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  • Invest In Stocks With A Margin Of Safety To Reduce Risk And Enhance Returns [View article]
    LTCM had to close doors because the data they used for their mathematical models went back only 5 years. They had not accounted for the kind of extreme market fluctuations that occur over longer periods. Their derivative pricing models did not provide the necessary buffer for such extreme fluctuations and when that occurred, they incurred unsustainable losses almost overnight (they kept their Nobel prizes though).

    The Margin of Safety principle is closer to the Factor of Safety principle used in Engineering than anything used in Physics. This is where you calculate the maximum load you expect a structure to bear, and then design it to be able to withstand some higher multiplier of that maximum load.

    Ben Graham gave Margin of Safety calculations for both Stocks and Bonds and he backtested his formulas over a period of decades, some for even up to 50 years.

    It's all out there for those who have the time and patience. There's really nothing new under the sun.
    Sep 17 02:35 AM | 2 Likes Like |Link to Comment
  • Why This Energy Stock Came In Second For My Portfolio [View article]
    Hello Michael Fitzsimmons,

    Just to add an additional note to the above:

    There are plenty of one-hit-wonder methods of stock research out there. But success in investment comes from consistently finding good stocks and avoiding losses. Graham's metrics may miss an occasional winner but will come out far better overall, over time.

    Warren Buffett once gave a famous speech on why Graham's methods have stood the test of time and his students tend to be the most successful investors on Wall Street.

    It's called "The Superinvestors of Graham-and-Doddsville" and can be found online.
    Sep 17 12:39 AM | Likes Like |Link to Comment
  • Invest In Stocks With A Margin Of Safety To Reduce Risk And Enhance Returns [View article]
    Absolutely Chuck!

    In fact, that's exactly what Serenity does too - facilitate the use of Graham's elaborate techniques using modern data-mining technology.

    The passage above simply details Graham's views on "effort vs risk" in investment.
    Sep 16 02:45 PM | Likes Like |Link to Comment
  • Invest In Stocks With A Margin Of Safety To Reduce Risk And Enhance Returns [View article]
    That's exactly what Graham recommends too, David.
    That one should start by first learning to keep up with the averages.

    Since he believed that returns were proportional, not to risk, but to the amount of intelligent effort the investor was willing to commit, he designed his strategies accordingly.

    The Index fund strategy required the least effort, followed by Defensive, Enterprising and then NCAV stocks. The final strategy was "Special Situations" which required the most effort and experience.
    Sep 15 03:47 PM | 1 Like Like |Link to Comment
  • Invest In Stocks With A Margin Of Safety To Reduce Risk And Enhance Returns [View article]
    Hello David Jonas,

    Benjamin Graham himself gave 3 different intrinsic value calculations for a stock - Defensive, Enterprising and NCAV - and 16 criteria for arriving at them them.

    For details, see "How To Build A Complete Benjamin Graham Portfolio": http://seekingalpha.co...
    Sep 15 03:37 PM | Likes Like |Link to Comment
  • Invest In Stocks With A Margin Of Safety To Reduce Risk And Enhance Returns [View article]
    Thank you for your very thoughtful reply, David Van Knapp!
    To add a couple of points to what you said:

    1. Graham's strategies are designed keeping not only the market's quirks in mind, but the investor's own psychology as well.

    "Our main objective will be to guide the reader against the areas of possible substantial error and to develop policies with which he will be comfortable. We shall say quite a bit about the psychology of investors. For indeed, the investor’s chief problem—and even his worst enemy—is likely to be himself. (“The fault, dear investor, is not in our stars—and not in our stocks—but in ourselves. . . .”)"
    - From the Introduction to "The Intelligent Investor"

    2. While the indices are somewhat managed themselves, they are usually restricted by some simple criterion such as Market Capitalization, Sector etc. So they are somewhat less prone to error than more unrestricted lists.
    Sep 15 10:18 AM | Likes Like |Link to Comment
  • Invest In Stocks With A Margin Of Safety To Reduce Risk And Enhance Returns [View article]
    Thank you for your comment, David Crosetti!

    Three quarters of managed Mutual Funds do not manage to keep up with the market "average", as Graham pointed out. Hence the advent of Vanguard, Index funds etc.

