Investment Lessons From Benjamin Graham (2)

Here are some more amazing principles, tips, strategies, and concepts as shared by the icon, Benjamin Graham.

In our last post, we reviewed some of the amazing lessons and principles shared in different forms by one of the pioneers of investment in the stock market – Benjamin Graham. Here, we review some more specific tips and investment strategies shared by the icon. Let’s get straight to it!

Are You Active Or Passive?

One thing to consider is who you are as an investor. Are you active or passive? Do you make it happen or do you wait for it to happen? Are you careful or are you bold?

Benjamin Graham split these two kinds of people into enterprising and defensive. The idea borders around the amount of time, commitment, and effort you are willing to put into the investment process.

If you don’t have the time to figure everything out, then you might be better off with a mutual fund. You could also invest in stocks and bonds to balance things out.

However, if you’re an active investor, then you must be able to commit to the time and knowledge required to make the most out of your investment. You should be able to carry out a level of financial analysis and leverage good strategies.

Have A Margin Of Safety

One very important concept Benjamin Graham constantly spoke and wrote about is the need to have a margin of safety in your investments. Stocks are priced in the stock market at either a rate that is below what they are really worth (undervalued) or more than they are worth (overvalued).

If you purchase the stock at an overvalued rate, when the actual fair value at least for that period returns to normal, you will make a few losses. If it’s a growth stock, it will eventually grow to be more than what you purchased it at but there is no gainsaying the fact that you truly win when you purchase it at a price that is below its intrinsic value.

This is what the margin of safety is about and Benjamin Graham was fully aware of this concept. Having a margin of safety on your stock purchases involves buying a security at a good discount to its intrinsic value.

This allows you reduce risks while also increasing your potential earnings. Graham popularly invested in stocks where the liquid assets on the company’s balance sheet were more than the total market capitalization of the company.

Think of this as the safety net that comes with purchasing a stock for less than it is worth.

Volatility is Normal

If there’s anything you should already know about investing in the stock market, it is that volatility is as natural as breathing – and Benjamin Graham knew that for sure.

Following the explanation of Mr. Market from yesterday’s article, his idea is that instead of fretting every time, relax and wait for whatever new offer another day presents itself with. Do not let the stock market control your emotions or push you around.

If you’re confident in the potential of the company you have invested in, it is only a matter of time before it pays off good. Buy only when the price is good and sell only when the time is right.

Written by Lawretta Egba