21 Jun Benjamin Graham’s “Securities In An Insecure World – Nov 1963”
On general investing risks
In the field of financial security, as limited to the problems of investment policy, I would say there are three kinds of threats or dangers that investors should recognize as possibly existing at the present time. One of them would be the threat from atomic war; the second would be the threat from inflation; and the third would be the threat from severe market fluctuations up and down, and of course primarily down.
On behavioral finance
My conclusion is that investor’s feelings and reactions regarding inflation are probably more the result of the stock market action that they recently experienced than the cause of it.
I would like to point out that the last time I made any stock market predictions was in the year 1914, when my firm judged me qualified to write their daily market letter, based on the fact that I had one month’s experience in Wall Street. Since then I have given up making predictions.
Investors cannot have a dependable view on the market’s future action in the next year or so, but that a large and disturbing decline is likely to take place again sometime in the future, and that we should be prepared in thought and action for it, is a necessary assumption for investors to make, and for sensible speculators too if they are any such.
I must reluctantly express some skepticism about the general efficacy of economic forecasting, of stock market forecasting, and of expert selection of common stocks, in their relation to the investment and speculative profits which can be made therefore.
On stock picking
I think the third and most important reason why the investor should not be led to emphasize his selection of individual stocks, and to neglect the general level of the stock market is the fact that there is no indication that the investor can do better than the market averages by making his own selections or by taking expert advice. The outstanding support for that pessimistic statement is found in the record of the investment funds, which represent a combination of about the best financial brains in the country, and a tremendous expenditure, of money, time, and carefully directed efforts.
I do believe it is possible for a minority of investors to get significantly better results than the average. Two conditions are necessary for that. One is that they must follow some sound principles of selection which are related to the value of the securities and not to their market prices action. The other is that their method of operation must be basically different than that of the majority of security buyers. They have to cut themselves off from the general public and put themselves into a special category.
Let me raise a final question: Despite rather discouraging results from endeavors to predict market moves or to select the most attractive companies, can the intelligent investor follow any policies of common stock selection that promise better than average results? I think it is possible for some strong minded investors to do this, by buying value rather than prospects or popularity. Some examples of this approach: 1) Select stocks of important companies which sell on a no-glamour basis. 2) Buy definitely “bargain issues”. 3) “Special situations” – reorganizations, mergers, take-overs, liquidations, etc. This is a professional area, but it is not impossible for intelligent investors to profit handsomely from it if they approach security operations as they would a commercial business.
On asset allocation
In my nearly fifty years of experience in Wall Street I’ve found that I know less and less about what the stock market is going to do but I know more and more about what investors ought to do; and that’s a pretty vital change in attitude. Investor is required by the very insecurity ruling in the world if today to maintain at all times some division of his funds between bonds and stocks.
We have talked about a bond component and a common stock component.
Many investors would think my prescription too simple. If they can get results equal to the averages in this easy way why shouldn’t they try to get a substantially higher return by careful and competently-advised selection? My short answer has already been given: If the investment funds as a whole can’t beat the averages, even pretty clever investors as a whole can’t do it either. The underlying problem of selection is that the “good stocks – chiefly the growth stocks with better than average prospects – tend to be fully priced and often overpriced.”
Excellent speech by Benjamin Graham, titled “Securities in an insecure world – 15 Nov 1963”. – You should be able to google a copy.