Those who have been following my blog for a while may have noticed that I’ve been covering more financial topics in recent years. For years, I trusted an MLP financial advisor, and while I did set many things up correctly because of that, over time, I started feeling increasingly uncomfortable, sensing that he wasn’t telling me the whole truth. Last year, I parted ways with him and MLP after I got fed up with the constant chatter about how great a fund manager was doing his job and how his 2.4% markup was worth it. A consultation with an independent fee-based advisor (note: many claim to be independent, but true independent advisors are paid by the client, not by commissions from insurance companies) revealed just how much my financial affairs were being managed to my detriment. I will write more about this later, but today, I want to focus on one specific area: stocks, funds, and ETFs. And I deeply regret not having read Graham’s book much earlier.
When I was a child, I found the daily newspaper with its stock market tables incredibly fascinating. Not that I had any idea about stocks or that anyone in my family could explain everything to me. But every day, I would look at the stock prices of companies I knew and thought to myself that it must be important somehow. During my studies, I became an MLP client and simply trusted that they knew what to do with my then-limited money. My first attempts to act independently from MLP were a few years ago with RoboAdvisor platforms like Scalable Capital, Growney, etc., but I no longer think much of them. Now and then, I also bought stocks, but rather naively. I got lucky once (with my Apple stocks from the ’90s, I paid back my student loan… though, if I had kept them, well…), but I also had bad luck (the former Friends & Family program from Lycos Europe). And along the way, I sometimes made the mistakes that Graham describes in his book.
Benjamin Graham was born in 1894 and passed away in 1976, far removed from today’s tools like real-time stock prices, AI models, and so on. However, he lived through several market crashes. He was the teacher of Warren Buffett and laid the foundations of securities analysis. His seminal work The Intelligent Investor (published in German as Intelligent investieren) was first released in 1949 and is still being reissued with updated commentary; the foreword of the current 550-page edition was written by Buffett. Graham himself regularly updated the book before his death, reflecting on the events in the stock market during those years. The language, at least in my English original edition, is no longer exactly modern, but the current relevance is made clear through the valuable comments after each chapter.
Through the book, and also through the stories from Helmut Jonen, I have increasingly understood the difference that most people on the stock market are more speculating—that is, hoping to buy stocks cheaply and sell them for a multiple—rather than investing, meaning actually seeing themselves as shareholders in a company. Graham’s approach is called Value Investing, which means you select companies you believe in because you’ve done your research, understand the company and its business model, and ideally, can assess its value. This contrasts with the popular SUHR approaches (quick and hectic wealth), where people believe they can quickly become a millionaire with crypto or some obscure stock. For example, Graham (and other value investors) buy stocks of companies whose share price is below their book value. If a debt-free company has assets worth 100 million euros but its market value is only 80 million, you could essentially buy 1 euro worth for 0.80 euros. Even if the company went bankrupt, the assets would still cover the investment. Such opportunities are not easy to spot, even though you can check the price-to-book ratio (P/B ratio). For example, in Germany, companies like ThyssenKrupp and Hornbach are currently at the top of the list with a P/B ratio under 1, but obviously, the P/B ratio isn’t the only KPI you should consider.
An investment is always considered in the long term. As an investor, you must be able to endure the fact that prices will sometimes go down. A 20%, 30%, or even 50% loss, even if unrealized, can make you nervous. Graham’s most important message is, and I hope he will forgive me for this brief summary, that investors should not try to beat the market, but rather control their own emotions. Because, as I have done myself in the past, many beginners in the stock market buy at a high price when everyone is already talking about a new trend and they want to jump on the bandwagon (FOMO), and then panic-sell when the stock price drops because they want to save their money. If you’re buying Nvidia shares today because AI is the future, well: Five years ago, that was a good idea, and the invested amount would have more than tenfold, but now the stock has a price-to-earnings ratio of over 50, making it very expensive. A great company is not a great investment if you pay too much for the stock.
Emotions in the stock market, according to Graham, are exaggerated. Either in one direction or the other. Stocks are over- or undervalued, mostly for emotional reasons, not because the market knows what the best price for a stock is. Of course, AI is a trend. Airlines were also a trend in the 1950s and 60s, as Graham writes. But just because flying suddenly became possible for many people and the growth rates of that industry were enormous, it didn’t mean it was a good deal for investors. In fact, airline stocks haven’t brought joy to investors since the popularity of air travel.
My professional life after university began in the New Economy, the dot-com bubble, where we thought everything would change due to the internet, and the old economy would become obsolete. That too was a growth market. But were most companies profitable? No. The current edition of The Intelligent Investor contains comments from Jason Zweig, which were written shortly after the dot-com bubble burst. Here, there are plenty of other examples of how stocks were overvalued just because everyone wanted to jump on the bandwagon. And I saw with my own eyes how technology funds were sold to seniors at the Sparkasse bank, which were claimed to be a “sure thing.” In the end, only the bank profited. And the children and grandchildren wondered where the money had gone.
Value investing means also looking at “boring” stocks like consumer goods. Food, toothpaste, razors—these are purchased, used, and then repurchased. It’s unlikely that we’ll stop brushing our teeth tomorrow. Unilever may not sound as exciting as Nvidia, I know. The same applies to the pharmaceutical sector. We are getting older, and the question is not whether we will eventually get cancer during a long life, but when. Would I invest in Novo Nordisk right now? No, with Ozempic, the stock is the Nvidia of the pharmaceutical industry. But other stocks are relatively cheap. Of course, AbbVie, with its research on eczema, doesn’t sound as exciting as a cure for excess weight.
Graham formulated three criteria for selecting stocks:
- Appropriate diversification: At least ten, but no more than thirty different investments (the number thirty should be approached with caution, just like his recommendation that 100 minus your age should be the percentage of your wealth in stocks).
- Companies should be large, well-known, and conservatively financed.
- A long history of continuous dividend payments from each company.
Certainly, for most investors, it makes more sense to cover this through an ETF to avoid spending the time on research themselves. Graham also points out that companies should pay dividends; a whole chapter is dedicated to the idea that the management of a company does not necessarily know better how to handle profits if no or only a small dividend is paid. And this is exactly the strategy that Helmut Jonen follows: He doesn’t care whether a stock rises or falls today or tomorrow because what matters more to him is the dividend that is paid. The stock market itself, with all its emotions, is only interesting when something actually changes about the real value of a company. Of course, a company can also cut dividends, as Walgreens Boots just did. But as long as there is enough diversification…
Nowadays, especially through Graham and Jonen, I remain calm even during price crashes with my investments. Or, better said, I even wait for price drops. Because that’s when you can buy overvalued stocks at a cheaper price. Wealth is made in a crisis, as they say. And the next bear market will come, because the market doesn’t just go up. That’s why some investors have increased their cash holdings in recent months.
One thing, however, I will never do again: entrust my money to someone else. And I now advise everyone against going to MLP or anyone else. Instead, we need to ensure that more people receive financial education.
Finally, here’s a little bonus from YouTube, a video of a lecture by Benjamin Graham:
No investment advice.