Ben Graham is arguably the most important investment thinker of modern times.
Not because he personally produced the best investment results but because he wrote THE book, the seminal guide to successful long term wealth accumulation through investment in stocks.
“The Intelligent Investor”
His thesis has come to be known as “value investing” and perhaps the greatest investor of all time, Warren Buffett, its most devout exponent.
What is value investing?
Investing in shares for most people is the attempt to buy low and sell high.
This is usually done using numerous different methods from interpreting charts to following momentum, from the next big thing to tips in the newspapers.
The common thread to all such methods is that they are variations on speculation, attempts to guess the future.
By comparison the central tenet of the value investor is to understand the value and likely future profits from a business. That by understanding the current economics and dynamics of a company and being able to predict with a satisfactory level of certainty its future progress, it is then possible over time to accumulate investments that predictably and satisfactorily compound upwards in value (so not speculation).
Easy to say, hard to do!
Mr Buffett and his partner Charlie Munger at Berkshire Hathaway decry “efficient market theory”, the idea that implicitly markets always price assets correctly. They argue that markets on occasion dramatically misprice either too high or too low and that if an investor waits for such moments and allies them to Value Investing principles then wonderful long term holdings can be secured.
Such opportunities however are not plentiful and one of the key ingredients to success is patience.
The six key principles of value based analysis
- Become intimately knowledgeable about a company
- Identify management which is ethical, talented and focused on shareholders’ best interests
- Investing on the basis of fundamental value not popularity
- Investing for long term profits over time not short term share price movement
- Don’t fear not being one of the crowd, doing what others do is comforting but a guarantee of being average
- Always investing with a Margin of Safety
Margin of safety
The concept of margin of safety is the point in the investment road where stock price meets intrinsic value (defined as all the future profits of a company).
The classic value investment will have the following characteristics.
- The Company will be fundamentally profitable and cash flow positive
- It will have an enduring franchise
- Excellent management
- A predictable future of increasing sales
- There will be a reason the share price does not fully represent the above, usually short term problems, occasionally the markets collective misunderstanding of the future growth trajectory
The patience to wait for the infrequent occasions where markets over react to transitory bad news and mark down the share price of a Company to significantly below its correct value is the point in time that a value investor enjoys a margin of safety.
It is simply the practice of paying £60 or £70 for an asset worth £100.
Value investing is hard work, requires sometimes protracted periods of inactivity and is rarely focused on the hot sector or new idea.
It is however the only quantifiable way investors have continually made outstanding returns over long time periods.
NOTE: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. This is not a recommendation to buy any product or service including any share or fund mentioned. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.