Of tangents and orbits

The extraordinary thing about the securities market, if you judge it over a long period of years, is the fact that it does not go off on tangents permanently, but it remains in continuous orbit.

- Benjamin Graham

Screen of logic

Even when the underlying motive of purchase (of stocks) is mere speculative greed, human nature desires to conceal this unlovely impulse behind a screen of apparent logic and good sense.

- Benjamin Graham

The need for business channels

Nearly everyone interested in common stocks wants to be told by someone else what he thinks the market is going to do. The demand being there, it must be supplied.

- Benjamin Graham

You don't succeed by doing this

If I have noticed anything over these sixty years on Wall Street, it is that people do not succeed in forecasting what's going to happen to the stock market.

- Benjamin Graham

Margin of Safety is not the one and only to consider

Even with a margin [of safety] in the investor's favor, an individual security may work out badly. For the margin guarantees only that he has a better chance for profit than for loss - not that loss is impossible. But as the number of such commitments is increased the more certain does it become that the aggregate of the profits will exceed the aggregate of the losses.

- Benjamin Graham

Physical growth doesn't translate into profits

Obvious prospects for physical growth in a business do not translate into obvious profits for investors.

- Benjamin Graham

Admission

I would like to point out that the last time I made any stock market predictions was in the year 1914, when my firm judged me qualified to write their daily market letter, based on the fact that I had one month's experience in Wall Street. Since then I have given up making predictions.

- Benjamin Graham

Two extreme behaviors of the market participants

While we were writing, we had to combat a widespread conviction that financial debacle was to be the permanent order; as we publish, we already see resurgent the age-old frailty of the investor-that his money burns a hole in his pocket. But it is the conservative investor who will need most of all to be reminded constantly of the lessons of 1931-1933 and of previous collapses. ... We have striven throughout to guard the student against overemphasis upon the superficial and the temporary. Twenty years of varied experience in Wall Street have taught the senior author that this overemphasis is at once the delusion and the nemesis of the world of finance.

- Preface to the First Edition of Security Analysis by Benjamin Graham & David L. Dodd.

The authors bring two extreme behaviors of the market participants in one sentence. During market collapses, people tend to extrapolate the severity and justify the permanency of what has already occurred. But market tends to ignore these opinion and bounce back even before people could realise it. Similarly, as the market rise up further and further, the investor loses his patience and jumps in into market. In both the situations, emotions would have overruled the investors logical investment decisions. The underlying cause in both the situations is to view the permanency of the current situation into the future. A conservative investor has to overcome this tendency and have to take logical decisions overcoming the emotions which are formed by what we see and read day in and out.

Your ideas and future

We have been trying to point out that this concept of an indefinitely favorable future is dangerous, even if it is true; because even if it is true you can easily overvalue the security, since you make it worth anything you want it to be worth. Beyond this, it is particularly dangerous too, because sometimes your ideas of the future turn out to be wrong. Then you have paid an awful lot for a future that isn't there. Your position then is pretty bad.

- Benjamin Graham

Why 'growth stocks' would go wrong

There was nothing wrong with these ideas, except that it was almost impossible not to carry them too far. With encouragement from the past and a rosy prospect in the future, the buyers of 'growth stocks' were certain to lose their sense of proportion and pay excess prices. For no clear-cut arithmetic sets a limit to the present value of a constantly increasing earning power. Such issues could become worth any value set upon them by an optimistic market.

- Benjamin Graham

Function of Margin of Safety

The function of the margin of safety is, in essence, that of rendering unnecessary an accurate estimate of the future. If the margin is a large one, then it is enough to assume that future earnings will not fall far below those of the past.

- Benjamin Graham

IPO's

Investors should be wary of new issues - which means, simply, that these should be subjected to careful examination and unusually severe tests before they are purchased. There are two reasons for this double caveat. The first is that new issues have special salesmanship behind them, which calls therefore for a special degree of sales resistance. The second is that most new issues are sold under "favorable market conditions" - which means favorable for the seller and consequently less favorable for the buyer.

- Benjamin Graham

Price fluctuations

Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.

- Benjamin Graham

20 times PE

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.

- Benjamin Graham & David Dodd

Never hold off buying

It is far from certain that the typical investor should regularly hold off buying until low market levels appear, because this may involve a long wait, very likely the loss of income, and the possible missing of investment opportunities. On the whole it may be better for the investor to do his stock buying whenever he has money to put in stocks, except when the general market level is much higher than can be justified by well-established standards of value. If he wants to be shrewd, he can look for the ever present bargain opportunities in individual securities.

- Benjamin Graham

Marking up or down the value of capital

Obviously the stock market is quite irrational in thus varying its valuation of a company proportionately with the temporary changes in its reported profits. A private business might easily earn twice as much in a boom year as in poor times, but its owner would never think of correspondingly marking up or down the value of his capital investment.

- Benjamin Graham

Distinction between Investor and the speculator

The most realistic distinction between the investor and the speculator is found in their attitude toward stock-market movements. The speculator's primary interest lies in anticipating and profiting from market fluctuations. The investor's primary interest lies in acquiring and holding suitable securities at suitable prices. Market movements are important to him in a practical sense, because they alternately create low price levels at which he would be wise to buy and high price levels at which he certainly should refrain from buying and probably would be wise to sell.

- Benjamin Graham

Most of the time...

Most of the time 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.

- Benjamin Graham

Make money out of forecasts?

It is absurd to think that the general public can ever make money out of market forecasts.

- Benjamin Graham

Unfavorable industries?

It is natural to assume that industries which have fared worse than the average are "unfavorably situated" and therefore to be avoided. The converse would be assumed, of course, for those with superior records. But this conclusion may often prove quite erroneous. Abnormally good or abnormally bad conditions do not last forever. This is true not only of general business but of particular industries as well. Corrective forces are often set in motion which tend to restore profits where they have disappeared, or to reduce them where they are excessive in relation to capital.

- Benjamin Graham