Monday, May 21, 2007

Benjamin Graham's core principles for investing

Benjamin Graham, arguably the Father of Value Investing, was professor and teacher to Warren Buffett, the greatest investor of our time. I recently came across an article by Alphen Fund Management, which stated Graham's core principles for investing as described in the book Intelligent Investor were as follows:

1. A stock is not just a ticker symbol or an electronic blip; it is an ownership interest in an actual business.

2. The market is a pendulum that forever swings between unsustainable optimism (which makes stocks too expensive) and unjustified pessimism (which makes them too cheap). The intelligent investor is a realist who sells to optimists and buys from pessimists.

3. The future value of every investment is a function of its present price. The higher the price you pay, the lower your return will be.

4. No matter how careful you are, the one risk no investor can ever eliminate is the risk of being wrong. Only by insisting on what is called the 'margin of safety' - that is by never overpaying, no matter how exciting an investment seems to be, can you minimize your odds of error.

5. The secret to your financial success is inside yourself. If you become a critical thinker that takes no Wall Street 'fact' on faith, and you invest with patient confidence, you can take steady advantage of even the worst bear markets. By developing your discipline and courage, you can refuse to let other people's mood swings govern your financial destiny. In the end, how investments behave is much less important than how you behave.

These are pearls of wisdom for investors who are serious about long-term wealth creation.

No comments: