Stocks are Crashing. "SALE! 50% OFF!" News you could use from "Benjamin Graham Financial Network"

News you could use

Stocks are crashing, so you turn on the television to catch the latest market news. But instead of CNBC or CNN, imagine that you can tune in to the Benjamin Graham Financial Network. On BGFN, the audio doesn't capture that famous sour clang of the market's closing bell; the video doesn't home in on brokers scurrying across the floor of the stock exchange like angry rodents. Nor does BGRN run any footage of investors gasping on frozen sidewalks as red arrows whiz overhead on electronic stock tickers.

Instead, the image that fills your TV screen is the facade of the New York Stock Exchange, festooned with a huge banner reading: "SALE! 50% OFF!" As intro music, Bachman-Turner Overdrive can be heard blaring a few bars of their old barn-burner, "You Ain't Seen Nothin' Yet." Then the anchorman announces brightly, "Stocks became more attractive yet again today, as the Dow dropped another 2.5% on heavy volume - the fourth day in a row that stocks have gotten cheaper. Tech investors fared even better, as leading companies like Microsoft lost nearly 5% on the day, making them even more affordable. That comes on top of the good news of the past year, in which stocks have already lost 50%, putting them at bargain levels not seen in years. And some prominent analysts are optimistic that prices may drop still further in the weeks and months to come."

The newscast cuts over to market strategist Ignatz Anderson of the Wall Street firm of Ketchum & Skinner, who says, "My forecast is for stocks to lose another 15% by June. I'm cautiously optimistic that if everything goes well, stocks could lose 25%, maybe more."

"Let's hope Ignatz Anderson is right," the anchor says cheerily. "Falling stock prices would be fabulous news for any investor with a very long horizon. And now over to Wally Wood for our exclusive AccuWeather forecast."


Ref: Intelligent Investor by Benjamin Graham

https://myinvestingnotes.blogspot.com/2009/07/news-you-could-use.html

====

Based on the provided text, here is a summary:

This article presents a satirical vision of a financial news network (the Benjamin Graham Financial Network) that frames a stock market crash not as a disaster, but as a welcome sale.

Key Points:

• Reframing the Narrative: Instead of showing panic and fear, the "news report" cheerfully announces falling prices, describing stocks as "more attractive," "cheaper," and "more affordable."

• A Long-Term Perspective: The report celebrates the decline, stating that "falling stock prices would be fabulous news for any investor with a very long horizon." This reflects the core value investing principle of buying when prices are low.

• Contrast with Typical Media: The piece directly contrasts this approach with mainstream financial media, which typically focuses on the short-term panic and losses during a market downturn.

• Graham's Philosophy: The summary perfectly illustrates Benjamin Graham's philosophy, as detailed in The Intelligent Investor. He famously advocated for being greedy when others are fearful and viewing market pessimism as an opportunity to buy quality assets at a discount.

In essence, the article uses humor to highlight the fundamental investing wisdom of treating a market crash as a buying opportunity rather than a reason to sell.

Introduction: THE INTELLIGENT INVESTORS

Introduction: THE INTELLIGENT INVESTORS 

Elaboration of the Introduction

The Introduction serves as the foundational pillar and mission statement for the entire 33-section document. It is not merely a preface but a critical piece that sets the tone, establishes credibility, and provides the primary resource for the learning journey ahead.

Its key components can be broken down as follows:

1. The Central Text: "The Intelligent Investor" by Benjamin Graham

• Credibility and Endorsement: The introduction immediately establishes its authority by quoting Warren Buffett's endorsement: "By far the best book on investing ever written." This is crucial because Buffett is the most famous and successful investor in history, and his seal of approval signals to the reader that the material to follow is not just theory, but a philosophy proven in practice.

• The "Father of Value Investing": Benjamin Graham is introduced as the definitive source. He is the intellectual architect behind the entire value investing school of thought. The document positions itself as a guide to understanding and applying his principles.

2. Providing the Tools for Learning
The introduction is highly practical. It doesn't just tell the reader to read the book; it provides direct access to it:

• Accessibility: It offers an e-copy of the book, acknowledging that a physical hard copy is also available. This removes the first barrier to entry for the reader.

