Thursday, November 16, 2006

Words of wisdom for investors according to Benjamin Graham

Benjamin Graham preached commandments that any investor can use as stars when navigating through the vast and mystifying seas of the investment world. An individual who is not in a hurry or under pressure to shoot comets across the heavens but would instead like to earn a smart, fair, decent and substantially higher return in the long run should take heed from Ben's guidance. In greatly simplified terms, here are some points he constantly delivered in his writing and speaking. Most of these points are not technical but rather in adopting the right attitude and mindset.
  • Be an investor, not a speculator - Speculator is one who seeks to profit from market movements without primary consideration to intrinsic value. A prudent investor is one who buys only at prices amply supported by underlying value and determinedly reduces his stock holdings when the market enters the speculative phase during a sustained advance. Speculation, however he insisted, had its place in the securities market, but only if an investor has done enough research to justify his action and be prepared for losses if they come.
  • Know the asking price - Ask yourself if I bought the whole company would it be worth this much money? Always know what you are paying for. As the old saying goes "value for money."
  • Rake the market for bargains - In his days, he is best known to search for companies that sells below its "net current asset value." By buying stocks that are below this value, essentially, it means an investor is buying a bargain because nothing at all is paid for the fixed assets of the company. As time goes by, stocks like these are getting harder to by. In modern days, disciples of his enlarged the model to look for hidden value in additional ways, but still probe the question, "what is this company worth?"
  • Regard corporate figures with suspicion - It is a company's future earnings that will drive its share price higher but estimates are based on current numbers, of which investors must be wary of. Even with more stringent rules in place, earnings can still be manipulated through creative accounting. There will always be ways around all things. Special attention is urged to be paid to reserves, accounting changes and footnotes when reading company documents.
  • Don't stress out - Always recognize that you are unlikely to hit the precise "intrinsic value" of a stock right on the mark. A margin of safety provides peace of mind.
  • Don't sweat the math - Ben said: "In 44 years of Wall Street experience and study, I have never seen dependable calculations made about common stock values or related investment policies, that went beyond simple arithmetic or the most elementary algebra. Whenever calculus is brought in, or higher algebra, you could take it as a warning signal that the operator was trying to substitute theory for experience, and usually also to give speculation the deceptive guise of investment."
  • When in doubt, stick to quality - If you buy good stocks at fair prices, investors do not make mistakes. They make serious mistakes by buying poor stocks, particularly the ones that are pushed for various reasons. And in fact, very frequently, they commit mistakes by buying good stocks in the upper reaches of bull markets.
  • Dividends as a clue - A long record of paying dividends, as long as 20 years, shows that a company has substance and is a limited risk. Growth stocks seldom pay dividends.
  • Be patient - Be prepared both financially and psychologically for the possibility of poor short-term results.
  • Think for yourself - Don't follow the crowd. There are two rules here. One, you have to think correctly. Two, you have to think independently. Always search for better ways to ensure safety and improving your investment mindset. Do not ever STOP thinking.


fishman said...

Hey pal. Funny you took so long to add post new article. For awhile thought you trying to publise daily paper or something!

Wanted to ask you, any idea what's an option? All I know now is there's put and call. Read its a lot less risky. Wondering why!

Berkshire said...

haha, i want to post it daily but sometimes, inspiration is somewhat not there. I do not want to post just for the sake of posting. I rather post quality ideas which i think is worthwhile than to post things which are neither here nor there. But anyway, i just posted on something which all investors should look out for in terms of what really can cause a difference in success.

For options, i've posted it before. There are 3 articles. Pls check archives in Oct, posted on 15 Oct (From peddling computers to alternative investments), 14 Oct (Definition of options part 2) and 12 Oct (Definition of options). Let me know if you can't find. The basics of options are there.

Anonymous said...

Hey Berkshire
I came across your blog and have found your articles very informative. Have even bookmark your blog for future reading. : )

I'm also trying to follow the steps of guru Ben Graham and Warren Buffett. Trying to practice hard on value investing and constantly trying to find good companies to invest.

Wonder how you value the price of the stock to be like in future? People have used PER and I used DCF together with Free cash flow. Question is how to estimate the growth of the company in the next 10-20 years ?