Investment Lessons From Benjamin Graham (1)

Benjamin Graham was an investor extraordinaire. Not only is he sometimes regarded as the father of investing, he popularized the art of using financial analysis as a tool for investing in stocks.

As such, just as we go back to the founding fathers of other disciplines we’re in to garner timeless knowledge on them, we must certainly revisit the works of Benjamin Graham to learn timeless lessons and principles on investing.

Unlike many other investors, Benjamin Graham employed relatively safe strategies for investing. His modus operandi was to make money from the stock market for himself and his investment clients without having to take huge risks.

Consequently, many of the strategies used today to invest safely (and also win at it), were propounded by him. It is no surprise that he was a mentor to Warren Buffet.

History has it that after Buffet read "The Intelligent Investor", one of Benjamin Graham’s books, while he was just 19 years old, he enrolled in Columbia Business School to study under Graham. His strategies were simple, logical, and very effective.

Let us review some of the lessons and strategies he shared.

Determine If You’re A Speculator Or An Investor

One of the things Graham spoke about was about some people in the investment space being investors and others just speculators. The difference isn’t that one invests and the other dances around; rather, it talks about their perception to the investment process.

According to Benjamin Graham, an investor looks at a stock as part of a business entity and regards himself as one of the owners of the business. However, the speculator sees the entire investment process as a game where expensive pieces of paper are traded with no intrinsic value.

The speculator only cares about how much one paper can sell at and who is willing to pay for the paper. This can also be viewed as the difference between investors and traders. An understanding of which side you fall on will help you determine how you approach the investment process and even the time you spend in it.

A long-term “Buy Low Sell High” Strategy

Investors generally want to buy at a low price and sell when the value is high. However, there are different ways to do so. Benjamin Graham explained that whether an investor chooses to literally just buy low and sell high or invest a little more time before concluding the process, is subject to an understanding of his capabilities.

He explains that one way to determine which strategy works best for you is to determine how close to the business world you are. Unless you can attest to your proficiency of buying low and selling high on the move, taking a long-term view is a better investing strategy to go by.

Have You Met "Mr. Market?"

Do you know who “Mr. Market” is? He is the stock market. Benjamin Graham personified the stock market as a way to change our perception of it.

Graham emphasized that we took a look at the market the same way we imagine a business partner who on a daily basis, offers to buy you out or simply sell to you.

Sometimes, Mr. Market has a good offer that genuinely is great. Other times, his prices are too high or too low especially given the state of the investing environment.

With Mr. Market constantly on your tail, you are presented with three (3) options every time. You can choose to buy, sell to him, or simply ignore if you don’t like his price for as long as you want, especially because you know for a fact that he will always be back the next day with a different offer.

A key tip Benjamin Graham shared here in coping with market dynamics is to be able to confidently say No. Suspending judgment will always give you the opportunity of getting a better offer at a different point in time.

In our next post, we’ll review some of his other interesting concepts and strategies.

Written by Lawretta Egba.