Strategic investing: When to buy; when to sell

Benjamin Graham wrote that investors should ignore the stock market most of the time. They should buy shares that the market greatly undervalues. And sell shares that the market has over-inflated. But it’s very difficult to successfully put this simple investment strategy into practice.

Mr. Benjamin Graham is recognized as the father of modern fundamental security analysis. In one of his books, The Intelligent Investor, Mr. Graham writes that investors should ignore the stock market except for big price movements and concentrate on their own strategic investment plan. And to do that, investors should focus on the operations and dividends of the companies they own. The Chairman of our Investment Planning Committee suggested we read Mr. Graham’s book again, given the conflicting advice of optimistic and pessimistic observers.

On page 108 of The Intelligent Investor Mr. Graham writes “Imagine that in some private business you own a small share that cost you $1,000. One of your partners, named Mr. Market, is very obliging indeed. Every day he tells you what he thinks your interest is worth and furthermore offers either to buy you out or to sell you an additional interest on that basis. Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them. Often, on the other hand, Mr. Market lets his enthusiasm or his fears run away with him, and the value he proposes seems to you a little short of silly.

Ignore, or exploit, Mr. Market when it suits your investment strategy

“If you are a prudent investor or a sensible businessman, will you let Mr. Market’s daily communication determine your view of the value of a $1,000 interest in the enterprise? Only in case you agree with him or in case you want to trade with him. You may be happy to sell out to him when he quotes you a ridiculously high price, and equally happy to buy from him when his price is low. But the rest of the time you will be wiser to form your own ideas of the value of your holdings, based on full reports from the company about its operations and financial position.

“The true investor is in that very position when he owns a listed common stock. He can take advantage of the daily market price or leave it alone, as dictated by his own judgment and inclination. He must take cognizance of important price movements, for otherwise his judgment will have nothing to work on. Conceivably they may give him a warning signal which he will do well to heed—this in plain English means that he is to sell his shares because the price has gone down, foreboding worse things to come. In our view such signals are misleading at least as often as they are helpful. Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.”

Focus on your strategic investment objectives

Too often we see speculators (as opposed to what Mr. Graham calls “the true investor”) glued to a screen. They agonize every time a twitch in the market causes their share prices to move by a nickel or a dime. It’s a mistake to pay such close attention to the market. Speculators with itchy fingers buy and sell too much. Over time, brokerage fees, the bid-ask spread (the difference between the most a potential buyer will pay and the least a potential seller will accept) and capital gains taxes will erode any trading profits.

A friend who works as a broker told us that he’s seen it many times. Speculators end up losing money while enriching him in the short run. Meanwhile, in the long run he makes more off his patient buy-and-hold investors—who survive and prosper by sticking to their own best long term strategic investment plan.

We recommend you ignore Mr. Market most of the time—except to take advantage of him.


The Investment Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

Comments are closed.