of 2000, including all charges for management.  A dollar investing in the S&P Index would have been worth $118.”*

walter-schlossA lot has been said about the legend and his style of investing – a very simple style based on buying depressed stocks trading close to book value, of companies with some record of reasonable performance and with little or no debt. His famous lack of interaction with management because “I am not a good judge of people” and dependence on buying something that is so cheap that “something good will happen” are largely responsible for his success. The sheer conviction and high degree of comfort that Schloss had on this approach that he consistently followed with his son for over 40 years to give results surpassing most traditional investors is almost ascetic.

“Their office – Castle Schloss has one room – is spare; they don’t visit companies; they rarely speak to management; they don’t speak to analysts; and they don’t use the Internet. Not wanting to be swayed to do something they shouldn’t, they limit their conversation.  There is an abundance of articulate and intelligent people in the investment world, most of whom can cite persuasive reasons for buying this stock or that bond.  The Schlosses would rather trust their own analysis and their long standing commitment to buying cheap stocks.  This approach leads them to focus almost exclusively on the public financial statements that public firms must produce each quarter.”*

* from the book “Value Investing: From Graham to Buffett and beyond” by Greenwald

Their approach to investing is something that any individual investor with conviction in it can follow with reasonable effort and study – with no need to predict the future or understand businesses beyond a point; but with only a single objective of weeding out companies to find price less than value.

Here is a valuable document that Walter Schloss shared a few years ago, when asked about how he goes about making his investing choices –  a clear and simple set of golden rules of the Walter Schloss style of truly conservative investing.

Walter Schloss and 16 golden rules of investment

Buffett: Penny stocks and day trading are my real key to wealth

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Interesting article that I read yesterday on sfgate.com.

In an interview that is sure to shake the pillars of Wall Street, billionaire investor Warren Buffett revealed to our crack reporter Kent Baleevit that he actually made his wealth from risky penny stocks and day trading. “C’mon, Kent … long term value investing? Who has time for that crap? I’m an old man … I need to make my money quick and get to the casino before the lines at the early-bird buffet get too long.”

Read the entire interview at: http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2011/04/01/investopedia51599.DTL

Happy Belated April Fools Day!

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