Although Benjamin Graham has always been called the “Father of Value Investing”, the Chinese know him Most of his name is because he is the mentor of Warren Buffett, who has been at the forefront of the global rich list for many years. Buffett has said on multiple occasions that he “is 85% Graham and 15% Fisher.”
Nowadays, many professional investors (including funds and other institutions) pride themselves on the Graham-style value investment philosophy, but if you look closely, you will find that there are a large number of highly valued stocks in their portfolios. And they also frequently buy and sell operations, this so-called “value investment” is far from the value investment Graham said.
After the 1980s, a new generation of “value investors” such as Buffett and Seth Karaman rose to fame. Janet Lowe was the first financial writer to unearth the resources of Graham’s thought behind the success of these people, and she was also Graham’s biographer. If you want to understand Graham’s investment philosophy, investment strategy and investment technology, but don’t have time to gnaw on his original book “Securities Analysis”, then this “Learning from Graham to Value Investing” is undoubtedly a good choice.
However, reading “Learning Value Investing with Graham” in this era of great water release is actually the same as reading “Securities Analysis”, which will make many readers wonder whether these things Graham said are out of date? The original English version of Janet Lowe’s book is named “The Triumph of Value Investing” (The Triumph of Value Investing), which just shows that she wants to write this book and also has the intention of responding to this question.
Extremely conservative stock selection criteria
So is Graham’s investment theory really outdated? It’s out of date. But it didn’t.
The investment principles that Graham has repeatedly emphasized are “value investing”, “margin of safety” and “Mr. Market”. Translated into the vernacular, it means buying a very valuable company at a very good price, and then holding it no matter how the market fluctuates. , Until the price fully reflects the value before selling. This investment principle seems simple, but in our era of big water release, it is actually very difficult to implement it out-of-the-box, or simply impossible.
For the time being, let’s not consider how difficult it is to find a valuable company, and how difficult it is to ignore the interference of “Mr. Market”, just wait until the stock price of the valuable company falls back to fully satisfy Graham’s offer. Conditions may make investors fall into the helplessness and confusion of “waiting for Godot”.
Graham’s criteria for selecting stocks are as follows:
1. The stock’s earnings price ratio (that is, the reciprocal of the price-to-earnings ratio expressed as a percentage) should be greater than 2 times the income of AAA bonds;
2. The stock’s price-to-earnings ratio should be less than this 40% of the
stock’s highest price-earnings ratio in the past five years; 3.The dividend rate of the stock should be greater than two-thirds of the AAA bond yield;
4.The stock price should be less than two-thirds of the net book value of tangible assets per share;
5. The total market value of stocks must not be higher than two-thirds of net current assets or net liquidation value;
6.Total liabilities must be less than the net tangible assets;
7.Current ratio must be greater than 2;
8.Total liabilities must be less than 2 times of net current assets;
9. The average annualized profit growth rate in the past 10 years must be greater than 7%;
10. In the past 10 years, the number of years of profit decline cannot exceed two years, and the magnitude of each decline must not exceed 5%.
Investing in accordance with such a stock selection standard can of course get a very sufficient “margin of safety”, but this is undoubtedly extremely conservative. In fact, in today’s world, if you implement this standard to the full, you may not find any stocks worth investing in. Now all investors who claim to be Graham believers (including Buffett), if they are strictly measured by this standard, they are actually doing trend investment (or even speculation) in the name of value investment.
So why did Graham set such a standard in the first place? On the one hand, it was because he was “fearful of loss”, and on the other hand, during the Great Depression and for a long period of time afterwards, stocks that were underestimated were almost everywhere, so that such strict stock selection criteria were also applicable.
Two kinds of “value investing”
In the United States, the 1920s were known as the “roaring years”. The economy was booming and the stock market was rising like a rainbow. Graham’s investment was successful again and again. After more than ten years of honed on Wall Street, Graham started his own business. He formed the Graham-Newman Company. The scale of funds under management rose rapidly from US$400,000 at the beginning of 1926 to 2.5 million in 1929. Dollar. Graham became a millionaire.
However, at this moment, the stock market crashed, the worst economic crisis in American history broke out, and the Great Depression that lasted several years followed. The stock market saw two waves of 70% plunge, and the overall decline reached 90%. Graham also failed to withdraw in time. Instead, he used leverage to buy bottoms when the stock market fell sharply. As a result, he lost more than 70% in the stock market crash.
After the stock market crash, volatility in the U.S. stock market was very high until the early 1950s. Therefore, the market performance during this period, especially his own and his family’s personal experience, had a decisive influence on Graham’s investment theory. He realized that the main problem of investors, and it can even be said that the biggest enemy of investors is often himself.