• Guidance for Study: Recognizing that "The Intelligent Investor" can be a dense and challenging read, the introduction provides a curated "summary of the book" and explicitly points out that Chapters 8 and 20 are the most important, according to Buffett. This gives the reader a focused starting point.

  • Chapter 8: The Investor and Market Fluctuations - This is where Graham introduces the famous "Mr. Market" allegory, which teaches investors how to think about market volatility emotionally.

  • Chapter 20: "Margin of Safety" as the Central Concept of Investment - This is the cornerstone of value investing, the principle of always buying at a significant discount to intrinsic value to minimize the risk of loss.

3. A Preview of the Core Philosophy
The linked summary provides a concise preview of the core tenets that will be explored in detail throughout the document:

• Risk Management: Through asset allocation and diversification.

• Maximizing Probabilities: Through valuation analysis and the margin of safety.

• A Disciplined Approach: To prevent emotionally-driven, consequential errors.

4. Multi-Format Learning Resources
To cater to different learning styles, the introduction provides resources in various formats:

• Audiobook: A YouTube link to an audio version for those who prefer listening.

• Additional Synopses: Multiple website links for summaries and chapter-by-chapter reviews, allowing the reader to cross-reference and deepen their understanding.

5. The Aspirational Goal
The closing remark, "May your investing be as successful as Warren Buffett," sets a high but inspiring bar. It frames the entire ensuing discussion not as a get-rich-quick scheme, but as a journey toward profound, long-term success by emulating the best.

---

Summary of the Introduction

The Introduction establishes "The Intelligent Investor" by Benjamin Graham as the ultimate guide to investing and provides all necessary resources to begin studying its principles.

It immediately captures the reader's attention with a powerful endorsement from Warren Buffett, validating the source material's immense value. The section is intensely practical, providing direct links to an e-copy of the book, a helpful summary, and specific guidance on the most critical chapters (8 and 20).

By offering the content in multiple formats (text, audio, online summaries), it ensures the foundational knowledge is accessible to everyone. Ultimately, the introduction frames the entire document that follows as a practical guide to understanding and applying the time-tested, Buffett-approved philosophy of Benjamin Graham, with the aspirational goal of achieving significant, long-term investing success.

Definition of Investing by Benjamin Graham.

Definition of Investing by Benjamin Graham.

Elaboration of Section 20

This section serves as a crucial philosophical anchor, returning to the absolute bedrock principle from which all intelligent investing flows. It reposts Benjamin Graham's precise, formal definition of an investment operation to remind the reader of the standard against which all potential investments must be measured.

The definition is broken down into its three non-negotiable components:

1. Upon THOROUGH ANALYSIS
This is the foundation. An investment cannot be based on a tip, a rumor, a gut feeling, or a chart pattern. It demands:

• A Detailed Study: Scrutinizing the company's financial statements, competitive position, industry trends, and management.

• Established Standards: Using reasoned, established standards of safety and value to evaluate the facts.

• Eliminating Speculation: This requirement automatically disqualifies most of what is passed off as "investing" in the public discourse.

2. Promises SAFETY OF PRINCIPAL
This is the primary goal. The number one job of an investor is not to make money, but to avoid losing money.

• Protection Against Loss: Graham clarifies that "safety" does not mean absolute guarantee. It means "protection against loss under all normal or reasonably likely conditions."

• A Safe Investment: Is one where, after thorough analysis, the prospect of losing the money you paid is quite unlikely, barring a disaster.

• Buffett's Rule #1: This is the direct source of Warren Buffett's famous two rules: "Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1."

3. Promises a SATISFACTORY RETURN
The return must be reasonable and relative to the goal of safety.

• "Satisfactory" is Subjective: It can be a low return, as long as it meets the investor's personal objectives and is achieved with "reasonable intelligence."

• Includes Income and Profit: The return can come from dividends, interest, or capital appreciation.

• Not "Maximum" Return: The focus on a "satisfactory" return is key. Chasing the highest possible return almost always involves sacrificing the first two criteria (thorough analysis and safety).

