What Benjamin Graham Taught Warren Buffett About Investing

Don’t lose money and play the long game

“Every day, do something foolish, something creative, and something generous.” Those are the words of Benjamin Graham and, according to his most famous student — Warren Buffett — “he excelled most at the last.”

Benjamin Graham is the “father” of value investing, a long-term, contrarian approach to managing money. From 1936 to 1956, Graham’s company achieved a stellar 20% annual return for its investors. If you had invested $10,000 with him over those 20 years, you’d have walked out with $383,375.99 — or about $3.6 million in today’s dollars.

Graham is also one of the main reasons why, today, companies pay dividends to their shareholders.

In 1926, companies first had to file public financial reports. Graham analyzed those of Northern Pipeline, an oil company owned by John D. Rockefeller, and found they had $95 per share in extra cash that they weren’t using. Graham rallied shareholders together and, two years later, received a board seat and $70 per share — along with everyone else. Rockefeller supported his motion and pushed other companies to do the same — which they still do today.

When Warren Buffett first approached Graham in 1951, he offered to work him for free — to which Graham said: “You’re overpriced.” Knowing how much work it is to teach someone who can’t contribute much yet, Graham only hired Buffett three years later, but the rest is history.

Maybe because of Buffett, Graham decided to write his knowledge down. To this day, Buffett, once the richest man in the world, calls Graham’s book The Intelligent Investor “the best book about investing ever written.”

Here are 3 lessons from it that’ll help you understand and grow your money.

1. Follow the 3 risk-mitigating principles.

Warren Buffett often shares his “two only rules for investing:”

  1. Never lose money.

  2. Never forget rule #1.

Buffett has those rules because the value investing approach he learned from Graham follows three core, risk-mitigating principles:

  1. Always analyze the long-term evolution and management principles of a company before investing.

  2. Always protect yourself from losses by diversifying.

  3. Always focus on safe and steady returns over crazy profits.

Nobody can predict the next Facebook, but everyone can protect themselves against losses.

Intelligent investors collect evidence of a gap between current price and intrinsic company value. Only when they find that evidence do they strike — and then wait for the value to unlock.

They invest into a few but not too many of those companies in order to not lose everything when one investment fails, and they’re perfectly happy with any return that beats the stock market average of 8%.

2. Don’t trust Mr. Market.

Graham often imagined the entire stock market as a single person. What would that person be like?

He said that if Mr. Market showed up on your doorstep each day quoting you various stock prices, most of the time, you’d probably ignore him as you would any other door-to-door salesman. You’d think prices are suspiciously cheap or way too high — and you would be right.

Mr. Market is not the brightest, totally unpredictable, and suffers from serious mood swings. Don’t trust Mr. Market.

When Elon tweets the right thing, Tesla’s stock goes up. If it’s the wrong thing, it goes down. When a new iPhone comes out, people queue in line, and Apple’s stock goes up. When an influencer finds a flaw in the phone the next day, the stock plummets.

None of this has anything to do with the value of the company as a whole — and yet, these things affect Mr. Market! Humans are too good at finding patterns. We see them even where none exist.

If you want to be an intelligent investor, you must do your own homework.

3. Develop a formula and stick to it.

A common piece of advice among poker pros is this: Leave your emotions at home. Money is a numbers game. It requires logic, not feelings.

To detach himself and cut the emotional stress out of investing, Benjamin Graham worked by a set of strict formulas. Some of them helped him evaluate companies, others manage his money, such as dollar-cost averaging.

Dollar-cost averaging means you set a fixed budget you will invest at fixed intervals. Every week, month, or quarter, you’ll invest more in the stocks you’ve previously determined are valuable, no matter the price.

For example, I’ve set a recurring transfer for 10% of my income to go into my brokerage account each month. Then, I use that to buy new stocks on my list or more of the ones I already own.

This can also be emotionally demanding because you’ll keep investing the same budget regardless of whether stocks look cheap or expensive, but it’s still much easier than constantly fretting about how much to invest when, why, and into what.

Use formulas in your investing. It’s a great way to protect yourself against losses — and both Buffett and Graham thought that’s what it’s all about.

Summary

The Intelligent Investor explains value investing, a long-term money management strategy focused on steady profits, ignoring the daily whims of the market, and picking companies with high intrinsic value.

Remember these three lessons to take advantage of the miracle of compounding interest:

  1. The three principles of value investing are analyzing companies for their long-term evolution, protecting yourself against losses, and going for consistent profits rather than crazy bets.

  2. The market as a whole is biased, irrational, and moody, especially in the short term. Ignore Mr. Market.

  3. Stick to a set of strict formulas by which you make all your investments.

“The intelligent investor is a realist who sells to optimists and buys from pessimists.”
— Benjamin Graham

-Nik

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