British-born American Economist Benjamin Graham’s The Intelligent Investor was published in 1949 and remains among the most respected books ever written on investing. Warren Buffet, who first read the book at age 19 and later studied under Graham at Columbia University, calls it “the best book on investing I’ve ever read.”
Graham’s subject is value investing; he is known, in fact, as “the father of value investing.” But the principles he espouses throughout the 600-plus pages of The Intelligent Investor apply broadly; they serve as reminders, more like reins, restraints to keep investors from straying from their investment commitments and focused on their investment goals during the most turbulent markets.
Two of Graham’s principles seem particularly relevant when inflation soars and stock prices sink:
“In the short run, the market is a voting machine and in the long run it’s a weighing machine.”
Graham is telling his readers that in the short term, the market represents how investors feel that day. Fads, popularity contests, emotions—they combine for rapid changes in the prices of stocks, the product of those volatile markets we have seen become even more volatile in 2022. But underlying value doesn’t change. Graham reminds us that long term, stocks’ movement reflects their intrinsic value: the most “weighty,” those with the strongest fundamentals—revenue growth, free cash flow, substantial profit margins— are going to rise, are going to be winners.
It is easier today than ever, with various apps at our fingertips, to click and buy or sell a stock. And with financial media talking at us on a 24-hour cycle, and social media channels like Reddit and TikTok inventing trends and creating crises—think Gamestop—investors are continuously under siege and can be easily swayed.
“You must invest in order to protect yourself and your cash against inflation.”
Inflation, even low inflation, works to erode the value of the dollar and rob you of purchasing power. If you have two dollars and put one in a bank account and invest the other, the dollar you invested has the potential to grow over time while the dollar in the bank continues to lose value to inflation.
Graham warns against “money illusion.” Consider two scenarios: In 2016 when inflation was 6 percent, you received a 3 percent raise, and in 2017 inflation was zero but you received a pay cut of 3 percent. Your inflation-adjusted purchasing power was the same in both instances.
We are emotional beings and can’t help but react emotionally to negative influences on our finances, like runaway inflation and falling stock prices. But the intelligent investor understands that selling as stock prices decline means you’re getting a discounted price for your stock. You invest to create wealth; if you sell as the market declines you’re losing wealth.
If your goals haven‘t changed, your investment timeframe shouldn’t change. Thinking long-term over short term is always a better investment strategy. Avoid short cuts and stay committed. Those are precepts that rang true in 1949 and that remain timeless investment principles.
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