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As I’ve mentioned in several of my articles, aside from just working to earn money, you also need to Save and Invest if you want to be financially successful.
Now, I’ve already explained why I don’t want to recommend particular stocks on another article (Read that one if you want to know how “Investment Advisors” can manipulate you), but I CAN teach you what I’ve learned from OTHER investors through their books and research!
“Fools say that they learn by experience. I prefer to profit by others experience.”–Otto von Bismarck
Now, you don’t need to be an extremely wealthy super-genius to become an investor. All you need (aside from a broker like BPITrade or ColFinancial if you live in the Philippines) is some money, discipline, and applied knowledge.
Here’s some simple guidelines from Benjamin Graham, author of the classic “The Intelligent Investor
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How to Invest in Common Stock: Benjamin Graham’s 4 Rules for Defensive Investors
First Rule: Diversify!
Own at least 10-30 different stocks, preferably in different industries.
A fruit farmer won’t plant just one tree in his land, he’ll plant MANY trees. If a few trees die for any reason, there’s a LOT more that can still bear fruit. You must do the same thing with stocks.
While it’s tempting to bet everything on a few “sure-win” stocks, you open yourself to a LOT of risk that way if any one of those companies suddenly fall in value.
If you ever heard people “don’t put all your eggs in one basket” when talking about stocks, this is what they meant: Don’t put all your money in one company/mutual fund/industry and invest in a wide variety of them.
Second Rule: Select Large, Prominent, Conservatively Financed Companies
Invest in established leaders in the industry, preferably companies in the top 25% or 30%.
Generally, you want companies that have found a winning formula and have withstood the test of time.
While new ideas and startups sound exciting and it IS possible to build fortunes from them, remember that there is a MUCH bigger risk for failure, especially if you didn’t check the fundamentals correctly. In the late 90s to early 2000s, brand new, web-based businesses were the most popular and stock prices soared. Suddenly, when many of those new web-based businesses failed and the “dot-com bubble” burst, people LOST their investments overnight and nearly TRILLIONS of dollars worth of market value disappeared.
Choose great and stable companies. Remember: We’re investing in businesses, not gambling on racehorses.
Third Rule: The Company you’re buying should have a Long, Unbroken Record of Dividend Payments
Graham recommends at least 20 years of dividend payments (profit given to company stockholders).
Why are dividend payments so valuable? Lowell Miller, author of “The Single Best Investment: Creating Wealth with Dividend Growth” explained that dividends signify actual profit. Companies can lie on their “Earnings” reports to look good to investors and boost their stock price, but as Geraldine Weiss wrote, “Dividends Don’t Lie.” They’re real, solid proof that the company is making money.
If a company givesgood dividends to their stockholders, it means it has actual earnings to pay it.
Fourth Rule: Choose companies with a 7-year Price-to-Earnings (P/E) Ratio of Less than 25 (and less than 20 in the past 12 months)
What’s the P/E Ratio? According to Investopedia, it’s the “ratio for valuing a company that measures its current share price relative to its per-share earnings.” In short the P/E Ratio is how much the share currently costs compared to the earnings each share gives.
Why is a low P/E desirable? A very high P/E means that the stock is likely overpriced and that there’s a lot of speculation with it. In layman’s terms, many people are betting on it so as they buy the stock, the price increases.
It’s like paying P500 for a P100 T-shirt, hoping that the T-shirt can be sold for P1,000 later (You lose P400 if the shirt’s value rightfully goes down to P100). That’s a rough example, but you get the idea.
Choose good companies with a moderately low P/E Ratio (less than 25).
So there you have it! The Four Rules for Defensive Investors! Remember:
- Diversify! Own around 10-30 different stocks in many different industries!
- Select Large, Prominent, Conservatively Financed Companies
- Choose companies with Long, Unbroken Records of Dividend Payments
- A 7-year Price-to-Earnings (P/E) Ratio of Less than 25, and less than 20 in the past 12 months
If you want to learn more about Benjamin Graham’s Investing method, you can check out his book, “The Intelligent Investor” below. If you want the absolute basics or a quick reviewer of the book, there’s also a 100-Page Summary version by Preston Pysh and Stig Brodersen on this link.
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FAQs
In conclusion, the 4 golden rules of investment - start early, watch out for costs, stick to your goals, and diversify - collectively play a crucial role in building a resilient and rewarding investment portfolio. By starting early, investors can benefit from compounding returns over time.
What were Graham's two rules of investing? ›
Graham's most recognized rules of investing are to protect yourself from losses and distrust market prices. Loss protection measures include investing with a margin of safety and diversifying across and within asset classes. Graham's margin of safety concept is closely related to his distrust of market prices.
