Excerpt

1. Successful investing is only common sense. Each system for investing will eventually become obsolete.

2. The time to buy a stock is when the short-term owners have finished selling and the time to sell a stock is often when short-term owners have finished their buying.

3. Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy and sell.

4. “This time is different” are among the most costly four words in market history.

5. Search for bargains. You should try to buy that particular investment whose market price is lowest in relation to your estimate of its true value.

6. I never ask if the market is going to go up or down, because I don’t know, and besides it doesn’t matter. I search nation after nation for stocks, asking: “Where is the one that is lowest priced in relation to what I believe it’s worth?”

7. The only investors who shouldn’t diversify are those who are right 100 percent of the time.

8. If you are diversified among different forms of wealth, nations, and industries, you’ll be safe in the long-run.

9. Experience teaches us that one of the most common errors in selecting stocks for purchase, or for sale, is the tendency to emphasize only the most obvious factor; namely the temporary outlook for sales and profits of the company.

10. The only certainty about the future is the fact that it will be different from the past.

11. For those properly prepared in advance, a bear market in stocks is not a calamity but an opportunity.

12. An investor who has all the answers doesn’t even understand the questions.

13. Diversify. In stocks and bonds, as in much else, there is safety in numbers.

14. …success is a process of continually seeking answers to new questions.

15. People are always asking me where is the outlook good, but that’s the wrong question…. The right question is: Where is the outlook the most miserable?

16. If you begin with prayer, you will think more clearly and make fewer mistakes.

John Bogle was the founder and retired CEO of the Vanguard Group. He is known for his 1999 book Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor, which became a bestseller and is considered a classic. A proponent of mutual funds for individual investors to build long term wealth, Bogle (through Vanguard) was the first to introduce low cost Index funds for individuals. Here are some famous words:

1. Time is your friend; impulse is your enemy.

2. If you have trouble imaging a 20% loss in the stock market, you shouldn’t be in stocks.

3. When reward is at its pinnacle, risk is near at hand.

4. We now have an equity fund industry that’s [worth] $2 trillion, and if everyone wants their $2 trillion back tomorrow, they’re not going to get it.

5. Capitalism requires a structure and value system that people believe in and can depend on.

6. The scandal is not what’s illegal. It’s what’s legal.

1. Only when the tide goes out do you discover who’s been swimming naked.

2. A public-opinion poll is no substitute for thought.

3. Beware of geeks bearing formulas.

4. Derivatives are financial weapons of mass destruction.

5. Never ask a barber if you need a haircut

6. I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.

7. We’ve long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.

8. If a business does well, the stock eventually follows.

9. If past history was all there was to the game, the richest people would be librarians.

10. It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.

11. Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.

12. Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.

13. Our favorite holding period is forever.

14. Price is what you pay. Value is what you get.

15. There seems to be some perverse human characteristic that likes to make easy things difficult.

16. Time is the friend of the wonderful company, the enemy of the mediocre.

17. We believe that according the name ‘investors’ to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a ‘romantic.’

18. We enjoy the process far more than the proceeds.

19. We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.

20. You do things when the opportunities come along. I’ve had periods in my life when I’ve had a bundle of ideas come along, and I’ve had long dry spells. If I get an idea next week, I’ll do something. If not, I won’t do a damn thing.

21. Lethargy bordering on sloth remains the cornerstone of our investing style.

Again continuing on Benjamin Graham, this weekend I was privileged to have read a book by this title “Benjamin Graham, Building a Profession”. It is a collection of rare writings by and interviews with one of financial history’s most brilliant visionaries. The book presents Graham’s evolution of ideas on security analysis spanning five decades.

Particularly striking are the changes in thinking that occurred in Graham over time from the pre-1929 to the Great Depression era when security analysis as a profession was not even defined, and then later from the World War II to the post 1950’s to the late 1960’s and 70’s when stock market levels and the approach to security analysis had changed quite dramatically. While this set of writings are not in the nature of an investing bible, like ‘Security Analysis’ and ‘The Intelligent Investor‘, there still are numerous nuggets and views specially provided to his own industry. They also reflect Graham’s lifelong effort to bring science into his own fraternity, his numerous attempts to bring integrity into the methods of Wall Street and the sheer difficulty of doing so due to the nature of the beast, and his honest effort to help ordinary individual investors. Here are a few excerpts from the writings:

1. On the Accountability of Security Analysts: We have no scoring system for security analysts, and hence no batting averages. Yet it would be anomalous indeed if we were to devote our lives to making concrete recommendations to clients without being able to prove, either to them or to ourselves, whether we were right in any given case. (1946)

