Feeling nervous about the future? Not sure how the world will look in a week, let alone a year? Worried that politics will spill into markets and make your retirement poorer than you hoped? Wishing you could find a way to somehow add a margin of monetary safety into the next couple of decades? I have good news. There is a perfect financial self-help book that can help you. The Intelligent Investor by Benjamin Graham is, according to Warren Buffett, ‘by far the best book on investing ever written’.
Follow the behavioural and business principles that Graham sets out, says Buffett in his introduction to one of the many editions of the book (first printed in 1973), and ‘you will not get a poor result from your investments’. Given that most people, one way or another, do get a poor result from their investments, that’s quite a call. So what’s so great about the late Benjamin Graham?
The answer is that he really understood how markets work over the long term. He saw that the return on every investment was a function of the price you paid for it. The more you paid, the less you would make. He saw that other people didn’t always grasp this; that markets are always on the move; either towards unjustified optimism (overpriced stocks) or ridiculous pessimism (cheap stocks). He believed in discipline. He knew how easy it can be to get carried away, to run with the crowd and to mistake activity for control. The investor’s ‘chief problem’, he tells us, ‘is likely to be himself’. He had, he wrote, seen more money being made by those ‘temperamentally well suited for the investment process than by those who lacked this quality even though they had an extensive knowledge of finance, accounting and stock market lore’. And finally he knew that it was entirely possible for him to be wrong — and that the greatest risk in investing is not of failing to make money, but of losing money.
So into every investment he instructs his readers to build a ‘margin of safety’. He only ever bought stocks offering value in absolute terms: trading ‘not far above their tangible asset value’ (physical assets, cash and money owed to it), something that made it extremely unlikely that he would make a long-term loss on them (physical assets can always be sold on).
He was also clear that investing is hard (and, to most of us, pretty boring) work. You have to really understand the businesses you invest in: getting to know their market, their management, their competitive environment and every part of their financials. Simple as this sounds (get to know businesses, figure out what they are really worth, buy their shares for less…) almost no one can do it. Most fund managers I speak to tell me that, one way or another, they have a Graham-style value bias to their investing. Almost none actually do. Why? Because it is hard to buy things other people don’t like (we all crave approval) and it is hard to be patient with investments that don’t perform immediately, particularly if you are a fund manager judged every quarter.
As an individual investor you can have a go at doing it yourself if you think you are ‘temperamentally suited’ (I don’t think I am) and won’t end up deathly bored/deathly boring. Or you can look at some of the very few investment managers that are giving Graham-style investing a real go at the moment (this no longer includes Buffett, by the way). Try the VT Cape Wrath Focus Fund or Church House’s Deep Value Investment Fund (both still small) or, for something more mainstream, the Schroder Recovery fund. You might also look at the range of value funds from Oldfield Partners; in particular their Japanese and Europe funds: there are plenty of stocks in both that would meet Graham’s criteria in both markets.
Buffett says that the day he picked up The Intelligent Investor when he was 19 was one of the ‘luckiest’ days of his life. Reading it and acting on its principles isn’t going to make you as rich as him and it might not make you rich quickly either — if you read all of its 581 densely printed pages you won’t be getting started for a while. But given what’s going on around us at the moment, I suspect that those who take the time to add a genuine margin of safety into their investing are significantly less likely to end up poor than those who do not.