5 Wise Thoughts On Investing From Warren Buffett’s Mentor Benjamin Graham

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5 Wise Thoughts On Investing From Warren Buffett’s Mentor Benjamin Graham

Article by Vintage Value Investing

magine if you could get the same investing advice that Warren Buffett got when he was just starting out.

Just think of what it would be like to learn from Warren Buffett’s mentor the way he did.

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That mentor – Benjamin Graham, is one of the most respected minds in the investing world even today.

Ben Graham authored one of the greatest books on investing of all time, The Intelligent Investor, and has provided sound advice for investors for decades.

Here are 5 of some of Benjamin Graham’s wisest thoughts on investing:

1. “While enthusiasm may be necessary for great accomplishments elsewhere, on Wall Street it almost invariably leads to disaster.”

In most cases, one needs passion to succeed. You have to muster up the emotional strength to push forward when reason says to retreat. This, however, is a bad practice for investors. In fact, the exact opposite is true. In investing, one must learn to put all feelings aside and move forward based on factual, sound reasoning alone.

2. “To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.”

Learning to invest is not difficult. Almost anyone can do it. With a bit of learning and experience, you can make a decent amount of returns with not a lot of effort involved. However, if you want to transition from average to extraordinary, the entire scene changes. It may be easy to assume that just as one can make a decent return with little effort, (s)he can then make a good bit more of a return with just a little extra input. That, however, is not always the case. There isn’t a lot of middle ground between average and excellent in the investing world. You either do a minimum and ride it out or do it all the way and aim big. Just a little more, however, may result in disaster.

You can see Benjamin Graham’s influence in Warren Buffett through this popular quote from the Oracle of Omaha“It’s pretty easy to get well-to-do slowly. But it’s not easy to get rich quick.”

3. “The underlying principles of sound investment should not alter from decade to decade, but the application of these principles must be adapted to significant changes in the financial mechanisms and climate.”

Who better to say this than Benjamin Graham? His classic book on investing, The Intelligent Investor, was originally published in 1949. Its principles have stood the test of time and offer insight to today’s investors just as it did to those in the early ‘50s. However, applications change. One may have used Graham’s principles, for example, to invest in rental movie stores or bookstores in the mid ‘90s, while video streaming and e-books have altered that market drastically over the last decade. Investors can still use the principles, but the applications must always change with the times.

4. “Investment is most intelligent when it is most businesslike.”

Investing is done best when it is treated, not like a hobby, but like a business. If you see it as a side job, separately from business principles, the results will not be as profitable. You are looking at businesses. Analyzing them. Buying them. Selling them. The entire stock market centers around the economy of business. In order to be successful, investors treat investing like a business of its own.

5. “Operations for profit should be based not on optimism but on arithmetic.”

Do the math. Look at data. It’s not about what someone says, or the hot new idea fresh off the press. Just because the newspaper forecasts high returns for a certain company doesn’t make it true. Avoid the buzz and do the research. Numbers never lie.

Summary

All in all, Benjamin Graham’s words are timeless. They encourage us, inspire us, and teach us sound advice for investing.

Use what he said. Apply it. Take it to the market and adapt it to your goals. The results are sure to follow.

 

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Ben Graham, the father of value investing, wasn’t born in this century. Nor was he born in the last century. Benjamin Graham – born Benjamin Grossbaum – was born in London, England in 1894. He published the value investing bible Security Analysis in 1934, which was followed by the value investing New Testament The Intelligent Investor in 1949. Warren Buffett, the value investing messiah and Graham’s most famous and successful disciple, was born in 1930 and attended Graham’s classes at Columbia in 1950-51. And the not-so-prodigal son Charlie Munger even has Warren beat by six years – he was born in 1924. I’m not trying to give a history lesson here, but I find these dates very interesting. Value investing is an old strategy. It’s been around for a long time, long before the Capital Asset Pricing Model, long before the Black-Scholes Model, long before CLO’s, long before the founders of today’s hottest high-tech IPOs were even born. And yet people have very short term memories. Once a bull market gets some legs in it, the quest to get “the most money as quickly as possible” causes prices to get bid up. Human nature kicks in and dollar signs start appearing in people’s eyes. New methodologies are touted and fundamental principles are left in the rear view mirror. “Today is always the dawning of a new age. Things are different than they were yesterday. The world is changing and we must adapt.” Yes, all very true statements but the new and “fool-proof” methods and strategies and overleveraging and excess risk-taking only work when the economic environmental conditions allow them to work. Using the latest “fool-proof” investment strategy is like running around a thunderstorm with a lightning rod in your hand: if you’re unharmed after a while then it might seem like you’ve developed a method to avoid getting struck by lightning – but sooner or later you will get hit. And yet value investors are for the most part immune to the thunder and lightning. This isn’t at all to say that value investors never lose money, go bust, or suffer during recessions. However, by sticking to fundamentals and avoiding excessive risk-taking (i.e. dumb decisions), the collective value investor class seems to have much fewer examples of the spectacular crash-and-burn cases that often are found with investors’ who employ different strategies. As a result, value investors have historically outperformed other types of investors over the long term. And there is plenty of empirical evidence to back this up. Check this and this and this and this out. In fact, since 1926 value stocks have outperformed growth stocks by an average of four percentage points annually, according to the authoritative index compiled by finance professors Eugene Fama of the University of Chicago and Kenneth French of Dartmouth College. So, the value investing philosophy has endured for over 80 years and is the most consistently successful strategy that can be applied. And while hot stocks, over-leveraged portfolios, and the newest complicated financial strategies will come and go, making many wishful investors rich very quick and poor even quicker, value investing will quietly continue to help its adherents fatten their wallets. It will always endure and will always remain classically in fashion. In other words, value investing is vintage. Which explains half of this website’s name. As for the value part? The intention of this site is to explain, discuss, ask, learn, teach, and debate those topics and questions that I’ve always been most interested in, and hopefully that you’re most curious about, too. This includes: What is value investing? Value investing strategies Stock picks Company reviews Basic financial concepts Investor profiles Investment ideas Current events Economics Behavioral finance And, ultimately, ways to become a better investor I want to note the importance of the way I use value here. It’s not the simplistic definition of “low P/E” stocks that some financial services lazily use to classify investors, which the word “value” has recently morphed into meaning. To me, value investing equates to the term “Intelligent Investing,” as described by Ben Graham. Intelligent investing involves analyzing a company’s fundamentals and can be characterized by an intense focus on a stock’s price, it’s intrinsic value, and the very important ratio between the two. This is value investing as the term was originally meant to be used decades ago, and is the only way it should be used today. So without much further ado, it’s my very good honor to meet you and you may call me…

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