The Critical Corollary: The Cynic's Definition
Graham acknowledges a cynical but insightful view: "An investment is a successful speculation and a speculation is an unsuccessful investment."
This highlights the fine line between the two and how outcomes can blur definitions. However, the intelligent investor does not rely on luck. They rely on a process that maximizes the probability of success by adhering to the three pillars.

The Consequence of Confusion
The section ends with a grave warning: the failure to distinguish between investment and speculation was a primary cause of major market bubbles and crashes (like the 1929 crash). This confusion continues to lead would-be investors into speculative behaviors that jeopardize their capital.

---

Summary of Section 20

Section 20 reiterates Benjamin Graham's foundational definition of an investment operation, establishing the three essential pillars that separate true investing from speculation.

• An INVESTMENT OPERATION is one which, upon:

  1. THOROUGH ANALYSIS, promises...

  2. SAFETY OF PRINCIPAL, and...

  3. A SATISFACTORY RETURN.

• Any activity that fails to meet all three of these requirements is, by definition, SPECULATION.

In essence, this section is a call to discipline and intellectual honesty. It forces the investor to constantly ask: "Have I done the work? Is my capital safe? Are my return expectations reasonable?" By returning to this definition, the section ensures that the complex strategies and stock analysis discussed in previous sections are always grounded in the core philosophy of intelligent, business-like, and safe investing.

Investing is most intelligent when it is most business like (Life cycles and types of company).

Investing is most intelligent when it is most business like (Life cycles and types of company).

Elaboration of Section 13

This section tackles a fundamental shift in mindset: to be a successful investor, you must stop thinking like a stock trader and start thinking like a business owner. It provides three powerful frameworks for analyzing and categorizing companies, which helps an investor understand what they are buying and what to expect from their investment.

The section is structured into three distinct but complementary parts:

13a: Life Cycle of a Successful Company
This model explains how a company evolves from birth to death and how its financial characteristics, particularly its dividend policy, change along the way.

• The 6 Stages:

  1. Start-Up Phase: High risk. All profits are reinvested for growth; no dividends.

  2. Early Growth Phase: Rapid growth continues. All cash flow is reinvested; no dividends.

  3. Late Stage Growth: Growth stabilizes. The company begins paying a small dividend (10-15% of earnings) as a sign of stability.

  4. Expansion Phase: Growth slows as competition increases. The company increases its dividend payout (30-40% of earnings).

  5. Maturity Phase: A stable, "cash cow." Growth is slow but steady. It pays out a generous dividend (50-60% of earnings) and is often a great source of income.

  6. Decline Phase: The business model becomes obsolete. Sales and profits fall, and the company will eventually reduce or eliminate its dividend.

• Investment Implication: An intelligent investor should identify which stage a company is in. Buying a company in the Maturity phase is very different from buying one in the Early Growth phase. The former is for income, the latter for capital appreciation. One should generally avoid companies in the Decline phase.

13b: The 6 Types of Companies of Peter Lynch
Peter Lynch, another legendary investor, provides a simpler, more behaviorally-focused categorization that helps set realistic expectations.

• The 6 Types:

  • Slow Growers (Sluggards): Large, mature companies. Bought for dividends, not high growth.

  • Stalwarts: Large, high-quality companies (e.g., Coca-Cola) that can still deliver steady, medium growth. Good for defense in recessions.

  • Fast Growers: Small, aggressive companies growing at 20%+. High risk, high reward.

  • Cyclicals: Companies whose fortunes rise and fall with the economy (e.g., autos, airlines). Timing is crucial.

  • Turn-arounds: Companies rebounding from a crisis. Can offer stunning returns if successful.

  • Asset Plays: Companies whose hidden assets (e.g., real estate, patents) are not reflected in the stock price.

• Investment Implication: This framework forces you to ask, "Why am I buying this stock?" Each category has different rules for when to buy and sell. You shouldn't buy a cyclical stock like a stalwart, or a fast grower for its dividend.

13c: The 3 Gs of Buffett (Great, Good and Gruesome)
Warren Buffett simplifies everything into three categories based on the quality of the underlying economics.

• The 3 Gs:

  1. Great Businesses: Have a durable competitive advantage, earn huge returns on capital, and don't need to reinvest all their earnings to grow. They are "compounding machines." (e.g., See's Candy).

