[Archives] Current Views And Reiterations Of Ben Graham And Peter Lynch

Current Views And Reiterations Of Ben Graham And Peter Lynch by Redfield, Blonsky & Co.

May 31, 1996

Dear Client:

We would like to inform you of some views on investing and my interpretation of current investment conditions.  I will also mention several investment philosophies.  Please call is if your risk tolerance or investment goals are different from these.

The following selections are various philosophies of which I feel all investors should be aware:

“In most periods, the investor must recognize the existence of a speculative factor in common stock holdings.  It is his or her task to keep this component within minor limits, and to be prepared financially and psychologically for the adverse results that may be of a short or long duration” (Benjamin Graham).

“One fairly dependable sign of the approaching end of a bull swing is the fact that new common stocks of small and nondescript companies are offered at prices somewhat higher than the current level for many medium sized companies with a long market history” (Benjamin Graham).

“You can lose money in a very short time, but it takes a long time to make money” (Peter Lynch).

“The key to making money in stocks is not to get scared out of them.  This point cannot be overemphasized” (Peter Lynch).

“A decline in stock values is not a surprising event, it’s a recurring event – as normal as frigid air in Minnesota.  If you live in a cold climate, you expect freezing temperatures, so when your outdoor thermometer drops below zero, you don’t think of this as the beginning of the next Ice Age.  You put on your parka, throw salt on the walk and remind yourself that by summertime it will be warm outside.”

“A successful stock picker has the same relationship with a drop in the market as a Minnesotan has with freezing weather. You know it’s coming and you’re ready to ride it out.  When your  favorite stocks go down with the rest, you jump at the chance to buy more” (Peter Lynch).

Warren Buffett’s admonition that “people who can’t tolerate seeing their stocks lose 50 percent of their value shouldn’t own stocks also applies to stock funds” (Peter Lynch).

“People who can’t tolerate seeing their mutual funds lose 20-30 percent of their value in short order certainly shouldn’t be invested in growth funds or general equity funds” (Peter Lynch).

There are also several concerns on fixed income investments.  When investing in fixed incomes, you must understand the following risks to principal:

  • Rising interest rates
  • Credit quality
  • Callable features
  • Maturity date
  • Inflation (which appears to be reemerging)
  • The Federal deficit
  • Foreign ownership of U.S. Treasuries and the United States potential reliance on continued investment by foreign nations.

We are in a very difficult time for investing.  The U.S. stock market is at all time highs.  Certain valuation models on the market are also at arguably high levels.  Several of these potentially negative indicators are dividend yields, volume of initial public offerings and mass market optimism (from the factory worker, taxi driver, bank teller, construction worker, accountant, lawyer, etc.).   We have also been in a bull market since 1981.  Over the last fifteen years (including the “crash” of 1987) losing money has been difficult.

In summary, we do not think the sky is falling.  Understanding the risks of both equities and fixed income investments is very important (remember mutual funds are included in these risks).  Again, if  you have any questions or comments please call me.  To invest properly, a teamwork approach is necessary.  It is important that all parties on your financial team (including you) are in touch with the risks and rewards of investing.  It is also important that you have a clear understanding of your portfolio.

We thank you for taking the time to read this letter.



[Archives] Current Views And Reiterations Of Ben Graham And Peter Lynch

Comment (1)

  • Serenity Stocks

    While Warren Buffett said:
    “Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.”

    His mentor, Benjamin Graham, wrote:
    “Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.”

    Benjamin Graham – also known as The Dean of Wall Street and The Father of Value Investing – was a scholar and financial analyst who mentored legendary investors such as Warren Buffett, William J. Ruane, Irving Kahn and Walter J. Schloss.

    Buffett describes Graham’s book – The Intelligent Investor – as “by far the best book about investing ever written” (in its preface).

    Graham’s first recommended strategy – for casual investors – was to invest in Index stocks.
    For more serious investors, Graham recommended three different categories of stocks – Defensive, Enterprising and NCAV – and 17 qualitative and quantitative rules for identifying them.
    For advanced investors, Graham described various special situations or “workouts”.

    The first requires almost no analysis, and is easily accomplished today with a good S&P500 Index fund.
    The last requires more than the average level of ability and experience. Such stocks are also not amenable to impartial algorithmic analysis, and require a case-specific approach.

    But Defensive, Enterprising and NCAV stocks can be reliably detected by today’s data-mining software, and offer a great avenue for accurate automated analysis and profitable investment.

    Graham’s Value Investing framework acknowledges the stock market’s randomness and irrationality, and uses them to the investor’s favor; consistently outperforming more impressive looking strategies that stand on less tenable foundations.

    Warren Buffett once wrote a detailed article explaining how Graham’s record of creating exceptional investors (such as Buffett himself) is unquestionable, and how Graham’s principles are everlasting. The article is called “The Superinvestors of Graham-and-Doddsville”.

    May 22, 2015 at 4:56 pm


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