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Benjamin Graham’s advice on buying stocks in a rising market

By Robert Stephens. Originally published at ValueWalk.

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Maintaining your focus on value opportunities could be crucial after the market’s rebound The S&P 500’s rebound over the past month means that it is now up 27% from the three-year low it recorded on March 23. However, investors continue to face major risks. Covid-19’s ultimate impact on the economy is not yet known, and investor sentiment could be highly changeable in the meantime. Through following value investor Benjamin Graham’s advice, you could navigate an uncertain period for the stock market. His strategy may help you to benefit from buying sound businesses trading at fair prices for the long run.


Q1 2020 hedge fund letters, conferences and more

Benjamin Graham’s Advice On Buying Stocks: Fundamentals Versus Sentiment

Investor sentiment may have improved recently, but value investors should not allow this to influence their perspective on the merits of any investment. They should instead continue to focus on company fundamentals when determining the appeal of a stock, according to Benjamin Graham:

“Buy not on optimism, but on arithmetic”.

In the near term, investor sentiment could deteriorate rapidly or improve significantly depending on news and updates on Covid-19. Therefore, buying quality stocks that can withstand a period of economic uncertainty and deliver improving returns in the long run may be a better idea than becoming more optimistic based on the views of your peers.

Risk management

Just because the S&P 500 has surged higher in recent weeks does not mean that the risks facing investors from Covid-19 have disappeared. The process of reopening the economy could be a very slow one that ultimately leads to anaemic GDP growth in the short run.

Therefore, considering the risks of an investment is likely to continue to be of high importance – even if investors have recently experienced gains in the value of their wider portfolio.

Benjamin Graham maintained a focus on risks throughout his investing career:

“The essence of investment management is the management of risks, not the management of returns”.

By adopting a similar approach, you may be in a better position to limit your downside and take part in a long-term economic recovery.

Coping with losses

Cash may prove to be an exceptionally unattractive asset in the medium term. Interest rates are now near-zero, and holding cash is likely to produce a negative return in real terms.

According to Benjamin Graham, though, you should be in a financial position that enables you to cope with severe declines in your portfolio without suffering financial hardship:

“Before you invest, you must ensure that you have realistically assessed your probability of being right and how you will react to the consequences of being wrong”.

Having some spare cash may not only provide you with peace of mind should your portfolio value decline, it could also enable you to capitalize on potentially lower valuations across the index as the Covid-19 pandemic plays out.

Maintaining your focus

It’s all too easy during an uncertain time for the S&P 500 to change your strategy. You may feel, for example, that making adjustments to your investment objectives to incorporate the economic impact of Covid-19 will help you to adapt to an evolving world economy.

However, maintaining your value investing strategy could be a better idea. Benjamin Graham encouraged value investors to remain disciplined and focused on their long-term objectives even during volatile periods for the stock market:

“A strong-minded approach to investment, firmly based on the margin-of-safety principle, can yield handsome rewards”.

Benjamin Graham advice: Conclusion

Staying the course with your current strategy may or may not yield high returns in the short run. However, buying quality companies that trade on a margin of safety is likely to be a successful means of generating strong capital returns in the long run. Being rigid in keeping that strategy no matter how the macroeconomic outlook changes could strengthen your portfolio’s performance.

This article first appeared on ValueWalkPremium

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