4 Investment Lessons From Benjamin Graham

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As one of the most influential figures in the world of investing, Benjamin Graham is widely known as the Father of Fundamentals-Based Investing and Warren Buffett’s mentor. Benjamin Graham insists that intelligent investors should forget about what the stock market is going to do, and instead focus on what you, as an investor, ought to do. He’s studied securities intensively and has written his fair share of investment insights, laying down the groundwork for much of the fundamental valuation used in stock analysis. In this article, we’re going to focus on some of his most essential investment lessons.

Focus on value-investing

Buying undervalued or out-of-favor stocks is sure to provide a “margin of safety,” given that it offers investors a reduced risk of losing money. This strategy is explained in Graham’s book, The Intelligent Investor, which is considered the stock market bible and has been since its release in 1949. The book tackles Graham’s insights and experiences on value-investing. Essentially, the strategy involves considering company factors such as assets, earnings, and dividend payouts. By doing so, an investor will see that the intrinsic value of a stock could well be over its market price. Graham advises holding out until the price reflects its true value, which yields you profit from value-investing.

Foster long-term strategies

Graham looks to the philosopher Spinoza and his vision of eternity when it comes to his personal outlook on investing. Investopedia summarizes the difference between long-term and short-term investors. The problem with long-term investors, he insists, is the careful attention they put into how the stock market is doing, which is often the job of short-term investors. This is mainly because short-term investors rely on fluctuations in the prices of assets. Instead, he encourages investors to think of themselves as the owner of a company. Specifically, you mustn’t care about what the market thinks about its worth, as long as you have solid backing that the business will be sufficiently profitable.

Diversify your assets

“Don’t put your eggs in a single basket.” This saying is popular for a reason. As a rule of thumb, traders and investors shouldn’t allocate more than 5% of their invested capital into a single account to limit their losses. This is often practiced by defensive investors. In fact, Graham himself was known to buy a little of everything. Studies have shown that a diversified portfolio of 25 to 30 stocks yields the most cost-effective level of risk reduction. Moreover, The Balance encourages investors to go beyond stocks and explore other investment vehicles, like mutual funds or commodities, for the sake of diversification. Although it may mitigate investment performance, it unites the two concepts of value-investing and thinking about the long term much more effectively.

Avoid debt

His principles place an emphasis on having a strong balance sheet, with low debt in particular, for all types of investments. For defensive investors, long-term debt should be lower than net current assets, and the enterprising investor should avoid debt lower than 110% of net current assets. This is also referred to as the “debt to current asset ratio.” In our post on ‘When Does it Make Sense to Borrow Money to Eliminate Debt?’, we explain that personal debts affect credit scores and reliability. The same applies to buying companies with a debt load. Thus, it’s valued as an important criterion for investing.

These are only four of the investment fundamentals Benjamin Graham was able to inspire people worldwide with. As one of the greatest investment advisors, his legacy has influenced many of today’s economic principles. The insights found in his writings are indispensable lessons to investors and market analysts both old and new.

As our second lead editor, Anna C. Mackinno provides guidance on the stories Great Lakes Ledger reporters cover. She has been instrumental in making sure the content on the site is clear and accurate for our readers. If you see a particularly clever title, you can likely thank Anna. Anna received a BA and and MA from Fordham University.