How Ben Graham’s investing principles help prepare for crash

Benjamin Graham | Enter after the market has gone down and keep booking profits after every significant rise. Well, the Graham strategy that I outlined does exactly that and helps you do the right thing from a long term perspective.

February 06, 2022 / 07:52 AM IST

Benjamin Graham, the father of value investing, was in equal parts magnanimous and brilliant. He wanted the common investor to earn good long term returns and hence, was always obsessed with refining his techniques and strategies and making them as easy as possible.

Consider for example the following 3-point strategy that he outlined in one of the last interviews he gave before he passed away.

a) The individual investor should act consistently as an investor and not a speculator. He should be able to justify every stock purchase he makes by impartial, objective reasoning that gives him the satisfaction that he is buying the stock with a significant margin of safety

b) The investor should have a definite selling policy for all his common stock investments, corresponding to his buying techniques and lastly,

c) Investor should always have a minimum percentage of his total portfolio in common stocks and a minimum percentage in bond equivalents. He then recommended at least 25 percent of the total at all times in each category.

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The rules have everything a sound portfolio management needs. A proper stock selection policy i.e. a predefined buy criterion, a predefined sell criterion and last but not the least, the way the portfolio should be structured.

In fact, here’s a proof from real life. I have been using this strategy successfully over the last 8 years.

This strategy has generated a CAGR of 20 percent, turning every Rs 100 into more than Rs 400 versus the Rs 277 that the Sensex would have given during the same period.

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The strategy works on the same principle of reducing exposure to stocks when the markets turn expensive and increasing exposure when they turn cheap.

Now, many investors are surprised by the way the markets have corrected over the last few weeks.

However, one look at the broader market valuations and how expensive they are and you realise that a correction was well on the cards.

Therefore, a good strategy would have been to book profits and take some money off the table, exactly the way Graham prescribed. And what a great decision it would have turned out to be.

One of the big reasons most investors end up underperforming the market is because they are terrible timers. They enter the stock market after it has gone up a great deal and exit out of panic after the market has gone down a great deal.

A sensible long term strategy is of course to do the exact opposite.

Enter after the market has gone down and keep booking profits after every significant rise. Well, the Graham strategy that I outlined does exactly that and helps you do the right thing from a long term perspective.

So, follow Graham by basing your decision on the valuations of individual stocks and also that of the broader market and trust me, you won’t be disappointed in the long run.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

–> b) The investor should have a definite selling policy for all his common stock investments, corresponding to his buying techniques and lastly,

Source: https://www.moneycontrol.com/news/business/markets/how-ben-grahams-investing-principles-help-prepare-for-crash-8044011.html