Key points

● investors need to keep their emotions stable and isolated from the stock market at all times.

● defensive investors can use the Graham index more often when tracking stable dividend companies.

● diversification, 25% bonds, 25% common stock, remaining 50% flexible allocation

As one of the greatest investors of the 20th century,Benjamin Graham has always been regarded as the "father of value investment" and the "godfather of Wall Street". At the same time, he is also Buffett's "spiritual mentor".

Graham advises investors to distance themselves from the changing stock market, stick to the margin of safety, stay away from products, plans and investment vehicles you don't know, and abandon risky stocks and bonds.

Graham also proposed the Graham index, which combines a variety of indicators to perfectly measure whether a company's share price is reasonable.

The Fable of Mr. Market

Graham often mentions a fable called Mr. Market.

Suppose you and Mr. Market are partners in a private company. Every day, Mr. Market will quote a price, suggesting that he is willing to buy some shares from you at that price, or sell some of his shares to you.

Although the business you are in is operating steadily, Mr. Market's mood and quotation are not stable.

On some days, "Mr. Market" is in high spirits and can only see the light in front of him, and then he will quote a very high price; on other days, when "Mr. Market" is depressed and sees only the difficulties in front of him, he will quote a very low price. Moreover, Mr. Market is very persistent. If the offer made today is ignored, he will come back tomorrow and bring his new offer.

Graham warned investors that in this particular environment, it is necessary to maintain good judgment and control, and keep a distance from Mr. Market.

When Mr. Market's offer is reasonable, investors can take advantage of him; if his performance is abnormal, investors can ignore him or take advantage of him, but they must not be controlled by him, otherwise the consequences will be unimaginable.

Conclusion: today's successful value investors generally accept the fable of "Mr. Market", keeping their mood stable and isolated from the stock market mood.

Price fluctuations have only one important meaning for real investors, that is, they give investors the opportunity to make rational buying decisions when prices fall sharply, and to make rational selling decisions when prices rise sharply.

In addition, investors had better forget the existence of the stock market and pay more attention to their dividend returns and the operating results of enterprises.

Graham index

As the originator of value investment, Graham created an evaluation formula for investors to choose to use-Graham Index.

The specific calculation is as follows:

Graham Index = 22.5X earnings per share the square root of the book value per share of EPS X

For example, the Graham index for stocks with earnings per share of $1.50 and book value of $10 per share is $18.37.

Graham thinksA company's price-to-earnings ratio should not be higher than 15, and price-to-book ratio (P / B) should not exceed 1.5.This is the source of 22.5 in the formula (15 x 1.5 = 22.5).

Once the Graham index of the stock is calculated, which is designed to represent the company's actual intrinsic value per share, it can be compared with the current share price of the stock.

If the current share price is lower than the Graham index, the stock is undervalued and may be seen as a buy signal; if the current share price is higher than the Graham index, the stock appears to be overvalued and not a good time to buy.

Of course, the Graham index has its limitations. It is designed to stabilize dividend companies. It does not apply to growth stocks and companies with negative temporary returns, and is more suitable for defensive investors.

Thirteen pieces of advice

As the father of value investment and Buffett's teacher, Graham has been giving a lot of advice to future generations throughout his life. We have summed up the following 13 points.

First, be an investor, not a speculator.

Investment is aimed at value, speculation is directed at price. Graham believes that value depends on the assets and earnings of the company, while prices are disturbed by market sentiment. Investors are advised to pay attention to value, that is, the balance sheet and income level of the enterprise.

Second, buy a valuable company at a reasonable price.

Any commodity has a reasonable price, which is equal to value. If you buy a product at a price higher than the value, it is irrational. The best deal should be when the price is much lower than the value. The extent that the price is lower than the value should be regarded as a "safe space". The larger this space is, the higher the safety factor of investment is.

Third, make every effort to find the hidden value.

The biggest purpose of value investment is to find those values that have been ignored by the market, and to determine whether a company has hidden value through the existing net asset value rules.

The so-called existing net asset value is to subtract all kinds of debt from assets, from short-term debt to long-term debt, as well as preferred stock, and the rest is existing net asset value. The intrinsic value of each share is obtained by dividing the existing net asset value by the number of shares, and then compared with the price per share. If the intrinsic value of each share is much higher than the price per share, it indicates that there is hidden value, which indicates that a purchase opportunity has emerged.

Fourth, in addition to using the value of existing assets to evaluate the intrinsic value of companies and stocks, Graham also proposed another formula to determine the intrinsic value.

This formula takes advantage of earnings per share, expected earnings growth and the current yield on the highest credit-rated bonds.

The intrinsic value of the stock = earnings per share x (2x expected earnings growth rate + 8.5) the current yield on x4.4/AAA bonds.

Fifth, remain skeptical and do not easily believe any rumors and data.

Graham experienced the U. S. stock market crash of 1929, when there were many good hopes for the future of listed companies, but the crash since then caught Graham by surprise. This experience makes Graham so skeptical about expectations and the future that he tends to value existing assets rather than future earnings.

Sixth, leave room for fault tolerance.

No matter how cautious an investor is, he cannot accurately assess the intrinsic value. Therefore, in order to improve the safety factor, the greater the deviation between intrinsic value and price, the better, so that even if the estimation is wrong, there is still room for fault tolerance.

Seventh, diversify investment.

At least 25% of the money should be invested in bonds and at least 25% in common stocks, while the remaining 50% should be flexibly allocated between stocks and bonds on a case-by-case basis.

Eighth, don't rely too much on math and numbers.

Investors should not rely too much on mathematical calculation. if someone introduces calculus or higher algebra into securities analysis, investors need to be vigilant enough about this method.

Ninth, put the quality of the company first, not the absolute price.

Buying and selling stocks should first examine the quality of the company, not the current stock price. If a company has good profitability, stable dividend distribution and good asset-liability structure, then the high absolute price does not mean that the stock is really expensive. On the contrary, if the income of a company is negative, it does not pay dividends for a long time and is insolvent. Then no matter how low the stock price is, it is not worth buying.

Tenth, dividends are a good indicator.

If a company can maintain a stable dividend for more than 10-20 years, the company is very resistant to risk.

Eleventh, protect the rights and interests of shareholders.

The management of the company should put the interests of the shareholders first. A company worth buying must be those that the management can think of for the interests of the shareholders. At the same time, investors are reminded that if the management of listed companies cannot do this, investors should exercise their power to actively defend their interests.

Twelfth, have extraordinary patience.

Investors and speculators are like a race between the tortoise and the hare. Although investors' short-term profits are not as glorious as speculators, investors' long-term profits far exceed the performance of speculators because of their steady growth and continuous reinvestment.

Thirteenth, develop the habit of thinking independently.

Speculators often need to speculate on the mood and psychology of the public, and what investors need to do is not to be affected by the mood and psychology of the public. If investors want to think from a completely different point of view from the public, they must not blindly follow the public and public opinion, and stay away from the so-called market authority.