Expert advice

Aug 22, 2013,20.56 IST

3 Timeless Investment Principles of Benjamin Graham

Ramalingam K
Holistic Investment

I do not know what kind of shoes Warren Buffet wore. However, I am sure that a lot of people would definitely want to be in his shoes. I am not in a position to promise his shoes to the readers, what I caan do is share a few timeless investment principles which if followed, will surely give the investor a firm standing, as firm as Buffet’s, no less.

Warren Buffet owed his financial grooming to his mentor and teacher, Benjamin Graham. Concepts like security analysis and value investing acquired a new dimension under Graham.

His timeless books on investments – Security Analysis (1934) and The Intelligent Investor (1949) provide an insight into the realms of investment dynamics. In the following paragraphs the essence of his teachings are laid out for the modern day investor to reap its benefits.

Principle I: Invest with a Margin of Safety

Better be safe than sorry. In financial-investment parlance, ‘margin of safety’ signifies buying of securities at a discount to its actual worth or ‘intrinsic value’. This practice not only acts as a shield for the investor, but also provides high-return opportunities.

Graham favoured such assets due to their immense potential for generating stable earnings and also the overall simplicity in providing liquidity. He consistently advocated the purchase of stocks of companies whose liquid assets depicted on the balance sheet (net of all debts or "net nets") were worth far more than the company’s market cap. In simple terms what this means the ability to buy businesses at rock bottom prices.

The basic advantage of adhering to this principle is that the investment is likely to turn in profits when the market correction of the stock price occurs and it inevitably reverts to its fair value. One of the other essential advantages of buying a stock with a margin-of safety is that the chance of further slide in the price of the stock is usually unlikely.

Graham’s idea on the margin-of-safety acted as a safety net for a lot of his followers and investors can easily be in a win-win situation by following this principle.

Principle II:  Use Volatility to earn profits

An average person will seek the nearest exit-way when his investments are hit by market down-turn. A smart investor will view the down-turn as a turn-around opportunity to make profits. Graham used an interesting analogy to explain his point; an imaginary business partner, of every investor, referred to as “Mr Market”.

Based on Mr Market’s assessment of business prospects he is expected to charge a high price when the business is expected to be buoyant and vice-versa when the prospects are not encouraging.
The stock market exhibits the same kind of reaction and for a prudent investor the emotions of Mr Market are not going to hold sway on his investment decisions. Instead his decisions will be driven by hard facts and proper market trend evaluation.

The primal truth remains that investors need to buy low and sell high. Volatility is the inherent nature of the financial market and is just as natural as thunderstorms during monsoon. Gearing to combat such situations is the hallmark of a good investment decision.

Graham suggested two sub-strategies to combat such volatility. His dictum has been modified to match the Indian context:

i. Rupee Cost Averaging: A systematic investment plan or an SIP is an ideal choice for investing fixed amounts at regular intervals so that the investor does not have to buy at a high, in effect the total investment averages out on the basis of the stock price or mutual fund NAV. This technique is ideal for those who are not too keen to follow the market on a regular basis or are passive investors by nature.

ii. Investing in stocks and bonds: A balanced approach is what is recommended as an ideal investment option. Dividing one’s portfolio equally between stocks and bonds is what Graham advocates. Preserve the capital and then aim for growth is the philosophy behind this investment mantra. Such a balanced approach will also ensure that the investor is not tempted to speculate.

Principle III: Be aware of your investment self

Graham urges investors to introspect and be aware of the type of investor personality category he or she belongs to. According to Graham, investors basically belong to either of two categories: “enterprising investor” or “defensive investor”. The first one has a dashing investment persona and the later a more cautious persona. He felt that investment returns are based more on the “work” element than the "risk" element.

People who are prepared to work hard and study the fundamentals of the market can gain more than the one who is prepared to put in much less work while making his investments. It is a natural corollary that the hard worker will reap bigger gains than the other category of investors.

The enterprising investor will invest in stocks while defensive or cautious investor will opt for investment in index funds. Graham also differentiates between an investor and a speculator; the former views his stocks as part of business while the later views it as an expensive paper.  One should have the ability to realize whether he is an intelligent speculator or an intelligent investor.


Graham’s approach is methodical and views the stock market as a scientific field which is driven by a set of rules. Following Graham’s principle will guarantee that the stock market is a level playing field and not one with hidden land-mines.

Ramalingam K, CFP CM is the Chief Financial Planner at, a leading Financial Planning and Wealth Management company.

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