Graham emphasized that investment is to ensure the safety of the principal and obtain a reasonable return through detailed and detailed analysis. Anything that does not meet this requirement is speculation. To ensure the safety of the principal means to ensure the margin of safety, even if your purchase price is lower than the intrinsic value of the stock. The key question then becomes, where does the margin of safety come from? Especially in today’s era of big water release, can you really find the kind of safety margin that Graham said? Very doubtful.
However, this was not a problem during the Great Depression and for a long period of time afterwards. At that time, the price of many stocks was significantly lower than their value, or even significantly lower than their liquidation value. Graham cited many such examples in his book “Securities Analysis.” One of the most extreme examples is that on December 31, 1931, White Motor Company’s stock price was $8, but the company’s book net assets reached $55 per share, and even its net current assets reached $11 per share. . From 1932 to 1933, due to the stock market’s plunge again, there were even more examples of such over-undervalued stocks. Coca-Cola’s stock price is only $2.66 per share, with a dividend rate of 8%; General Motors’ stock price is only two-thirds of its net assets, with a dividend yield of 12.5%. These stocks will become big bull stocks in the future.
Although Buffett claims to be Graham’s disciple, what Buffett calls “value investment” is actually obviously different from value investment in Graham’s sense. Buffett is willing to buy a good company at a “reasonable” price, while Graham emphasized that the purchase price must be very “good”, even for a good company, it is not worth the price too good. Although they all emphasize the margin of safety, and even though they think that the margin of safety is roughly equivalent to the difference between the intrinsic value of the stock minus the stock price, the source of intrinsic value is very different between Buffett and Graham.
Graham believes that the company’s intrinsic value is determined by the company’s assets, income, profits, and future expected earnings. The most important factor is the company’s future profitability. However, he also emphasized that due to the company’s sales revenue and cost It is very difficult to predict costs and expenses. The intrinsic value calculated by the method of capitalizing future earnings is often inaccurate, and it is easily affected by various uncertain future factors. Therefore, the intrinsic value he actually applies is roughly equivalent to the company’s liquidation value (or net current assets). But for Buffett, the intrinsic value is mainly derived from a good industry, a good company, a good strategy, a good management, etc. (or to put it another way, it is “moat”-business model, competitive advantage, corporate governance, etc.).
The essence of value investing has not changed
Graham’s main investment activities basically ended after the 1950s. Maybe it was because he couldn’t find an investment target with a margin of safety in his mind at that time. Today, the relationship between the government and the market, technological trends, industry conditions, and the degree of monetary easing have undergone earth-shaking changes. If Graham were to come back from the dead, he might not know how to choose stocks at all.
In this sense, Graham’s stock selection criteria are undoubtedly outdated. In fact, Graham himself seems to have a clear understanding of this. He once said in an interview before his death, “More than 40 years ago, this was very useful for investing in the stock market, but now the market situation is very different. Skeptical.”
However, Graham’s specific stock selection criteria are out of date, which does not mean that his value investment philosophy is also out of date. On the contrary, in our era of big water release, perhaps it is more necessary to adhere to the concept of value investment. Of course, this kind of value investment is definitely no longer exactly the same as Graham’s original value investment. In fact, Graham’s own value investing philosophy has also changed. For example, he also began to accept investment in growth stocks later, although his most basic bottom line has not changed-at any time can not buy high valuations Stocks (even for growth stocks).
The reason why Graham’s concept of value investment seems particularly conservative is related to his over-impression of the Great Depression, or in other words, to his worries that similar crises may return at any time. Although Buffett is his student, he obviously has no such worries. The difference between their “value investment” concepts is related to their different visions of the future. Today, the government has become so powerful that Graham could not have imagined it. Whether for good or bad, the government may be able to avoid the recurrence of the crisis in the absolute sense of the Great Depression by means of quantitative easing or even directly issuing money to citizens. The financial crisis in 2008 and the new crown epidemic from 2020 to the present all illustrate this point. After the 2008 financial crisis, there were some undervalued stocks in the U.S. stock market where the margin of safety was close to Graham’s sense, and Buffett succeeded in buying bottoms. However, after the outbreak of the new crown pneumonia epidemic in 2020, the prices of those “value stocks” will not be the highest, only higher. Today’s investors seem to be dissatisfied with searching for “low-priced assets”. They not only pay attention to the known static value of the company, but are more willing to explore and even imagine the potential dynamic value of the company and invest on this basis. The advancement of technology, the innovation of products and services, the emergence of a new generation of consumers and consumption scenarios, and the “ripening” of capital to the industry have reshaped the market environment, but the essence of value investment has not changed, and it is still looking for the most creative A great company with value and persist in holding it for a long time.
Value investment, how much speculation is in your name! Janet Lowe’s “Learning Value Investing from Graham” can play a role in clearing the source and help us think about how to persist in value investment in this era of great water release.