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82 Years of Investing with Ben Graham

The Cure to Trading a Bad Market

Written by Charles Mizrahi
Posted June 15, 2016

Most books about investing usually have very short shelf lives.

In many cases, they hit the bookshelves at the peak of customer enthusiasm and then quickly lose their relevancy.

The challenge is to write up something new, and even more difficult is to write something about investing principles for one generation that will be just as relevant in the next.

More than 17 years ago, the stock market was raging to all-time highs. Investors were told that we were now in a new paradigm. Companies with no earnings and very few assets had market valuations in the billions of dollars.

By the end of 1999, the NASDAQ was up over 86%. Here are a few hot sellers that were flying off the shelf around that time:

  • The Roaring 2000s: Building the Wealth and Lifestyle You Desire in the Greatest Boom in History

  • Down 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market

  • How to Profit from the XYZ Recession

Instead of the “Roaring 2000s” or “Dow 36,000,” the stock market plunged into the worst bear market in 30 years. The Dow Jones lost 36% and the NASDAQ fell 77% from their highs before finding a bottom in October 2002. And Y2K proved to be a bust; planes didn't fall from the sky, computers didn't freeze up, and electronic equipment didn't go haywire when the clock struck midnight on January 1, 2000.

How many successful investors do you know who keep these books on their desks, quote from them often, and refer to them when the financial world is in flux?

Don't worry about having a hard time finding one; you're not alone.

These books remained relevant for a few months at best, and then remain tucked in bookcases, never again to see the light of day.

In September of 2008, the sixth edition of Security Analysis by Benjamin Graham and David Dodd was released. The book has been continuously in print since it was first published in 1934.

If you don't recognize these names, perhaps you'll recognize Ben Graham's most famous student: Warren Buffett.

He actually wrote the forward to the current edition of Ben Graham's book, saying, “They [Graham and Dodd] laid out a road map for investing that I have now been following for 57 years. There's no reason to look for another.”

How's it possible that today — with high-frequency trading via computers, instant access to information through the Internet, and trillions of dollars trading in the world market on a daily basis — a book on investing written during the Great Depression has stayed relevant for 82 years?

How does that make any sense?

Why it Still Makes Sense

When Professor Bruce Greenwald of Columbia University School of Business was asked that same question, he simply said Graham is still relevant because nobody can prove him wrong.

In other words, stocks that are overlooked by most investors or are in a boring business tend to sell at cheap prices.

Greenwald referred to them as “cheap and ugly.”

And studies have shown that over different time periods, "cheap and ugly" stocks outperformed the stock market by 3% to 5% on an annual basis.

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Benjamin Graham was proven right: buying "cheap and ugly" stocks continue to outperform.

Without knowing it, Graham understood that investors would avoid these types of stocks, preferring to buy the latest fad of the day, regardless of price, rather than what had the most value.

A new field of study called behavioral finance, which attempts to figure out the emotional side of investing, has developed over the past several years. In other words, when it comes to money, why do people act the way they do?

Well, it turns out that Greenwald gave us three reasons why buying those cheap and ugly stocks works.

1. People love to buy lottery tickets.

Investors look at buying a stock a lot like buying a lottery ticket, hoping to make a killing while knowing the whole time that they'll probably lose. When enough of this type of thinking converges on the same sector or stock, the price becomes detached from reality, and companies that are worthless have market caps in the billions.

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2. People avoid what is unpleasant.

Most investors are predisposed to buy stocks only when they are moving higher instead of going against the grain and buying them when they are trading at multi-year lows.

3. People are too sure of themselves.

Studies have shown that people are much more sure of themselves than they really ought to be. The future is uncertain, and there are many unknowns that can change the outcome, yet investors plug projections into spreadsheets and treat them as fact.

Needless to say, Benjamin Graham continues to be relevant 82 years after he wrote his principles on investing.

Both statistical and behavioral sciences have proven him right.

It's a simple concept, really — buying stocks that are out of favor when they trade for a discount is a logical and rational approach that has stood the test of time.

And using this approach, we’ve been able to close out serious gains for readers, such as 193.6% on HCC Insurance, 251.9% on Buckle, and 173.4% on Ross Stores.

On Friday, we're going to give you the opportunity to do the same.

All my best,

Charles Mizrahi signature

Charles Mizrahi

Twitter: @IWPeditor

Charles cut his chops on the trading floor of the New York Futures Exchange before moving on to become a wildly successful money manager on Wall Street.

And with more than 35 years of recommending stocks under his belt, Charles has knocked the cover off the ball, compiling an amazing record of success and posting gain after gain for his loyal readers. He is the editor of Park Avenue Investment Club and the Insider Alert newsletters.

Charles is also the author of the highly acclaimed book, Getting Started in Value Investing.

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