Tuesday, 28 September 2010 00:00

Wisdom from Graham

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I just read this section of a speech by Mr. Graham and I enjoyed it so much I feel compelled to share it with you all:

"...the second episode (first referred to the publication of Common Stocks as Long-term Investments which Mr. Graham believed help provide the foundation for the bull market in the 1920s) - historical in my thinking - occurred toward the end of the market's long recovery from the 1929 to 1932 debacle. It was the report of the Federal Reserve in 1948 on the public's attitude toward common stocks. In that year the Dow sold as low as 165 or 7 times earnings, while AAA bonds returned only 2.82%. Nevertheless, over 90% of those canvassed were opposed to buying equities - about half because they thought them too risky and half because of familiarity. Of course this was just the moment before common stocks were to begin the greatest upward movement in market history... What better illustration can one wish of the age-old truth that the public's attitudes in matters of finance are completely untrustworthy as guides to investment policy.

I think the future of equities will the roughly the same as their past; in particular, common-stock purchases will prove satisfactory when made at appropriate price levels."

p. 248 of Benjamin Graham, Building a Profession edited by Jason Zweig and Rodney Sullivan

I would add that you should take this wisdom and, as Mr. Munger likes to say, invert it in order to stay away from the areas of current rampant speculation. I would, at present, define those areas as gold and bonds.

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