What Were Graham’s Two Rules of Investing?
1. First rule: Be greedy when the market is fearful, be fearful when the market is greedy (Margin of safety)
2. Second rule: Don’t put all your eggs into one basket (Diversification of investments)
Benjamin Graham is popular as the father of value investing. Even, his book “The Intelligent Investor” is known as the bible of investing.
In this book, Graham shared these two most important rules that every investor must know.
Now, let’s learn how these two rules work in real-life investing.
1. The Margin of Safety – Be Greedy When The Market Is Fearful, Be Fearful When The Market Is Greedy
Rule number one – Buy in the lows and sell in the highs. But keep in mind, nobody can tell you, what is the exact bottom or what is the exact top. According to Graham, picking stocks during a bull market is much riskier than picking them in a bear market.
Investing in a bull market is riskier because those people will definitely book the profit who have bought the stocks at lower prices. And that’s why when they’ll sell, the market will crash.
Usually, amateur investors don’t understand it because of fear and greed; and often leave the game when the market enters a bearish zone, they are afraid of it.
An intelligent investor knows that the risk of losing money remains relatively low when we pick stocks in the bear market.
In fact, the bear market is the best time to pick good companies. Because during this time, we can get them at undervalued prices.
However, Graham’s rule doesn’t suggest buying any stocks without proper research or safety.
According to Graham, there are differences between an investor and a speculator. Keep in mind a speculator is a gambler.
In the Intelligent Investor book, he suggests people being an investor, but not a speculator.
2. Don’t Put All Your Eggs Into One Basket (Diversification of Investments)
Rule number two is diversification.
In the Intelligent Investor book, Benjamin Graham mentioned that an intelligent investor should diversify his portfolio among different categories; such as stocks, bonds, gold, and mutual funds.
Even, if you are investing in stocks, you shouldn’t put all your money in just one or two companies. Choose multiple companies, at least 10 to 15 minimum from different sectors.
Diversification helps investors to reduce risks and maximize profits from investments.
However, Graham also suggested that if an investor wants, he can use less than five percent of his entire portfolio for speculation. Because Graham believed, at some point, everyone loves gambling.