What can today's investors learn from a person who last wrote of investing 40 years ago? While the market has changed dramatically since Benjamin Graham last opined about it in Intelligent Investor, many of the principles that he wrote about can be used to find success investing in the market today. Over a series of articles, I plan on presenting what I see as important points that Graham taught during his life and how they still apply to investing today.
Who was Benjamin Graham?
Graham was born in London, but he moved to the U.S. shortly after birth. He graduated from, and later taught at, Columbia University in New York City. It was there that he influenced many of his students in his methods of value investing. He wrote two books on investing, starting with Security Analysis, which he used as a textbook in his classes at Columbia. He is most widely known, however, for The Intelligent Investor, a book that Warren Buffett has called "the best book on investing ever written."
Investment vs. speculation
One of the earliest points Graham makes in Intelligent Investor is shared by Fool co-founders David and Tom Gardner. A stock is not simply the price it trades for on the exchange; it is an actual ownership share in a company. Even though your share in the company may be small, it should still be treated as a piece of the business.
Graham pupil Warren Buffett presents probably the most famous example of investment in companies. He first invested in Berkshire Hathaway
As important as it is to view each investment as an ownership stake in a business, sometimes there is room for speculation as well. For example, during the technology bubble of the late 1990s, a lot more Internet stocks failed than succeeded. However, without speculation, untested new companies would never be able to raise the capital to grow. Despite dozens of companies like Pets.com that flamed out during the tech bubble, Amazon.com
Inflation and investors
Graham makes the point that it is hard to predict what effect future inflation will have on stocks, and I couldn't agree more. As mentioned by fellow Fool Morgan Housel, inflation has pushed prices up 633% since the late 1960s, while the S&P 500 increased 4,500% during the same period.
To hedge against inflation, there are numerous investments you can buy. Graham himself mentions "things," such as "diamonds, paintings by masters, first editions of books, rare stamps and coins, etc.," though he admits that items of that nature are out of his area of expertise. He also mentions real estate as a possible hedge against inflation, but the current state of real estate in this country, as well as the difficulty for those of moderate means to purchase real estate for investment purposes, makes it an option out of the reach of many.
Perhaps the best way for modern investors to combat inflation is a portfolio of solid dividend-paying companies. Philip Morris International
Is Graham still relevant?
This is but a small piece on what we can learn from the philosophy of Benjamin Graham. In future articles, I will go into some methods Graham used to select investments, as well as his views on corporate management and shareholder responsibility. Though he last updated his book in 1973, many of the principles he espoused can help today's investors improve their investment performance.
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