Imagine you could sit down and chat with the most influential investor in the world. What would they say? You would probably learn a lot about how to invest for long-term success and a whole load about what not to do.
The British-born American economist, professor and investor Ben Graham is widely known as the “father of value investing”. He was direct mentor to Warren Buffett and has taught the investing world the value of a rules-based approach. He is/was the most influential investor in the world. Why do I love Graham so much? Because he was a quant before the world even new what a quant was. He knew the power of strategy, structure, and systems.
In this article, I will go deep on 14 of Ben Graham’s most famous quotes and discuss their meaning. There is a lot to be learned, so hold on for an educational ride. I’m Shane, Quant investor, CEO of Aikido Finance, and life-long-learner. Without any further adieu, let’s hop in:
1. Quality > Glamour
“If you are shopping for common stocks, chose them the way you would buy groceries, not the way you would buy perfume.”
Though a bit enigmatic, there is real meaning behind this quote from Graham. What does he mean?
Buy high quality, good value, healthy companies rather than companies that just look good at first sniff.
2. Growth ≠ Profits
“Obvious prospects for physical growth in a business do not translate into obvious profits for investors.”
Beware of growth stocks. Short term gain might mean long term pain.
3. Periodically review your holdings
“Most businesses change in character and quality over the years, sometimes for the better, perhaps more often for the worse. The investor need not watch his companies’ performance like a hawk; but he should give it a good, hard look from time to time.”
A good time to review your holdings is each rebalance period. For example, The Top Quality and High Momentum Aikido strategy has a 1 month rebalance period. This means you will review you portfolio each month, selling some stocks and buying others.
4. Market Downturns are SERIOUS opportunities
“Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.”
I’m a big believer that investors have the definition of risk slightly wrong. Most of the time, risk is interchanged with volatility. But they are not synonymous. E=mc2 , Paris is the capital of France, and stocks go up and down over time. The risk comes not from whether they go down (though this is important), but rather from how likely the individual is to sell the stock at precisely the wrong time.
Market dips are great opportunities to hop in and buy at amazing bargain prices. Just make sure you are ready to strike when the moment is right. Have cash ready to invest.
5. Investing vs. Speculating
“The most realistic distinction between the investor and the speculator is found in their attitude toward stock-market movements. The speculator’s primary interest lies in anticipating and profiting from market fluctuations. The investor’s primary interest lies in acquiring and holding suitable securities at suitable prices. Market movements are important to him in a practical sense, because they alternately create low price levels at which he would be wise to buy and high price levels at which he certainly should refrain from buying and probably would be wise to sell.”
Buy and Hold. A simple rule for long-term investing success. Your time horizon needs to be 10 years or more. If it is not, you are gambling.
6. Ensure you are buying high quality stocks
“The risk of paying too high a price for good-quality stocks – while a real one – is not the chief hazard confronting the average buyer of securities. Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions. The purchasers view the current good earnings as equivalent to “earning power” and assume that prosperity is synonymous with safety.”
Warren Buffett initially adopted Graham’s Net-Net approach to buying stocks. a purely deep value approach. He was very successful in this method of investing, however as Berkshire Hathaway grew, this method of investing became unscalable, and so a quality-centric approach was adopted.
Buy Undervalued, High quality companies. Check out the Magic Strategy which selects Deep value (Low EV / EBITDA) and good quality (High ROIC) companies
7. There is risk in every investment
“Even with a margin [of safety] in the investor’s favor, an individual security may work out badly. For the margin guarantees only that he has a better chance for profit than for loss – not that loss is impossible.”
There is always a chance you’ve bought a bad egg. Just make sure you have more good eggs than bad ones. Its like winning an election: You don’t need every vote to win – you just need a majority!
8. Investment success is achievable
“To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.”
Heres some formulas for you:
a) How to underperform the market: Pick stocks qualitatively
b) How to match the market: Buy an index fund
c) How to beat the market: Pick stocks quantitatively
9. Hold Fast
“Most of the time stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble … to give way to hope, fear and greed.”
Risk is how likely you are to sell. Reduce risk by NOT SELLING! Reduce risk by creating an investment thesis that you cannot waver from.
10. Remember your history lessons
“They used to say about the Bourbons that they forgot nothing and they learned nothing, and [what] I’ll say about the Wall Street people, typically, is that they learn nothing, and they forget everything.”
Right now, this quote could not be more apt. The market is in a frenzy, with the S&P500 having a P/E ratio of 33! Let us not fall into the frenzy and leave our senses behind us. Remember what has happened during bubbles in the past: they pop. Use an investment strategy – quantify what you are doing.
11. Be careful of sexy products
“In my experience marketability has proved of dubious overall advantage. It had led investors astray at least as much as it has helped them. It has made them stock-market minded instead of value-minded.”
2000: You’ve gotta hear about this hot new .com company, its getting a lot of eyeballs!
2021: You’ve gotta hear about this cloud-based AI platform built on the blockchain!
Beware of sexy. Historically, IT has actually been one of the worst performing sectors of the stock market.
12. Be quantitative
“operations should be based not on optimism but on arithmetic.”
I need say no more. Be rules-based in everything you do. Use strategy, structures, systems. Not intuition. That’s what Aikido Finance is all about.
13. Be contrarian
“Have the courage of your knowledge and experience. If you have formed a conclusion from the facts and if you know your judgment is sound, act on it – even though others may hesitate or differ. (You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.)”
The fishing is best where the fewest go, and the crowd is often wrong. You must go against the herd and in fact it is often better to go the exact opposite direction.
14. You don’t need to be smart, you just need a recipe
“People don’t need extraordinary insight or intelligence. What they need most is the character to adopt simple rules and stick to them.”
Don’t worry about trying to outsmart everyone else you don’t have to. What you need is patience and a good investment recipe. Time is your friend. And you can find a good cookbook of recipes here.
I have studied Ben Graham a great deal and these are 14 most important lessons that I have derived.
The key takeaway: Use a rules-based approach to your investing. Buy high quality, good value companies.
Ben Graham has been beyond influential to the investing world and of course was Warren Buffett’s mentor – one of the most successful people on the planet. Take Graham’s teaching very seriously. Implement his teachings into your own investing.
At Aikido, we’re all about long-term investing success and rules-based thinking. You check out some of our long-term quantitative investment strategies here.
Until next time,
Take it easy.