Are you planning to invest in the stock market and want to get the perfect strategy? Investments involve a large amount of money. For this reason, you have to be wise on where you invest and ensure that you get financial growth. Fortunately, there are various guides online that will help you develop the right tactics; One of them is Benjamin Graham’s guide to investing.
If you want to start an investment or looking for ideas to make it grow, this blog will guide you on how to use a classic Benjamin Graham approach to value investing. So, read on!
What is Value Investing?
Value investing is a strategy about purchasing stocks at a discounted price. When you invest using this tactic, you focus on the value of the stocks and company rather than its current price in the market. Business owners sell their company or shares for certain reasons, such as a short-term decrease in sales. Besides that, the market prices of stocks will also vary on demand and supply. You’ll never find free shares, but you could score a bargain purchase. If the supply is low, but the demand is high, then the stock price tends to increase. On the other hand, if the supply is high, but the demand is low, then the stock price is most likely to fall. When you invest based on the value of a stock, you pay attention to what you can gain in the future rather than today.
Benjamin Graham’s Value Investing History
Benjamin Graham, the father of value investing, along with his colleague, David Dodd, established it in Columbia business school. They are co-authors in one of the most popular books about value investing ever written, “Security Analysis”, which was first published in 1934. Graham’s interest in this method of investing has made him do extensive research about stock analysis. He then developed methods for making the right stock selection and ways on how investors can increase their earnings through value investment.
The Benjamin Graham value investment strategy is considered extremely beneficial and advantageous by investors. In fact, he was the mentor of one of the most popular value investors today, Warren Buffett. According to Warren Buffett, Graham as his professor, employer, and partner, has significantly influenced his life and investment principles.
The Value Investing Strategy of Ben Graham
Despite the technology and easy access to data of the modern days, Benjamin Graham’s strategy is still considered advantageous in the stock market. If want to have a successful investment, here are a few things you have to consider.
Measure the Intrinsic Value
One of the principles of Benjamin Graham is measuring the intrinsic value of stocks. While businesses’ sales can increase and drop sales depending on several factors, those don’t make them unworthy of investments. So, as an investor, Graham’s strategy suggests that you pay attention to the company’s overall assets and not the current market price alone when buying stocks. You have to be wise and determine their true value.
When investors see that the market price of stocks is low, they tend not to take risks. However, if you know the stock’s actual value, you’ll know if it is worth your investment. Plus, it can grow over time and give you a financial increase.
Consider a Margin of Safety
Investing money comes with risks, and failing to manage your finances wisely can be a significant loss. So, you need to have courage and intelligence when handling your investment. You have to limit how far you are willing to go and how much you can risk.
For instance, if there is a stock value available for $1, there are chances that its value will increase or decrease in the future. While buying a stock for that price can give you a higher profit, you still have to consider the possibility of a decrease in its value in the future. You have to do something to minimize the risk and your loss in case something unfortunate happens. To do that, you can give some time and wait for the changes in the market price of the stock you want.
Besides that, if you can purchase a stock for a market price that is lower than its intrinsic value, you can wait until its market price increases before selling it. This way, you’ll gain more and get results that might be greater than your expectations.
Be the Wise Mr. Market
Mr. Market is a reminder from the father of value investing that you have to balance your decision-making. When investors get too optimistic, they sometimes also get overly confident, making them ignore the other angles and take bigger risks. They tend to rush their decisions and ignore the other possibilities.
On the other side, if they get pessimistic, they prepare for the worst outcome. While it’s great to be ready for anything, too much pessimism is still not good for investments. It can make investors lose the courage to take necessary risks and opportunities. Therefore, it’s crucial that you think rationally and analyze all the significant factors before deciding to buy shares.
Diversification
Another way to manage the risks according to Benjamin Graham’s principles is to apply the science of diversification. Its main idea is to have multiple investments that will help you balance the risks. Even if there is a decrease in some of your stocks, you can still get a reasonable adequate return or high profit. You only have to use the increase in your other investments to cope with your loss.