Warren Buffett has become rightly famous as one of the world's greatest investors. What is less known is that Buffett was initially mentored in investment analysis by Benjamin Graham.
Graham wrote two books which have essentially become the "bibles" of value investing and he has also been bestowed the title by some as the "father of value investing".
Back in the early 1950s Graham went before a US Government inquiry to provide his expert views on how best to improve the savings of American citizens. This series of questions and answers has been dubbed "How to handle your money" and many of Graham's answers are as important for investors looking to retire comfortably today as they were 60 years ago.
Equities
Graham made the case for even investors of modest means to own equities due to the ability of equities to at least keep pace with inflation and to outperform bonds.
Accumulate
In a statement akin to the parable of the tortoise and the hare, Graham suggested that it was better to practice a strategy of accumulation – buying a few shares regularly as slow and steady will win the race – than to not buy them at all believing that you should wait until you had large amounts of money to work with.
Balanced Portfolio
In terms of balance, Graham counselled that it was best to have adequate insurance and that it's reasonable to have a split of roughly one third in bonds and two thirds in equities.
Get educated or get out
Graham talks at length about the skill set required to invest successfully, so "get out" is not a suggestion to get out of equities per se but rather get out of the decision-making process. Graham suggested utilising the services of a full-time professional money manager, for example a fund manager or a listed investment company (LIC) such as Argo Investments Limited (ASX: ARG) or WAM Capital Limited (ASX: WAM).
Dollar-Cost Average
Particularly for those investors who don't have the time to devote to investment analysis and running a successful portfolio, Graham suggests one particularly good way to limit risk was to buy shares at regular intervals. This strategy should mean you end up buying more shares at lower prices than higher prices, thereby resulting in a lower average purchase price.
For example, over the past 12 months an investor who has purchased a total of $10,000 worth of shares in Woolworths Limited (ASX: WOW) via each quarter (3 months) and buying equal tranches ($2,500) of stock would have paid roughly $36 per share for 69 shares, $35 per share for 71 shares, $31 per share for 80 shares and $28 per share for 89 shares.
The advantage of this dollar-cost averaging is self-evident. Picking the bottom is difficult and more often than not investors will pay a higher price than that attained from this regular investment strategy.
Be wary of brokers
Graham makes the point that stock brokers may have a different time horizon to the long-term investor seeking to grow wealth to provide for a comfortable retirement. This can make many broker recommendations unsuitable for non-active long-term investors.
