Benjamin Graham aka the “Father of value investing” is best acclaimed for his book The Intelligent Investor. In his book, he has presented the core principles of his investing philosophy.
The Intelligent Investor, even after seven decades, has remained as relevant as ever. Warren Buffet considers Ben Graham as his mentor and credits all his success to his investing principles.
Principle 1: Investment vs. Speculation
An investment operation is thorough analysis promises, safety of principal and an adequate return. Operations not meeting this requirements are speculative.
a) Thorough Analysis
An investor must thoroughly analyze a company & the soundness of its underlying business operation before buying the stock.
b) Safety of Capital
An investor must deliberately protect himself against serious losing. Excessive risk must be avoided.
c) Adequate Return
An investor must aspire for adequate return on his stock investments.
The speculator’s primary interest lies in anticipating and profiting from market fluctuations. The investor’s primary interest lies in acquiring and holding suitable investments at suitable prices.
Principle 2: : Investor must think like a businessman
Graham said that “Investment is most intelligent when it is most businesslike”. The investor should understand that stocks are not merely pieces of paper but are fractional ownership of a business.
Principle 3: Concept of Mr. Market
Stocks are subject to frequent and wide fluctuations in their prices and an intelligent investor must learn to profit from these wild swings. These fluctuations are influenced by investor emotions: Over-optimism and greed.
Graham succinctly captured his philosophy through his famous analogy of Mr. Market.
To understand the whims of the market, let’s imagine the entire stock market as a person by the name, Mr. Market. The character of Mr. Market is highly unpredictable, subject to mood swings and is not very clever.
Each day, Mr. Market shows at your doorstep with a price quote to either buy the share you own or sell the one he owns. If he feels elated and sees favorable factors affecting the business, he will quote far higher value than the true value to buy your stocks.
At other times, he is depressed and can see nothing but trouble ahead for both the business and the world. On such occasions, he will give a very low price, as he is terrified that you will unload your interest on him.
Principle 4: Investor must focus on Intrinsic Value
The investor must learn to calculate the value of the underlying business. He must understand that the intrinsic value is not similar to the market value of the stock. The only way investment can take advantage of the market folly is by comparing the current market value to the intrinsic value.
Principle 5: Margin of Safety
Warren Buffett describes ‘’Margin of Safety” as the single most important thing he learned from Graham.
Intrinsic value of a stock is estimated using numerous assumptions which may or may not hold true in the future. That means the intrinsic value calculated always has an element of uncertainty attached to it. Graham suggests the investor buy the stock at a discount to its intrinsic value.
In The Intelligent Investor, Graham wrote that “You are neither right nor wrong because people agree with you.”
Graham was a strong proponent of taking an investment call independently. The investors should never shy away from intensive research before putting their hard earned money in the stock markets.
These were the 5 Core Principles of Ben Graham.
It’s time to end with Buffett’s famous quote:
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