Time Tested Investment Principles

(eToro Blog) Many traders see Warren Buffett as one of the most successful investors ever and his peers, and even his rivals, albeit grudgingly, heap accolades upon his skill and prowess. But the Oracle of Omaha will be the first to tell you that he learned well under the tutelage of two well-known securities analysts, Phil Fisher and Benjamin Graham; Graham was the author of a book on investment strategies that Buffett considered among his favorites. Buffett himself has been quoted as saying, “I’m 15% Fisher and 85% Benjamin Graham.” Graham taught Buffett at New York University, and his two most basic investment tenets were to take advantage of market fluctuations and keep a margin of safety. Buffett believes that those strategies will be the cornerstone of investing even 100 years from now.

The first tenet is to always have a margin of safety, whereby you buy a share of stock at a considerable discount to that stock’s intrinsic value. Graham, then, and Buffett to an extent today, relied on this strategy. The benefit of the margin of safety principle is actually two-fold; you minimize downside risk while providing yourself with an opportunity for high returns. Of course, not every undervalued stock is a bargain in and of itself, and investors would be wise to conduct an appropriate due diligence of the stock.

The second tenet involves putting market fluctuations to good use. Some investors will sit on the sidelines during periods of extreme market turmoil, much as what we’ve been recently seeing, but Graham and Buffett both believe that a downturn presents a good opportunity for a great investment. Both share the view that an investor’s estimation of a stock price should be based upon a sound, rational examination of the stock in question and not depend upon what the market is dictating. Volatility, as one keen analyst recently put it, should be embraced.

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