For over two centuries now, investing has been the driving engine of western economies. Big and small fortunes have been destroyed in times of crises, a few investors have profited. Benjamin Graham, Warren Buffett’s mentor, came up with a few rules that can change your investment attitude, now more than ever:
An investment is an operation that, following a thorough analysis, promises safety of principal and an adequate return.
Operations that do not meet these requirements are speculative. If you want to speculate, do it knowing that you will probably loose money; be sure to limit the amount of risk and to separate it completely from your investment program.
Buy stock when they are below their fair value. Profit from cycles and try not to overpay them.
Market quotations are there for your convenience, to be taken advantage of or ignored. You should never buy a stock because it has gone up or sell because it has gone down.
In order to understand the attractiveness of the market as it presents itself at different times, investors must have an adequate idea of stock market history, particularly in terms of the market fluctuation of its price levels and of the varying relationship between stock prices as a whole and their earnings and dividends.
You should adequately, but not excessively, diversify. This could mean ranging from a minimum of ten different issues to a maximum of about thirty. Investors should never have less than 25% or more than 75% of their funds in common stocks depending on market fluctuation. A 50/50 approach makes good sense for a defensive investor. Every company selected should be large, prominent and conservatively financed.
Do not let anyone else manage your money unless you can supervise their performance with adequate care and understanding unless you have unusually strong reasons for placing implicit confidence in his integrity and ability.
Do not enter an operation unless a reliable calculation shows that it has a fair chance to yield a reasonable profit. Be confident in your knowledge and expertise. If you have formed a conclusion analyzing the facts and if you know your judgment is sound, act on it.
Graham’s metrics have been adjusted to establish a relative investment opportunity between stocks. Absolute intelligent investment rules would eliminate nearly all the strongest and most known companies from your portfolio; particularly, it would virtually ban the entire universe of growth stocks.