2. On similarities between Medicine and Security Analysis: Both medicine and security analysis partake of the mixed nature of an art and a science; in both the outcome is strongly influenced by unknown and unpredictable factors; in both we may find “the concealment of ignorance, probably more or less unconsciously, with a show of knowledge.” (1946)

3. On the performance of security analysis: The greatest weakness of our profession is our failure to provide really comprehensive records of the results of investments initiated or carried on by us under various principles and techniques. We have asked for unlimited statistics from others covering the results of their operations, but we have been more than backward in compiling fair and adequate statistics relating the results of our own work. (1952)

4. On the change in valuation thinking from relying on past records to future expectations: A large part of the discrepancies between carefully calculated formula values based on the past and the market prices can be traced to the growth factor, not because the formulas underplay its importance, but rather because the market often has concepts of future earnings changes which cannot be derived from the companies’ past performance. (1957)

5. On the use of complex mathematical models in analysis: The combination of precise formulae with highly imprecise assumptions can be used to establish, or rather to justify, practically any value one wishes. Measuring imprecise variables with highly precise tools is not better than using crude tools. In fact, it may well be worse because over precise formulas tend to trigger overconfidence in those who wield them – creating the illusion of certainty in areas where no certainty is ever possible. (1958)

6. On the accumulation of equity using systematic plans like dollar cost averaging: The computations made of theoretical dollar averaging experience in the past embolden us to predict that such a policy will pay off ultimately, regardless of when it is begun, provided that it is adhered to conscientiously and courageously under all intervening conditions. This is by no means a minor proviso. It presupposes that the dollar-cost averager will be a different sort of person from the rest of us, that he will not be subject to the alternations of exhilaration and deep gloom that have accompanied the gyrations of the stock market for generations past. This, I greatly doubt. No technique or tool can ever impose complete external discipline on an investor who lacks internal discipline. (1962)

7. On market forecasts and their future: My views on the validity of stock market forecasting have been unfavorable for about half a century. Let me make a guarded prediction here. It is more than just possible that the investigations of Wall Street’s practices in the future will include a really comprehensive study of the claims and accomplishments of the leading approaches to market forecasting. The opposite possibility is merely that all such prognostications will be required to bear in large type the legend: “For entertainment purposes only. Do not take seriously.” (1963)

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.

Peter 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.

Over the past few days, I was privileged to have read another masterpiece of a book – “Common Stocks and Uncommon Profits” by the legendary investor Philip Fisher – the father of growth investing. A complete opposite of Graham and the theory of value investment, Fisher proposes a set of 15 ‘scuttlebutt’ principles that work as a checklist for investors to evaluate companies for growth investing. There are very few companies that consistently meet the criteria of being growth companies over the long-term, and his 15 criteria act as the guide for qualifying them.

Growth Investing

Fisher’s way of investing is to identify great growth companies and hold them forever or for as long as possible. His basic premise is that the best long term investments are companies that have products and services with large markets, a strong research function to keep coming up with newer products from time to time, an effective sales engine, high profit margins, and are run by happy employees and leaders of integrity. In case one is able to identify such companies, how much you pay for it does not matter so much as long as it is not completely unreasonable, as per Fisher.

Of course, such a lethal combination is tough to find. Therefore, his view is – if one finds them, hold them forever. One is more likely to find companies with these qualities and such stature in the large cap end of the market – and if one is fortunate enough to identify something like this when it is not large enough, it will multiply investments many times over.

Texas Instruments and Motorola were two such investments that worked well for Fisher – both of which he bought in the early 1950’s and held on almost till his death.  Obviously if you could find it, the young growth company is the best bet for superlative gains. But such scenarios are rare and also impractical.

When to Buy

Hence, in what to buy, Fisher says it is best if small as well as large investors stick to relatively large growth companies. On when to buy, Fisher has an unusual recommendation. His premise is that the best time to buy a growth company is when its new product development is going into production. That is when a fairly large growth is in store, which most people are unaware of.

So he does not get into pricing or valuation of companies as the basis for purchase, but relies more on the stage within the company for timing purchase.

When to Sell

On when to sell, Fisher says – almost never. Investors make a number of mistakes which come in the way of uncommon profits, like selling too soon, or selling when it has gone up quite a bit – or selling in the expectation of overall market downtrend. All of which are mistakes with heavy penalties as per Fisher. When thinking of selling a growth stock, think of yourself on your graduation day from college.

Let’s say you are to choose only 3 classmates who you will ‘buy’ by paying them what they would earn in the first twelve months of working, in return for which they would give you quarter of their earnings thereafter for the rest of their lives. Think of growth stocks like that is what Fisher says. It would be foolish for an investor to sell a growth stock either because it is going through a tough time, or if it has given stupendous returns. The only reasons why a growth stock should be sold is if one realizes one has made a mistake, or if the company does not qualify on one or more of the 15 scuttlebutt criteria, or if you find a relatively better growth stock. Basically if the choice is correctly made, it means that one should sell almost never.

