Saturday 23 October 2010

The Great Investing Wisdom Wall Street Forgot

By Matt Koppenheffer
October 22, 2010

When you hear the phrase "value investing," Warren Buffett most likely comes to mind. But hopefully, you also think of Ben Graham -- the father of value investing. Considering that some of the world's most successful investors carry Graham's flag, there's good reason for Fools like us to be obsessed with the concept.

Graham had a plan
But with thousands of stocks out there, how do we separate the value plays from the throwaways? In The Intelligent Investor, Graham lays out a basic framework for winnowing through the sea of stocks to get to the good stuff.

1. Financial stability. Graham wanted investors to be sure they weren't investing in castles made of sand, so he put requirements on prospective investments' balance sheet strength and record of past earnings.

2. Growth. You wouldn't have caught Graham dead chasing the high-flying stocks of the day, but he did want to see that over the long haul, earnings were at least moving in the right direction.

3. Valuation. This, of course, is what Graham is probably best known for -- requiring that a stock be selling for less than it's really worth. While a simple valuation ratio can't tell you the whole story, it may signal a stock that's definitely not a deal.

4. A dividend.

Did you catch that last part?
That wasn't a typo; whether you are a defensive or enterprising investor, Graham thought it necessary that you stick to companies that pay a dividend.

Dividends have largely been relegated to a dark corner on Wall Street, but Graham didn't equivocate. The safest stocks would have "uninterrupted payments for at least the past 20 years," but every investment should have "some current dividend."

When you think about it, this makes perfect sense. Graham's whole approach to investing in stocks revolves around thinking and acting like a businessperson, and treating your stock holdings as ownership shares in a business, not gambling slips. When businesspeople buy a piece of a business, they expect to know how much profit will be sent back their way.


http://www.fool.com/investing/general/2010/10/22/the-great-investing-wisdom-wall-street-forgot.aspx

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