  2. Good Businesses: Are decent companies but require significant reinvestment to grow (e.g., utilities). They offer satisfactory, but not spectacular, returns.

  3. Gruesome Businesses: Grow rapidly but require massive capital and earn little or no money. They are "value traps" that destroy capital (e.g., airlines).

• Investment Implication: The goal of the intelligent investor is to find and buy Great Businesses at a fair price. Failing that, buy Good Businesses at a wonderful (bargain) price. Avoid Gruesome Businesses at all costs.

---

Summary of Section 13

Section 13 provides three essential frameworks for analyzing companies, reinforcing the principle that investing is most intelligent when you think like a business owner evaluating a long-term partnership.

• Life Cycle Model: Teaches that companies evolve through stages (Start-Up to Decline), and their dividend and growth prospects change dramatically. This helps you match the company to your investment goals (income vs. growth).

• Peter Lynch's 6 Types: Offers a practical checklist to categorize stocks (Slow Growers, Stalwarts, Fast Growers, etc.), ensuring your investment strategy and expectations are aligned with the company's nature.

• Buffett's 3 Gs: Provides the ultimate litmus test for business quality, directing you to seek out "Great" businesses with durable competitive advantages and to avoid "Gruesome" businesses that consume capital.

In essence, this section equips you with the mental models to understand the character of a business before you buy its stock. It prevents you from making the classic mistake of using the same strategy for every investment and guides you toward the high-quality, understandable companies that form the bedrock of a successful long-term portfolio.

General Portfolio Policy (Benjamin Graham)

General Portfolio Policy: The Defensive Investor

Graham opens the chapter defining two different kinds of investors: the “active” investor, which is the kind of investor that actively seeks new investments and invests serious time into studying investments, and the “passive” or “defensive” investor, the kind of investor that wants to invest once (or on a highly regular basis) and just let his or her portfolio run on autopilot.

Regardless of the activity that you apply to your investments, Graham sticks hard with his recommendation from the earlier chapter: 50% stocks, 50% bonds (or a close approximation thereof, with an absolute maximum of 75% in either side). It’s important to remember with a recommendation like that that Graham is very conservative in his investing, dreading the idea of an actual loss in capital. Only in the most dire of down markets (like 2008, for example) would such a portfolio actually deliver a loss to the investor.

Things that enterprising investors should focus on. (Benjamin Graham) 2

Portfolio Policy for the Enterprising Investor: The Positive Side

Graham says that there are four clear areas of activity that an enterprising investor (read: not an ultra-conservative investor) should focus on:

1. Buying in low markets and selling in high markets.
Graham says, in essence, that this is a good strategy in theory, but that it’s essentially impossible to accurately predict (on a mathematical basis) when the market is truly “low” and when it’s truly “high.” Why? Graham says that there’s inadequate data available to be able to accurately predict such situations – he basically believes fifty years of data is needed to make such claims, and as of the book’s writing, he did not believe adequate data was available in the post-1949 modern era. 

2. Buying carefully chosen “growth stocks.”
What about growth stocks – ones that are clearly showing rampant growth? Graham isn’t opposed to buying these, but says that one should look for growth stocks that have a reasonable P/E ratio. He wouldn’t buy a “growth stock” if it had a price-to-earnings ratio higher than 20 over the last year and would avoid stocks that have a price-to-earnings ratio over 25 on average over the last several years. In short, this is a way to filter out “bubble” stocks (one where irrational exuberance is going on) when looking at growth stocks.

3. Buying bargain issues of various types.
Here, Graham finally gets around to the idea of buying so-called “value stocks.” For the most part, Graham focuses on market conditions as they existed in 1959, pointing towards what would constitute value stocks then. A brief bit on page 169, Graham discusses “filtering” the stocks listed by Standard and Poor’s (essentially a 1950s precursor to the S&P 500) and identifying 85 stocks that meet basic value criteria, then buying them and finding that, over the next two years, most of them beat the overall market.

That’s an index fund. Graham had basically conceived of the idea in the 1950s – it worked then, and it works now.

