Ben Graham's 3 Simple Rules for Investing in Stocks and Bonds | Exploring Markets

Ben Graham's 3 Simple Rules for Investing in Stocks and Bonds

In 1976, the founder and father of value investing, Ben Graham, gave his last interview. If you aren't entirely familiar with Graham, just remember he's the man who taught Warren Buffett everything he knows about stocks.

Graham's last interview is with the Financial Analysts Journal and the exact contents of this interview are hard to find anywhere. During the interview, Graham is asked how he thinks new investors should get started or what strategy they should use. He responds with a simple guide that we are sharing here for anyone looking to learn more about how to invest:
"Let me suggest three such rules: 
1. The individual investor should act consistently as an investor and not as a speculator. This means, in sum, that he should be able to justify every purchase he makes and each price he pays by impersonal, objective reasoning that satisfies him that he is getting more than his money's worth for his purchase. In other words, that he has a margin of safety, in value terms, to protect his commitment. 
2. The investor should have a definite selling policy for all his common stock commitments, corresponding to his buying techniques. Typically, he should set a reasonable profit objective on each purchase. Say 50% to 100%. And also a maximum holding period for this objective to be realized. Say, two to three years. Purchases not realizing the gain objective at the end of the holding period should be sold out at the market. 
3. Finally, the investor should always have a minimum percentage of his total portfolio in common stocks and a minimum percentage in bond equivalents. I recommend at least 25% of the total at all times in each category. A good case can be made for a consistent 50-50 division here, with adjustments for changes in the market level. This means the investor would switch some of his stocks into bonds on significant rises of the market level, and vice-versa when the market declines. I would suggest, in general, an average seven or eight-year maturity for his bond holdings." - Ben Graham