Monday, June 22, 2009

Benjamin Graham

Here's an article by Jason Zweig of the Wall Street Journal from this past May.

The article points out that during the crash in 1974, Ben Graham gave a speech and said that investors would be "enviably fortunate" if a long bear market were to occur.

These thoughts from Graham seem similar to the following quote by Shelby Davis:

"You make most of your money in a bear market, you just don't realize it at the time."

Davis was said to have borrowed $100,000 in 1947 and grew it to $800 million by the time of his death in 1994.

Here's another relevant quote by Graham:

"Imagine that in some private business you own a small share that cost you $1,000. One of your partners, named Mr. Market, is very obliging indeed. Every day he tells you what he thinks your interest is worth and furthermore offers either to buy you out or to sell you an additional interest on that basis. Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them. Often, on the other hand, Mr. Market lets his enthusiasm or his fears run away with him, and the value he proposes seems to you little short of silly.

If you are a prudent investor or a sensible businessman, will you let Mr. Market's daily communication determine your view of the value of a $1,000 interest in the enterprise? Only in case you agree with him, or you want to trade with him. You may be happy to sell out to him when he quotes you a ridiculously high price, and equally happy to buy from him when his price is low. But the rest of the time you will be wiser to form your own ideas of the value of your holdings…"

In Graham's allegory, Mr. Market is very temperamental. He has a tendency to swing from wild optimism to seemingly bottomless pessimism. As an intelligent investor, you should not fall under Mr. Market's influence, but rather learn to benefit from the irrational behavior.


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