4. Buying into “special situations.”
Graham largely suggests avoiding “topical” news as a reason to buy or sell, mostly because it’s hard for investors to gauge how exactly such news will truly affect the stock’s price. Instead, one should simply file away interesting long-term news for later use if you’re going to evaluate the stock. For example, recalling that a company is still paying off an incurred debt from ten years ago and that debt is about to be paid off might be an indication of an upcoming jump in profit for the company – and a possible sign of a good value.

Things that enterprising investors should focus on. (Benjamin Graham) 1

Ben Graham has a lot of ideas about what you should avoid.  Defensive investors should avoid everything but large, prominent companies with a long history of paying dividends. Even enterprising investors should avoid junk bonds, foreign bonds, preferred stocks, and IPOs.

To put it simply, Graham doesn’t like risk. It comes through time and time again in every chapter of the book – do the footwork, minimize risk, and don’t swing for the fences.

So what kind of real-world investing does that lead to? Graham finally gets down to actual tactics here, finally pointing toward some specific investment choices that he actually supports! At last!

Things that even enterprising investors should avoid. (Benjamin Graham) 2

Portfolio Policy for the Enterprising Investor: Negative Approach

So, what should you avoid?

First, avoid junk bonds. If they have anything less than a stellar bond rating, don’t bother, even if they appear to return very well. Junk bonds put your principal at risk, and the point of buying bonds is to have a safe portion of your portfolio.

Second, avoid foreign bonds. Here, there are stability issues, and it’s often hard to adequately judge the risk of buying bonds from government and private entities operating under rules unfamiliar to you. 

Third, avoid preferred stocks. Preferred stocks are ones that have a higher priority in the event of a liquidation of the business, but often come at a premium price. Almost always, Graham doesn’t feel these are worth any sort of premium. Of course, in the United States, preferred stock is generally not sold directly to individual investors, only to large institutions, so it’s largely a moot point.

Finally, avoid IPOs. To put it simply, new issues do not have any track record upon which to adequately judge the company. The “hype” of an IPO is all you really have to judge the issue on. Instead, let others jump into that feeding frenzy and wait until time has shown which companies swim and which ones sink.

Those are some good rules for anyone to follow, particularly if you’re concerned about not losing the money you invest. Most of these investments have a pretty significant amount of risk and in Graham’s world, one shouldn’t put the principal at undue risk.

Things that even enterprising investors should avoid. (Benjamin Graham) 1

Graham’s view of a conservative investor is very conservative. Focus primarily on big, blue chip stocks that pay a dividend and counterbalance that with roughly an equal amount of bonds. Very conservative, indeed.

But what about those of us who are less conservative and want to seek out other investments? After all, isn’t The Intelligent Investor supposed to be a guide to value investing, not just “buy blue chips and wait”?

Graham starts to head down this path here as he turns his sights from the very conservative investor to the … less conservative investor, the type of person who would actually follow value investing principles and seek out investments that show every sign of being undervalued – and then invest in them.

But first, a chapter of cautionary advice. Graham is nothing if not cautious, after all. The focus here is on things that even enterprising investors should avoid.

The Defensive Investor and Common Stocks (Benjamin Graham)

The Defensive Investor and Common Stocks

Graham’s advice, tends to focus on people who are willing to put in that extra time – and if you’re willing to do that, he has a lot of wisdom to share.

First of all, diversify. You should own at least ten different stocks, but more than thirty might be a mistake, as it becomes difficult to follow all of them carefully and also seek out new potential stock investments.

Second, invest in only large, prominent, and conservatively financed companies. Look for ones with little debt on the books and ones with a large market capitalization.

Third, invest only in companies with a long history of paying dividends. If a company rarely pays dividends, your only way to earn money from that company is if the market deems the stock to be valuable, and you shouldn’t trust that the market will do so.

Graham seems to point strongly towards the thirty stocks that make up the Dow Jones Industrial Average as a good place to start looking, as they usually match all of these criteria. I’d personally stretch that to include stocks that make up the S&P 500, but the Dow is a great place to find very large blue chip companies that are very stable and have paid dividends for a long time.

Other than that, Graham pooh-poohs many other common strategies. Buying growth stocks? Nope. Dollar-cost averaging? Good in theory, not great in practice. Portfolio adjustments? Be very, very careful – and only do annual evaluations. In short, be very, very wary and play it very, very cool.

