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|Subject: Re: Selecting stocks the Ben Graham way||Date: 12/17/2004 8:32 AM|
|Author: PaulEngr||Number: 35004 of 46847|
I'm surprised there isn't more discussion of his formula than his "values investing philosophy". That's his scheme whereby you take your investable assets, divide in two halves, one in stocks or equivalents, one in bonds or equivalents. If the stock side goes up to 55% or better, sell off 5% and invest on the bond side. When the stock side drops to 45% or less, sell enough of the bond side to bring the stock side back to 50%. Always invest in value companies or their equivalent.
I agree with the value investing part. So far, it seems that the only viable "growth" based strategy I've seen out there that is actually working is the Rule Breakers strategy that has been promoted via TMF. I don't use it only because I can't wrap my brain around the concept of investing in stocks which are as big of a crap shoot as those are, without picking away at it via valuation. However, there are great value stocks that also happen to be growth stocks, contrary to popular opinion. This is not an A vs. B decision; growth stock strategies simply choose to focus on one part of value investing (longer term future returns only).
I agree partially with the rest of what you laid out as well. Graham's strategy is literally a 2-part portfolio with rebalancing. Portfolio development and rebalancing makes a huge difference in your returns. Almost any basic investment book or guide that isn't fodder for the camp fire should talk about portfolio mixes and rebalancing.
Where I specifically disagree is in the amounts. The percentage that should be in equities vs. debt instruments (bonds) vs. perhaps other asset classes is not a fixed number for every situation. It is dependent on how soon you are actually going to need the assets in your portfolio. A 50/50 mix is appropriate for someone midway in their retirement with regards to their retirement assets. It is a rotten mix for someone just beginning retirement or anyone who isn't yet retired, or someone approaching the end of their assets (principal is zero within a couple years).
And the reason that I said individual situation is that although there is a mathematically perfect portfolio balance, you can always adjust based on risk taking nature of the individual. For instance, what percentage of people saving for retirement under the age of say 45 have 100% investment in equities? Of the remainder, what percentage have more than say 25% in various fixed income instruments? Both groups need to learn more about portfolio mixes.
It's simply amazing how conservative most people are, to the point of unnecessary paranoia, or the opposite extreme of undue risk taking.
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