Benjamin Graham, the well-known mentor of billionaire investor Warren Buffett, is a legend amongst the investing community. As such, it’s always a treat to read about his thoughts on investing. I had recently come across a fascinating old 1955 document that contained an interview Graham had with the U.S. Congress on the stock market. The document also included a statement that Graham had prepared in relation to the interview. Here are some of my favourite parts of the document along with my comments. On how the secret to successful investing has been out for decades “I have been accused of…
Benjamin Graham, the well-known mentor of billionaire investor Warren Buffett, is a legend amongst the investing community. As such, it’s always a treat to read about his thoughts on investing.
I had recently come across a fascinating old 1955 document that contained an interview Graham had with the U.S. Congress on the stock market. The document also included a statement that Graham had prepared in relation to the interview.
Here are some of my favourite parts of the document along with my comments.
On how the secret to successful investing has been out for decades
“I have been accused of telling all my secrets [about investing]. I have written a number of books [The Intelligent Investor and Security Analysis are two such books], and I reveal them all in these books.”
Take note! The secret to successful investing has been out since the 1930s, the date when Security Analysis was first published. But, fortunately, time does not seem to have diluted most of the concepts regarding sound-investing that were described by Graham.
On how time heals wounds in the stock market
“We did pretty well in 1929 alone, but the real difficulty we experienced in 1930 and 1931 when the market went much further downward than we had anticipated. We had pretty well anticipated the 1929 decline. And so our resources were shrunk pretty much… They went down fairly low, and it was not until 1936 that a person who had been with us in 1929 and had held on would find himself even, but by 1936 he was even in our business.”
The late 1920s and early 1930s was the era of the Great Depression, a time when the U.S. stock market crashed by nearly 90% in value from peak-to-trough. But, time eventually healed those wounds, as Graham had stated based on his experience.
On the need for skepticism when it comes to someone’s estimate of a stock’s value
“Present concepts of common stock valuation turn largely on estimating average future earnings and dividends and applying thereto a suitable capitalization rate or multiplier. Since these elements are all matters of prediction or judgement, there is room for a wide difference of informed opinion as to the proper value for a single stock or a group of stocks at any time.”
Some investors see an analyst’s estimate of a stock’s intrinsic value and take that as the North Star of the stock’s real worth. Thing is, analysts – even when studying the same set of facts and figures – can have huge variances in their estimate of a stock’s value.
The offshore engineering and property development conglomerate Keppel Corporation Limited (SGX: BN4) is a great example. My colleague Chin Hui Leong pointed out recently that some analysts had valued Keppel Corp at around S$5 at the same time that another group had pegged the company to have a value of over S$8. That’s a gap of around 40%.
On how value in the market should be measured
“The true measure of common stock values, of course, is not found by reference to price movements alone, but by price in relation to earnings, dividends, future prospects, and, to a small extent, asset values.”
A stock’s price tells us nothing about its real value. In fact, a stock with a price of S$100 can even be cheaper than one with a price of S$1. The two stocks Jardine Cycle & Carriage Limited (SGX: C07) and Q & M Dental Group (Singapore) Limited (SGX: QC7) exemplify the situation. The former has a price of S$42.33 apiece, but a price-to-earnings (PE) ratio of just 16. Meanwhile, the latter has a much higher PE ratio of 47 even though its price is only S$0.695.
On why the market eventually reflects a stock’s true value
Question to Graham:
“When you find a special situation and you decide, just for illustration, that you can buy for 10 and it is worth 30, and you take a position, and then you cannot realize it until a lot of other people decide it is worth 30, how is that process brought about – by advertising, or what happens?”
Answer by Graham:
“That is one of the mysteries of our business, and it is a mystery to me as well as to everybody else. We know from experience that eventually the market catches up with value. It realizes it in one way or another.”
Sometimes, things just happen in the world of investing. It can in fact be a futile attempt to discern reasons behind certain phenomena.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing does not own shares in any companies mentioned.