Benjamin Graham aka Ben Graham – the father of Value Investing, has been an inspiration for many of today’s most successful businesspeople like Warren Buffett. Ben Graham’s checklist guided us with his practical thoughts about stock market and the psychology of investors.
He had a very simple theory for differentiating Investing from Speculating as he knew the psychology of investors in Wall Street, who actually calls themselves as Investors but mostly were just speculators.
Ben Graham’s Checklist for Investing
Ben Graham’s explains Investing as,
An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return.
Ben Graham’s Checklist is a simple and yet most powerful checklist for Investing of all time.
- Thorough Analysis
- Safety of Principal
- Adequate Return
Ben Graham’s Checklist for investing had just three simple steps, whenever it comes to investing he suggested to do the thorough analysis, there must be safety of principal and to have an adequate returns.
Thorough Analysis: When it comes to investment in stocks, you must do a thorough analysis of the underlying business of that particular stock.
Safety of Principal: You must check the credibility of the underlying business and protect yourself against serious losses.
Adequate Return: You must aspire to “adequate”, not extraordinary returns on investment.
He also explained that, Operations not meeting these requirements are speculative.
As the father of Value Invested guided with these three simple and easy checklist for successful investing, still many people fail to follow it and end up speculating in stock market like day trading, following stock picking systems and then loosing hell a lot of money in that.
Such people who end up speculating in stock market might get successful in short term but they had no chance of succeeding in the long run, because they failed to meet all three of Ben Graham’s checklist for investing.
Here’s how Jason Zweig in his commentary in book The Intelligent Investor by Benjamin Graham explains why failing to meet Ben Graham’s Checklist for Investing will had no chance of succeeding in the long run..
To see why temporarily high returns don’t prove anything, imagine that two places are 130 miles apart. If I observe the 65-mph speed limit, I can drive that distance in two hours. But If I drive 130 mph, I can get there in one hour. If I try this and survive, am I “right”? Should you be tempted to try it, too, because you hear me bragging that it “worked”? Flashy gimmicks for beating the market are much the same: In short streaks, so long as your luck holds out, they work. Over time, they will get you killed.
So, when it comes to Investing I would strongly recommend you to follow Ben Graham’s Checklist for Investing and make sure you’re not speculating in any way because as Ben Graham explained, Operations not meeting these requirements are speculative. 😉
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- ben graham checklist