Remember, this is Graham’s advice for the defensive, very conservative investor.

Strong, thorough research is the most important part about owning stocks. (Benjamin Graham)

The Intelligent Investor by Benjamin Graham

There’s one big underlying theme to this book. Yet, it keeps coming to the forefront again and again. It’s the one point that I believe Graham wants people to take home from this book.

Strong, thorough research is the most important part about owning stocks.

If you can’t – or aren’t willing to – put in a lot of time studying individual stocks, identifying ones that genuinely have potential to return good value to you over time, and keep careful tabs on those individual stocks, then you shouldn’t be investing in stocks.

Over and over again, Graham makes this point, in both obvious and subtle ways. He’s a strong, strong believer in knowing the company. If you don’t have clear, concrete reasons for buying a stock, then you shouldn’t be buying that stock, period.

What if you don’t have that time? This book was written before the advent of index funds, but I tend to think that broad-based index funds can be a reasonable replacement for the stock portion of your portfolio.

Bargain-Issue Pattern in Secondary Companies (1): What led to creating these bargains?

Definition of Secondary Companies

A secondary company is one which is not a leader in a fairly important industry.

It is usually one of the smaller concerns in the field.

It may also equally be the chief unit in an unimportant line.

Any company that has established itself as a growth stock is not ordinarily considered as "secondary" company.



Stock Market's Attitude toward Secondary Companies

(a)  1920

In 1920, relatively little distinction was drawn between industry leaders and other listed issues, provided the latter were of respectable size.

The public felt that a middle-sized company

• was strong enough to weather storms and 
• that it had a better chance for really spectacular expansion than one which was already of major dimension.

(b)  Post 1931 -1933 depression

The 1931 - 1933 depression had a particularly devastating impact on companies below the first rank either in size or inherent stability.

As a result of that experience, investors have since developed a pronounced preference for industry leaders and a corresponding lack of interest in the ordinary company of secondary importance.

This has meant that the latter group has usually sold at much lower prices in relation to earnings and assets than have the former.

It has meant further that in many instances the price has fallen so low as to establish the issue in the bargain class.



No sound rational reasons for rejecting stocks of secondary companies

When investors rejected the stocks of secondary companies, even though these sold at a relatively low prices, they were expressing a belief or fear that such companies faced a dismal future.

In fact, at least subconsciously, they calculated that ANY price was too high for them because they were heading for extinction - just as in 1999 the companion theory for the "blue chips" was that no price was too high for them because their future possibilities were limitless.

Both of these views were exaggerations and were productive of serious investment errors.  

Actually, a typical middle-sized listed company is a large one when compared with the average privately-owned business.

There is no sound reason why such companies should not continue indefinitely in operation, undergoing the vicissitudes characteristic of our economy but earning n the whole a fair return on their invested capital.



The stock market's attitude toward secondary companies create instances of major undervaluation.

The stock market's attitude toward secondary companies tends to be unrealistic and consequently to create in normal times innumerable instances of major undervaluation.


As it happens, the war period and the post-war boom were more beneficial to the smaller concerns than to the larger ones, because then the normal competition for sales was suspended and the former could expand sales and profit margins more spectacularly.

• Thus by 1946 the market's pattern had completely reversed itself.  
• Whereas the leading stocks in the Dow-Jones Industrial Average had advanced only 40 percent from the end of 1938 to the 1946 high, Standard & Poor's Index of low-priced stocks had shot up no less than 280 per cent in the same period.  
• Speculators and many self-styled investors - with the proverbial short memories of people in the stock market - were eager to buy both old and new issues of unimportant companies at inflated levels.   

Thus, the pendulum had swung clear to the opposite extreme.

• The very class of secondary issues which had formerly supplied by far the largest proportion of bargain opportunities was now presenting the greatest number of examples of over-enthusiasm and overvaluation.
• If past experience can be relied upon, the post-war bull market will itself prove to have created an enlarged crop of bargain opportunities.
• For in all probability a large proportion of the new common stock offerings of that period will fall into disfavour, and they will join many secondary companies of older vintage in entering the limbo of chronic undervaluation.

The Intelligent Investor
Benjamin Graham