15 Thoughts from Grandmaster Ben Graham on How You Should Select Stocks

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Jae Jun

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“What stock should I buy?”

That’s a question I receive often when friends find out that I run an investment site.

“Don’t know. What are your requirements for buying?” I ask.

The conversation pretty much ends there because most people don’t know what they should be looking for.

If I then rephrase the same question to a car, the list becomes blindingly clear.

“I must have the following…” (note that it’s a must have and not a want)

  • navigation
  • 18″ wheels
  • leather seats
  • rear backup camera
  • lane change assist indicator

and the list goes on.

The S&P500 was only up 1.23% at the end of the first half. And where things are tough to come by, are you adapting or updating your list of must haves?

Or are you still hovering from one idea to the next without a firm idea of what to look for? 

Bruce Lee said the following:

Notice that the stiffest tree is most easily cracked, while the bamboo or willow survives by bending with the wind.

Markets are fluid beings.

Things are constantly changing.

As Ben Graham puts it

The underlying principles of sound investment should not alter from decade to decade, but the application of these principles must be adapted to significant changes in the financial mechanisms and climate.

It’s being able to bend, improve and not break during the tough times that will make you into a better investor.

How Do You Adapt?

Here are examples of what I mean to adapt, bend, improve.

Make a buying mistake?

Then identify where you went wrong and sell. Take the loss as your education fee.

Is one of your stocks rocketing up too quickly?

Then take some profit and let your house money ride. Or look back and what happened to a similar situation and adapt.

Feel like you’re missing out?

You’ll always be making less compared to somebody else. Get better, not bitter.

Not sure what to buy when you feel the markets are overvalued?

Then hold cash, ignore the noise and wait until a stock matching your checklist appears.

There’s plenty of ways to be a bamboo or willow in the market.

The stiffest trees are the ones that constantly monitor stock prices every minute on their phone like it indicates anything and is always plugged into the Wall Street market noise.

But if you’re like me and you like to look for stocks regardless of market valuations, then take some advice from the black belt grand master of value investing, Ben Graham, on how to choose stocks and what your mindset should be.

Value Investing Grandmaster Ben Graham’s Deep Insight on Selecting Stocks

1. It requires strength of character in order to think and to act in opposite fashion from the crowd and also patience to wait for opportunities that may be spaced years apart.

2. If a company was so sound that it’s stock carried little risk of loss, the company also must present excellent chances for future gains. It is easier for a company to build a profitable empire on a solid foundation than on a shaky one.

3. Never buy a stock immediately after a substantial rise or sell one immediately after a substantial drop.

4. Experience teaches that the time to buy stocks is when their price is unduly depressed by temporary adversity. In other words, they should be bought on a bargain basis or not at all.

5. People who habitually purchase common stocks at more than about 20 times their average earnings are likely to lose considerable money in the long run.

6. On the other hand, investing is a unique kind of casino—one where you cannot lose in the end, so long as you play only by the rules that put the odds squarely in your favor.

7. In market analysis there are no margins of safety; you are either right or wrong, and if you are wrong, you lose money.

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8. It remained true that sound investment principles produced generally sound results.

9. The disciplined, rational investor neither follows popular choice nor plays market swings; rather he searches for stocks selling a price below their intrinsic value and waits for the market to recognize and correct its errors. It invariably does and share price climbs. When the price has risen to the actual value of the company, it is time to take profits, which then are reinvested in a new undervalued security.

10. Never mingle your speculative and investment operations in the same account, nor in any part of your thinking.

11. The determining trait of the enterprising investor is his willingness to devote time and care to the selection of securities that are both sound and more attractive than the average. Over many decades, an enterprising investor of this sort could expect a worthwhile reward for his extra skill and effort in the form of a better average return than that realized by the passive investor.

12. Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble to give way to hope, fear and greed.

13. The stock investor is neither right nor wrong because others agreed or disagreed with him; he is right because his facts and analysis are right.

14. An investment is based on incisive, quantitative analysis, while speculation depends on whim and guesswork.

15. The intelligent investor is a realist who sells to optimists and buys from pessimists.

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