“Everyday, do something foolish, something creative and something generous.” — Ben Graham

Upon the recommendation of a close friend, I read the revised edition of ‘The Intelligent Investor’ in late 2018. It had an immediate and profound impact on me and how I thought about the role of wealth, investment and finance in my life. Ben Graham’s principles and thoughtful advice felt liberating and enlightening.

This article is my attempt at documenting ‘Value Investing’ and how the book altered the way I view the world.

Some of Graham’s core ideas

1. Think like a businessman

Upon reading the book, one of the most profound ideas that Graham suggests is to think of oneself as a private businessman inquiring into a private business.

Source: https://unsplash.com/photos/xDE_p0EXpc8

A stock is not just a ticker symbol or an electronic blip; it is an ownership interest in an actual business, with an underlying value that does not depend on its share price
(Source: The Intelligent Investor — revised edition by Benjamin Graham)

The job of the investor is to calculate the value of this business, similar to how he would evaluate a private business.

2. Mr. Market

Mr. Market was the metaphor Graham used to describe the market and explain how stocks can become mispriced.

Source: https://unsplash.com/photos/NDZQLKiaCSI

Here’s how Graham explained the market overpricing stocks.

Imagine that in some private business you own a small share that cost you $1,000. One of your partners, named Mr. Market, is very obliging indeed. Every day he tells you what he thinks your interest is worth and furthermore offers either to buy you out or to sell you an additional interest on that basis.

Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them. Often, on the other hand, Mr. Market lets his enthusiasm or his fears run away with him, and the value he proposes seems to you a little short of silly.

If you are a prudent investor or a sensible businessman, will you let Mr. Market’s daily communication determine your view of the value of a $1,000 interest in the enterprise?

(Source: The Intelligent Investor — revised edition by Benjamin Graham)

3. Margin of Safety

If I was thinking like an engineer and building something like a bridge. I would always want to build the capacity of the bridge more than it is shown to be able to carry.

As an example, if this bridge needed to carry 10,000 pounds I would want to build the bridge with the capacity to carry 30,000 pounds.

Source: The super investors of Graham and Doddsville by Warren Buffet — 1984

I have used this method of thinking throughout my work life. Leaving allowances in management for things that can go wrong even when I don’t expect them to do so has allowed me to deliver projects on time despite unexpected errors delaying a project.

The same logic applies to securities, this is the easiest way to think of the margin of safety of principle.

No matter how careful you are, the one risk no investor can ever eliminate is the risk of being wrong. Only by insisting on what Graham called the “margin of safety” — never overpaying, no matter how exciting an investment seems to be — can you minimize your odds of error.
(Source: The Intelligent Investor — revised edition by Benjamin Graham)

Final notes from the book

• you must thoroughly analyze a company, and the soundness of its underlying businesses, before you buy its stock
• you must deliberately protect yourself against serious losses
• you must aspire to “adequate,” not extraordinary, performance

Benjamin Graham died on September 1976. He was truly an intellectual giant amongst men. This book provides a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.

I will definitely be revisiting the ideas in this book throughout my life and owe the man a great debt to what I have learned about investments and one’s financial wellbeing.

Putting it into practice

In the following articles, I will discuss how I went about investing in the Colombo Stock Market and use my blog to document my findings, reasoning, and performance. I hope to re-visit this content in the future as I continuously learn about companies, industries, and the economy.