Fisher vs Graham

Some of Fisher’s views on buying cheap companies and dividends are completely in contrast with Graham’s quantitative approach to value investing. Most of Fisher’s assessment is qualitative. A pure value investor may not agree with his theories, perhaps find them outrageous too, but he has consistently used them over 70 years and with great results. His complete disregard to value metrics such as low price earnings or low price to book value as the basis of stock selection, and strong emphasis on growth as the only basis for long term profits is full of conviction.

Both value and growth approaches have been equally effective in their own ways and, Fisher and Graham, have been legends on their own. It is, therefore, testimony that there is no single way to successful investing. The father of growth investing – in the end – summarizes his philosophy by a very succinct quotation from Julius Caesar which I reproduce here – “There is a tide in the affairs of men which, taken at the flood, leads on to fortune.” That is perhaps Fisher’s formula for uncommon profits from common stocks.

Have read “The Intelligent Investor” by Benjamin Graham many times. Every time I read it fully or even in part – I am amazed by the depth, clarity and advice laid out in the book, and relevant every bit today, irrespective of the fact that it was written in the 1940’s. Such a piece of Investment Advice is available nowhere else in such crisp form for the individual investor.

It is almost like financial philosophy, akin to the ‘Bhagavad Gita’ of investing and finance for the individual investor. Whenever you pick it, you learn a new piece of investment wisdom every time.

It is difficult to pick up the best parts from such a book which is so all-encompassing. It covers everything from definition of investment to specific criteria for stock selection. Here are some of the key takeaways from the book that are invaluable for the individual investor. Many of which are well discussed, but still worth repeating and re-reading.

Investment versus Speculation

Graham presents a very clear definition of investing, which in his view, means any operation that on thorough analysis promises safety of principal and an adequate return. There must be thorough analysis. It must promise principal (he does not use ‘guarantees’ but promises). It must have adequate return (which he goes on to elaborate later). And finally, it must be like an ‘operation’ – business-like.

Bonds versus Stocks in Asset Allocation

He presents a simplistic 50:50 formula of allocation between fixed income bonds and stocks that works for most investors. He gives a leeway of 25% on either side. i.e. at no time should the allocation of either stocks or bonds fall below 25%. The guiding rule is to keep re-adjusting this allocation when one component increases above a certain defined limit. Like if it reaches 60%, rebalance by selling the additional 10% of the increased component and buy the other. This does not guarantee the highest returns. But it is a mechanical program that is most likely to practically work. Simply because it advises selling and buying when it is counter intuitive, and “chiefly because it gives the investor something to do”.

Defensive versus Enterprising Investors

Graham makes a distinction between types of investors not based on risk taking abilities or age – as was traditionally thought. Return is not dependent on risk, but rather on the amount of intelligent effort that is put into an investment operation.

The Defensive investor will place emphasis on avoidance of serious mistakes and losses, and seeks freedom from effort, annoyance and the need to make frequent decisions.

The Enterprising investor will be able and willing to put in time and effort in the selection and tracking of securities that may appear to be better valued than the general market from time to time – which may help him achieve better returns than the market over long periods of time.

Majority of investors would fall into the Defensive category. To achieve satisfactory results available to the defensive investor is easier than most people realize, to achieve superior results sought by the enterprising investor is harder than it looks.

The famous Mr.Market

This is perhaps the most valuable part of the book – on how to approach the widely fluctuating markets that an investor will face number of times in his investing life. Treat the market as an obliging, emotional partner in your businesses – i.e. the securities of which you own.  Every day, he tells you what he thinks of the value of the share of business that you own, and offers to buy your share at a price or sell you his share at a price.

Sometimes his fears overtake him offering you rock bottom prices, while sometimes he is too excited about the future offering you great prices. The best part is he does not mind being neglected – he will come back again tomorrow if you neglect him. Your best interests are then served if you only transact with him if and when you agree with his prices – the rest of the time, it is best for you to neglect him and focus on the operations of your business.

In the book, Graham goes on to provide clear stock selection criteria for defensive and enterprising investors – with great examples to help stock evaluation practically. But more than those, the clear framework based on the above – definition of investment, asset allocation, the decision on type of investor, and the attitude towards market fluctuations – are most valuable for an individual investor to go about his investment operations.

Graham‘s advice and wisdom are unlikely to make anyone rich in a hurry – perhaps only when one gets old. But the principles are timeless and practical, and unlikely to be available in such fullness anywhere else in today’s financial clutter.

That alone makes it a case for the ‘best book about investing ever written’ in Warren Buffett’s words, to be a guiding light on your desk throughout your investing lifetime.