The 3 most timeless investing principles

I happen to chance upon an interesting article in Investopedia summarizing Benjamin Graham’s approach towards investing who is also widely known as the father of value investing. His ideas and methods on investing are documented in his books, “Security Analysis” and “The Intelligent Investor”. These texts are not any easy reads and required some fundamental knowledge in order to grasp the concepts inside the book. I have finished reading “The Intelligent Investor” and struggle throughout the read because I do not understand most of the terms that were mentioned in the book so I will usually check the definition in Investopedia. My perseverance and efforts paid off as I have managed to learn a lot out from it and it also shaped my beliefs towards investing. I will give it a shot summarizing the article which I found in Investopedia.

Principle No 1: Margin of Safety
Basically, margin of safety is the principle of buying a security at a significant discount to its intrinsic value which is thought to not only provides high-return opportunities but also to minimize the risk of an investment. Graham also looks out for stocks where the book value is higher than the market cap. This means he is effectively buying the business for nothing.

One thing to take note is that company may mark up their asset values by using various accounting methods and this might mislead investors in believing the company is undervalued.

Principle No 2 : Expecting volatility and profit from it
Graham illustrates the market’s volatility with the analogy of Mr Market, the imaginary business partner of each and every investor. Basically Mr market will offer investors a price quote at which he would either buy an investor or sell his share of the business. He will tend to quote a high price when the prospect of the business is overly hyped and quote a low price when the prospect is unpromising.

The lesson here is that we should form our own judgment based on a sound and rationale examination of facts and not letting the market to affect our views and worse, leading us to a investment decision. The market will inevitably fluctuate over time, sometime wildly but instead of fearing it, we can use it to our advantage to make bargains in the market or sell out when your holding becomes overvalue.

Here are two strategies that Graham suggested to migtate the negative effects of market volatility .

1 . Dollar Cost Averaging
It can be achieved by buying equal dollars of amounts at regular intervals.

2.Investing in Stocks and Bonds
Graham recommended allocating one portfolio evenly between stocks and bonds as a way to preserve capital in market downturns.

Principle No 3 : Know what kind of investor you are
Graham advised that investors know their investment selves. To illustrate this, he categorized investors into 2 groups, active investors and passive investors. You only have two real choices : The first is to make a serious commitment in time and energy to become a good investor who equates the quality and amount of hands-on research with the expected return. Second, if you have nether the time nor the inclination to do quality research, then investing in an index will be a better alternative.

Both Graham and Buffett said that getting an average return from an index is more of an accomplishment than it might seem. The fallacy that many people buy into is that if it’s easy to get an average return with little or no work (index) than perhaps a little more work should yield a higher return but reality is that most people who try this end up doing much worse than average.

You can read the full article here.

Appendix
Investopedia