Best Quote: “While enthusiasm may be necessary for great accomplishments elsewhere, on Wall Street it almost invariably leads to disaster”
What would Graham have bought in India ? Probably nothing except a few stocks where the market value of holdings exceeds the market cap some thing like a Tata Investment.
Benjamin Graham was the only investing legend who ignored the subjective aspects of equity analysis. Graham was never interested in meeting managements and knowing what they were capable of doing or not doing. He never looked at a company's product pipeline nor concentrated on anything else. All he saw and studies were hard core numbers - the Balance Sheet. He wanted to buy cheap, discarded and under valued assets. He was fascinated with numbers and operated on the premise that financial numbers capture every thing that an investor ought to know. He was brutally shaven off in the 1929 crash.Later on he developed a theory that the prospects of a company cannot be determined. He therefore advised investors to look back wards rather then forward. he He encouraged investors to look at the operating history for the past 7 years . It was certain that Graham was not looking at any of the companies in the new sector. In 1934 he published a book titled “Security Analysis” which remains an investment classic till date. In the early 1950's Warren Buffet was amongst his team of research analysts trying to decipher the investing skills of the master.
Predominantly a man who saw numbers and ignored perceptions Graham had a very unique personal life His second wife was his secretary and the third an employee. In fact he spent the last few years of his life with a woman who was earlier involved with one of his sons.
One of Graham's basic investing rules was to compute real earnings of a company. His definition of real earnings was dividend paid adjusted with increase (decrease) in the net asset per share – which usually appears as the change in earned surplus including voluntary reserves.
Graham stressed the diversification mantra. His basic premise was to avoid having concentrated portfolios . Since he ignored the subjective aspects of investment he wanted to buy companies almost for free. While the idea looks good in theory it is actually hard to find such companies in actual practice though. Graham backed his theory by the “Cigar butt” analogy. He stated that cigar buts that are thrown on the ground are always good for a few puffs. Similarly investors should look for discarded companies possessing a good turnaround prospects.
Graham professed that investors should buy companies when the current situation is unfavorable, the near term prospects poor and the low price fully reflects the current pessimism . Investors he added focus on the long term picture and ignore the daily quotations that “Mr. Market” provides. He suggested treating the market as an insane partner who provides daily quotes depending on which side of the bed he got up from. Clearly it should suit the investor to buy shares when “Mr. Market” displays more insanity then otherwise .
Graham advised Investors to keep their equity exposure within 75% of their net assets. For the the more adventurous investors a 100% exposure to equity could be considered in case he meets the following guidelines:
Clearly in today's environement of overvalued asset classes it will be very difficult to find a stock on the Benjamin Graham way of Investing. Perhaps the 1929 fall shook him so much that he turned risk averse in the strict sense.