    So if most "professional" money managers have trouble keeping up with the S&P500, an index fund is hardly a bad recommendation for the average investor, wouldn't you say?
    Sep 15 04:44 AM | 1 Like Like |Link to Comment
  • Invest In Stocks With A Margin Of Safety To Reduce Risk And Enhance Returns [View article]
    In the "Legacy of Benjamin Graham" video released by the Heilbrunn Center, Warren Buffett explains that Graham was focussed on refining a method that ordinary investors, without specialized knowledge or access, could apply to achieve the same results as he did.

    His book "The Intelligent Investor" is the embodiment of this philosophy - defining an investment approach anyone can apply with publicly available information.
    Sep 14 03:18 AM | 2 Likes Like |Link to Comment
  • Invest In Stocks With A Margin Of Safety To Reduce Risk And Enhance Returns [View article]
    Hello Dan,

    You're right in that a low price alone is never a good enough reason to buy.

    Even for NCAV stocks - stocks selling under their net current asset value (effective cash value) - Graham still required that they at least have positive earnings in the last 12 month period before investing in them.
    Sep 14 03:07 AM | 1 Like Like |Link to Comment
  • Invest In Stocks With A Margin Of Safety To Reduce Risk And Enhance Returns [View article]
    Hi rizzardi23,

    Graham recommended 3 different types of stocks for investment - Defensive, Enterprising and NCAV - and 16 criteria for finding them.

    Defensive and Enterprising stocks require dividends but NCAV stocks don't.
    The Graham Number calculation that you correctly mention, with the 7 other criteria, is for Defensive stocks.

    To see all criteria and learn how to apply them apply them today, see "How To Build A Complete Benjamin Graham Portfolio": http://seekingalpha.co...
    Sep 14 02:59 AM | Likes Like |Link to Comment
  • Invest In Stocks With A Margin Of Safety To Reduce Risk And Enhance Returns [View article]
    "From this there has developed the general notion that the rate of return which the investor should aim for is more or less proportionate to the degree of risk he is ready to run. Our view is different. The rate of return sought should be dependent, rather, on the amount of intelligent effort the investor is willing and able to bring to bear on his task. "

    From "Chapter 4: General Portfolio Policy: The Defensive Investor" of Benjamin Graham's book "The Intelligent Investor".
    Sep 14 02:53 AM | 4 Likes Like |Link to Comment
  • Invest In Stocks With A Margin Of Safety To Reduce Risk And Enhance Returns [View article]
    One of Graham's core principles is to never use estimates of any sort. Past numbers are objective and the same no matter who analyzes them. Future estimates are subjective and can vary from source to source.
    Sep 14 02:42 AM | 2 Likes Like |Link to Comment
  • Invest In Stocks With A Margin Of Safety To Reduce Risk And Enhance Returns [View article]
    Ben Graham actually gave 3 different intrinsic values for a stock - Defensive, Enterprising and NCAV - and 16 criteria for arriving at them them.

    For details, see "How To Build A Complete Benjamin Graham Portfolio":
    http://seekingalpha.co...
    Sep 14 02:33 AM | 2 Likes Like |Link to Comment
  • Invest In Stocks With A Margin Of Safety To Reduce Risk And Enhance Returns [View article]
    Absolutely, David!

    Ben Graham's first recommended strategy for the Defensive investor was "buying the same amounts of all thirty of the issues in the Dow-Jones Industrial Average."
    Today, that translates to investing in an Index fund.

    From "How To Build A Complete Benjamin Graham Portfolio":
    http://seekingalpha.co...
    Sep 14 02:28 AM | Likes Like |Link to Comment
  • Invest In Stocks With A Margin Of Safety To Reduce Risk And Enhance Returns [View article]
    Great article, Chuck!
    A detailed discussion of Ben Graham's Margin of Safety principle has been long overdue.

    In the Preface to the Fourth Edition of The Intelligent Investor, Warren Buffett says
    "If you follow the behavioral and business principles that Graham advocates—and if you pay special attention to the invaluable advice in Chapters 8 and 20—you will not get a poor result from your investments."

    And in Chapter 20. “Margin of Safety” as the Central Concept of Investment, Ben Graham says
    "The margin-of-safety idea becomes much more evident when we apply it to the field of undervalued or bargain securities. We have here, by definition, a favorable difference between price on the one hand and indicated or appraised value on the other. That difference is the safety margin"

    You can find stocks meeting Graham's own Margin of Safety calculations today on Serenity's screeners.
    Sep 14 01:22 AM | Likes Like |Link to Comment
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