Benjamin Graham on "Asset Allocation"
Warren Buffett once stated in an interview that Graham's book, "The Intelligent Investor," had changed his life and set him on the right path. Buffett was referring to Graham's theories on value investing and bringing a form of professional analysis to the investment markets.
Graham is often called the "Dean of Wall Street" and the father of value investing. One of the most important early proponents of financial security analysis, Graham was so influential that he helped draft the Securities Act of 1933. He championed the idea that the investor should look at the market as though it were an actual entity and potential business partner – Graham called this entity "Mr. Market" – that sometimes asks for too much or too little money to be bought out.
Graham wrote "The Intelligent Investor" in 1949 as a guide for the common investor. The book championed the idea of buying low-risk securities in a highly diversified, mathematical way. Graham favored fundamental analysis and finding the difference between a stock's purchase price and its intrinsic value.
It would be difficult to summarize all of Graham's theories in full, but there are several key concepts worth pointing out. He believed that stock prices were frequently wrong due to irrational and excessive price fluctuations (both upside and downside). Intelligent investors, said Graham, need to be firm in their principles and not follow the crowd.
♦ First rule of diversification: Asset allocation at least 25% bonds, at least 25% stocks
♦ Second rule of diversification: Try to hold at least 30 different stocks
♦ When in doubt, stick to quality
♦ Dividends provide a clue
♦ Defend your shareholder rights
♦ Be patient
♦ Think for yourself !