Principle No. 1: Always Invest With a Margin of Safety
Margin of Safety is the principle of buying a security at a significant discount to its Intrinsic Value,
which is thought to not only provide high-return opportunities but also
to minimize the downside risk of an investment. In simple terms,
Graham’s goal was to buy assets worth $1 for 50 cents.Principle No. 2: Expect Volatility and Profit From It
Investing in stocks means dealing with volatility. Instead of running for the exits during times of market stress, the smart investor greets downturns as chances to find great investments. Graham illustrated this with the analogy of “Mr. Market,” the imaginary business partner of each and every investor. Mr. Market offers investors a daily price quote at which he would either buy an investor out or sell his share of the business. Sometimes, he will be excited about the prospects for the business and quote a high price. Other times, he will be depressed about the business’s prospects and will quote a low price.
Because the stock market has these same emotions, the lesson here is that you shouldn’t let Mr. Market’s views dictate your own emotions or, worse, lead you in your investment decisions. Instead, you should form your own estimates of the business’s value based on a sound and rational examination of the facts. Furthermore, you should only buy when the price offered makes sense and sell when the price becomes too high. Put another way, the market will fluctuate–sometimes wildly–but rather than fearing volatility, use it to your advantage to get bargains in the market or to sell out when your holdings become way
overvalued
Graham recommended distributing one’s portfolio evenly between stocks and bonds ( Minimum 25% in each class ) as a way to preserve capital in market downturns while still achieving growth of capital through bond income
Principle No. 3: Know What Kind of Investor You Are
Graham said investors should know their investment selves. To illustrate this, he made clear distinctions among various groups Active and Passive .
The first is to make a serious commitment in time and energy to become a good investor who equates the quality and amount of hands-on research with the expected return. If this isn’t your cup of tea, then be content to get a passive, and possibly lower, return but with much less time and work. Graham turned the academic notion of “risk = return” on its head. For him, “work = return.” The more work you put into your investments, the higher your return should be . If you have neither the time nor the inclination to do quality research on your investments, then investing in an index is a good alternative.
10 Rules for Stock Selections
1. An earnings-to-price yield at least twice the AAA bond rate
2. P/E ratio less than 40% of the highest P/E ratio the stock had over the past 5 years
3. Dividend yield of at least 2/3 the AAA bond yield
4. Stock price below 2/3 of tangible book value per share
5. Stock price below 2/3 of Net Current Asset Value
6. Total debt less than book value
7. Current ratio great than 2
8. Total debt less than 2 times Net Current Asset Value
9. Earnings growth of prior 10 years at least at a 7% annual compound rate
10. Stability of growth of earnings in that no more than 2 declines of 5% or more in year end earnings in the prior ten years are permissible.
Benjamin Graham's 10 Rules for Stock Selection
Here's the list that Graham came up with. The idea behind the rules is that the first five measure "reward" (by pinpointing a low price in relation to key operating results like earnings) and the second five "risk" (by measuring financial soundness and stability of earnings).- An earnings-to-price yield at least twice the AAA bond rate
- P/E ratio less than 40% of the highest P/E ratio the stock had over the past 5 years
- Dividend yield of at least 2/3 the AAA bond yield
- Stock price below 2/3 of tangible book value per share
- Stock price below 2/3 of Net Current Asset Value
- Total debt less than book value
- Current ratio great than 2
- Total debt less than 2 times Net Current Asset Value
- Earnings growth of prior 10 years at least at a 7% annual compound rate
- Stability of growth of earnings in that no more than 2 declines of 5% or more in year end earnings in the prior ten years are permissible.
Benjamin Graham's 10 Rules for Stock Selection
Here's the list that Graham came up with. The idea behind the rules is that the first five measure "reward" (by pinpointing a low price in relation to key operating results like earnings) and the second five "risk" (by measuring financial soundness and stability of earnings).- An earnings-to-price yield at least twice the AAA bond rate
- P/E ratio less than 40% of the highest P/E ratio the stock had over the past 5 years
- Dividend yield of at least 2/3 the AAA bond yield
- Stock price below 2/3 of tangible book value per share
- Stock price below 2/3 of Net Current Asset Value
- Total debt less than book value
- Current ratio great than 2
- Total debt less than 2 times Net Current Asset Value
- Earnings growth of prior 10 years at least at a 7% annual compound rate
- Stability of growth of earnings in that no more than 2 declines of 5% or more in year end earnings in the prior ten years are permissible.
Benjamin Graham's 10 Rules for Stock Selection
Here's the list that Graham came up with. The idea behind the rules is that the first five measure "reward" (by pinpointing a low price in relation to key operating results like earnings) and the second five "risk" (by measuring financial soundness and stability of earnings).- An earnings-to-price yield at least twice the AAA bond rate
- P/E ratio less than 40% of the highest P/E ratio the stock had over the past 5 years
- Dividend yield of at least 2/3 the AAA bond yield
- Stock price below 2/3 of tangible book value per share
- Stock price below 2/3 of Net Current Asset Value
- Total debt less than book value
- Current ratio great than 2
- Total debt less than 2 times Net Current Asset Value
- Earnings growth of prior 10 years at least at a 7% annual compound rate
- Stability of growth of earnings in that no more than 2 declines of 5% or more in year end earnings in the prior ten years are permissible.
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