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3 Investing Tips From Benjamin Graham That You Shouldn't Ignore

By Matthew Frankel, CFP® – Updated Sep 10, 2018 at 8:46AM

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Here are three valuable pieces of wisdom from Warren Buffett's mentor.

Warren Buffett is the most quoted investor in the world -- and for good reason. There is certainly much wisdom the average investor can learn from Buffett's six-plus decades of successful investing experience.

However, what many investors don't realize is that Buffett learned some of his most important investing lessons from a mentor named Benjamin Graham, author of The Intelligent Investor and Securities Analysis, which are two of the most highly regarded investing books of all time. With that in mind, here are three tips from Benjamin Graham that could make you a better investor.

Stock quote page in a newspaper.

Image Source: Getty Images.

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

This quote is from The Intelligent Investor and is one of the most powerful messages investors can learn. Many investors underperform because they do the exact opposite of what they should be doing. They buy when stocks go up and up and they see everyone else making boatloads of money. And when the market undergoes a correction or a crash, they panic and sell when prices are low.

Graham's quote advises the smart investor to sell into the greed when prices are high and experts can only seem to say how much higher they can get. And smart investors take advantage of panics and market crashes by buying investments when prices are depressed and the market is "on sale."

"Thousands of people have tried, and the evidence is clear: The more you trade, the less you keep."

Over the past 30 years, the S&P 500 has generated annualized total returns (including dividends) of approximately 10.2% per year. Yet, the average equity mutual fund investor has only managed about 4%.

Sure, fees have something to do with this, but the average mutual fund expense ratio is in the neighborhood of 1% per year, not the roughly 6% difference in returns experienced by the average investor.

The real reason for the poor performance: overtrading. The average investor moves in and out of investment vehicles far too often, and they typically do it with poor timing. As I already mentioned, when investors see the market soaring and their friends are making money, that's when they put their money in or trade into more speculative investment vehicles. On the other hand, when the market crashes, fear kicks in and investors get conservative at the times when they should be buying.

The point: Buy-and-hold investing is the way to go.

 "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."

This quote sums up why Graham is such an outspoken supporter of buy-and-hold investing as opposed to short-term trading or speculating.

Simply put, the market has a big upward bias over long periods of time. Sure, economic and political conditions can result in some big short-term swings, but over time there's really no direction for the stock market to go besides up.

Think about it: Inflation will cause the price of goods and services to rise over time, so companies will be able to charge more for their products (higher revenue). And as companies reinvest their profits into the businesses and buy back stock, the intrinsic value of the average company's share will increase. This is why the stock market has historically risen by about 10% per year over decades-long periods. By investing in a diverse basket of high-quality stocks, you can put the long-term odds well in your favor.

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