What is the Graham rule in stocks? ›
Graham says to stay within the range of 25/75 to 75/25: We have suggested as a fundamental guiding rule that the investor should never have less than 25% or more than 75% of his funds in common stocks, with a consequent inverse range of between 75% and 25% in bonds.
What is the Graham method of investing? ›
Benjamin Graham's method of value investing stresses that there are two types of investors: long-term and short-term investors. Short term investors are speculators who bet on fluctuations in the price of an asset, while long-term, value investors should think of themselves as the owner of a company.
What is the 4 rule in stocks? ›
It's relatively simple: You add up all of your investments, and withdraw 4% of that total during your first year of retirement. In subsequent years, you adjust the dollar amount you withdraw to account for inflation.
What are the 4 key principles of investors in people? ›
IiP has three principles – Plan, Do, Review – and ten indicators. In 2009 the IiP standard was reviewed to enable organisations to concentrate on high-priority indicators and work to improve these areas first. See more on the IiP website. Some evidence suggests that organisations adopting IiP gain benefit.
What is the Graham formula for investing? ›
Based on Graham's theory that an undervalued stock should have a price-to-book ratio (PB ratio) of no more than 1.5 and a price-to-earnings ratio (PE ratio) of no more than 15, 22.5 is recommended. Thus, the PB ratio × PE ratio equals 22.5 = (15 × 1.5).
What is the Benjamin Graham approach to Buffett? ›
One of Graham's fundamental investment principles that Buffett was not a fan of was pure quantitative investing. Graham focused on companies that traded below their intrinsic value and bet on their mispricing. Further, he underlined the importance of portfolio diversification to boost the probability of gains.
What Benjamin Graham taught Warren Buffett about investing? ›
Buffett has those rules because the value investing approach he learned from Graham follows three core, risk-mitigating principles: Always analyze the long-term evolution and management principles of a company before investing. Always protect yourself from losses by diversifying.
What is the golden rule of stock? ›
Warren Buffet's first rule of investing is to never lose money; his second is to never forget the first rule. This golden rule is key for long-term capital protection and growth. One oft-used strategy to limit losses in turbulent markets is an allocation to gold.
Benjamin Graham's investing philosophy boils down to value investing, looking to buy those stocks that are undervalued according to earnings per share (EPS), book value, and investing multiple (e.g., the price is trading at nine times earnings instead of proper valuation, of, say, 15 times earnings).
What is the Buffett rule of stocks? ›
Buffett's circle of competence rule relates to buying stocks in companies that you understand. He believes that stock investors should be more concerned about a company's business than short-term stock price volatility. Buffett has long been a proponent of value investing.
What is Graham's rule #1? ›
Graham's protégé, Warren Buffett, admonishes investors to remember the two main rules in value investing: (1) Don't lose money; and (2) Don't forget rule #1. Although every value investor hopes to grow capital, preservation of principle and the careful thinking this requires is the foundation of success.
What formula does Warren Buffett use? ›
The Rule of 72: Buffett often makes use of the Rule of 72, a straightforward formula to estimate the time required for an investment to double in value. This rule is determined by dividing 72 by the annual rate of return.
What is Graham ratio in stocks? ›
The Graham number (or Benjamin Graham's number) measures a stock's fundamental value by taking into account the company's earnings per share (EPS) and book value per share (BVPS). The Graham number is the upper bound of the price range that a defensive investor should pay for the stock.
What are the 4 elements of investment? ›
- Goals. Create clear, appropriate investment goals. An investment goal is essentially any plan investors have for their money. ...
- Balance. Keep a balanced and diversified mix of investments. ...
- Cost. Minimize costs. ...
- Discipline. Maintain perspective and long-term discipline.
A: Five rules drawn from Warren Buffett's wisdom for potentially building wealth include investing for the long term, staying informed, maintaining a competitive advantage, focusing on quality, and managing risk.
What is the 4 fund investment strategy? ›
The Four Fund Combo is built on four index funds (or exchange-traded funds) that include the most basic U.S. equity asset classes: large-cap blend stocks (the S&P 500 SPX, +0.27%, in other words), large-cap value stocks, small-cap blend stocks, and small-cap value stocks.
What are the golden stock rules? ›
In trading keeping patience is another important rule many traders do not follow and many times they regret making the decision in haste. After entering into a trade position keep an eye on that but also keep patience, sometimes stock moves as per the market direction it takes time.
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” explained that dividends signify actual profit. Companies can lie on their “Earnings” reports to look good to investors and boost their stock price, but as Geraldine Weiss wrote, “Dividends Don’t Lie
.” They’re real, solid proof that the company is making money.
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