Benjamin Graham - Investment Quotes

Confidence

• "You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right."

Investing and Emotions

• "Individuals who cannot master their emotions are ill-suited to profit from the investment process."

• "Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble...to give way to hope, fear and greed."

Sense of Humour

• Warren Buffett, story from Benjamin Graham: A story that was passed down from Ben Graham illustrates the lemminglike behavior of the crowd: "Let me tell you the story of the oil prospector who met St. Peter at the Pearly Gates. When told his occupation, St. Peter said, “Oh, I’m really sorry. You seem to meet all the tests to get into heaven. But we’ve got a terrible problem. See that pen over there? That’s where we keep the oil prospectors waiting to get into heaven. And it’s filled—we haven’t got room for even one more.” The oil prospector thought for a minute and said, “Would you mind if I just said four words to those folks?” “I can’t see any harm in that,” said St. Pete. So the old-timer cupped his hands and yelled out, “Oil discovered in hell!” Immediately, the oil prospectors wrenched the lock off the door of the pen and out they flew, flapping their wings as hard as they could for the lower regions. “You know, that’s a pretty good trick,” St. Pete said. “Move in. The place is yours. You’ve got plenty of room.” The old fellow scratched his head and said, “No. If you don’t mind, I think I’ll go along with the rest of ’em. There may be some truth to that rumor after all."

Flawed Mental Model - By Dhirendra Kumar

Here's a joke that has a great pedigree in the investment world. The father of value investing, Benjamin Graham, apparently used to narrate this story to his students and draw a parallel to the behaviour of stock market punters.

So this oil prospector dies and goes to heaven. At the gate, St Peter reads the account of his life and tells him that he's qualified for heaven, but there was a problem. “See that crowd over there? They're all oil prospectors who've arrived before you. And the way things work here, you can' get in until after them. So I' afraid this looks like a long wait for you.” “Not a problem", replies the man, “I know how to get rid of that crowd.” So he turns towards that crowd of oil prospectors and shouts out, "Hey, did you hear? Oil has been discovered in Hell.” And sure enough, as soon as they heard him, every single one of them ran off towards hell. Looking at this, St Peter reluctantly said, "Well, it seems your way is clear. You can enter heaven now." But the oil prospector had his doubts. “You know what? I think I'll follow the guys. The rumour could be true.”

As Graham used to point out, the oil prospector's behaviour has much in common with what passes for investment research nowadays. As sophisticated commentators would point out, their mental model of how the market works probably leads them to believe that if a lot of people believe in something, then it must be true. A mental model of something is our idea of how it works internally.

A flawed mental model can be a problem. For example, in the early days of email, a friend of a mine believed that if you reduced the font size in an email message, then the message would become smaller and therefore easier to send. It was a flawed mental model, or rather, it was the fax mental model being applied to email.

I believe one of the fundamental reasons why so many people have trouble investing in the stock markets is that they have severely flawed mental models of what determines a stock price. While there are many mental models of how the stock markets work, some are more common than others. Here's the commonest. “There are people who know when a stock's price is about to rise. If one of them tells me, then I can make money.”

This is the 'tip' model of the stock markets. It isn't so much a mental model as the lack of one. Unfortunately, this is a very common one. There seem to be a lot of people who believe that someone out there knows which way things will move and everything depends on somehow getting to know these secrets.

A little broader than the 'tip' model is the 'operator' model. Under the operator model, people believe that there are people (“operators”) who manipulate stocks and what one needs is to figure out what the operators are doing and then somehow, manage to ride the stock while the operator is pushing it. This model is actually realistic. Outside the big, high volume tickers, many, many stocks are routinely manipulated by the so-called 'operators', at least in the short-term.

However, this model is useful only for the operators themselves. To succeed, operators need greater and greater fools to buy into the stock they are operating on. Basically, if you are not an operator yourself, you are under considerable risk of giving away your money to an operator. There is, of course, yet another model. This one is about observing how much companies earn and estimating how much they'll earn in the future and how they'll compete and other things like that. But compared to the other two models, few seem to believe in it so I suppose it can't be very important.

Businessline - Investment Nuggets

If you cannot afford to ignore the advice of the Oracle of Omaha, Warren Buffet, the man who taught the Sage the core investing tenets must obviously be someone very special. Meet the legendary Benjamin Graham, christened the "Father of Value Investing" and sometimes called the "Dean of Wall Street". He has also immortalised himself by penning two investment classics: Security Analysis (with David Dodd) and Intelligent Investor — must reads for anybody entering and staying wedded to the investment profession. Enjoy the wonderful wit and wisdom through these quotable quotes:

Short- vs long-term investing

"In the short term, the market is a `voting' machine whereon countless individuals register choices that are product partly of reason and partly of emotion. However, in the long term, the market is a `weighing' machine on which the value of each issue (business) is recorded by an exact and impersonal mechanism."

On market fluctuations

"Since common stocks, even if investment grade, are subject to recurrent and wide fluctuations in their prices, the intelligent investor should be interested in the possibilities of profiting from these pendulum swings. There are two possibilities of profiting from these pendulum swings: The way of timing and the way of pricing. By timing we mean the endeavour to anticipate the action of the stock market — to buy and hold when the future course is deemed to be upward, to sell or refrain from buying when the course is downward. By pricing we mean the endeavour to buy stocks when they are quoted below their fair value and to sell them when they rise above such."

The madness of `crowds'

A story that was passed down from Ben Graham illustrates the lemming-like behaviour of the crowd:

"Let me tell you the story of the oil prospector who met St. Peter at the Pearly Gates. When told his occupation, St. Peter said, "Oh, I'm really sorry. You seem to meet all the tests to get into heaven. But we've got a terrible problem. See that pen over there? That's where we keep the oil prospectors waiting to get into heaven. And it's filled, we haven't got room for even one more." The oil prospector thought for a minute and said, "Would you mind if I just said four words to those folks?" "I can't see any harm in that," said St. Peter. So the old-timer cupped his hands and yelled out, "Oil discovered in hell!" Immediately, the oil prospectors wrenched the lock off the door of the pen and out they flew, flapping their wings as hard as they could for the lower regions. "You know, that's a pretty good trick," St. Peter said. "Move in. The place is yours. You've got plenty of room." The old fellow scratched his head and said, "No. If you don't mind, I think I'll go along with the rest of 'em. There may be some truth to that rumour after all."

Warren Buffet, relating a story by Benjamin Graham