Benjamin Graham (1984 - 1976)
Finance professor Benjamin Graham (1894-1976) was the mentor of Warren Buffett, and coauthor of the influential textbook, Security Analysis. His book for ordinary investors, The Intelligent Investor, appeared in 1949 and went through subsequent editions up through 1973. In this book, Graham gave a widely-cited piece of advice on asset allocation. The advice can be summarized in his words:
"the investor should never have less than 25% or more than 75% of his funds in common stocks."
Graham distinguished between the "enterprising" investor with "willingness to devote time an attention to securities that are more sound and more attractive than the average," i.e. to beat the market, and the "defensive" investor who "will place his chief emphasis on the avoidance of serious mistakes or losses. His second aim will be freedom from effort, annoyance, and the need for making frequent decisions." In short, the Bogleheads investment philosophy is like that of Graham's "defensive" investor.
In The Intelligent Investor, Graham recommends 50/50 as the standard allocation:
We are thus led to put forward for most of our readers what may appear to be an oversimplified 50–50 formula. Under this plan the guiding rule is to maintain as nearly as practicable an equal division between bond and stock holdings. When changes in the market level have raised the common-stock component to, say, 55%, the balance would be restored by a sale of one-eleventh of the stock portfolio and the transfer of the proceeds to bonds. Conversely, a fall in the common-stock proportion to 45% would call for the use of one-eleventh of the bond fund to buy additional equities.
Graham says to stay within the range of 25/75 to 75/25:
We have suggested as a fundamental guiding rule that the investor should never have less than 25% or more than 75% of his funds in common stocks, with a consequent inverse range of between 75% and 25% in bonds. There is an implication here that the standard division should be an equal one, or 50–50, between the two major investment mediums.
He is equivocal about what is now called "tactical asset allocation" (varying stock exposure in response to market conditions):
According to tradition the sound reason for increasing the percentage in common stocks would be the appearance of the “bargain price” levels created in a protracted bear market. Conversely, sound procedure would call for reducing the common-stock component below 50% when in the judgment of the investor the market level has become dangerously high. These copybook maxims have always been easy to enunciate and always difficult to follow—because they go against that very human nature which produces that excesses of bull and bear markets....
and, he says,
we can give the investor no reliable rules by which to reduce his common-stock holdings toward the 25% minimum and rebuild them later to the 75% maximum.
See also
References
All quotations are from The Intelligent Investor, Rev. Ed, by Benjamin Graham, ed. Jason Zweig, HarperCollins, 2009, and are taken from the parts of the book that reproduce the 1973 edition. (The book also contains extensive added commentary by Jason Zweig).
As a seasoned financial expert deeply entrenched in the world of investment strategies, particularly those rooted in the teachings of Benjamin Graham, I bring to the table a wealth of knowledge and a profound understanding of the intricacies of intelligent investing. My expertise extends to the core principles outlined in Graham's seminal works, including "Security Analysis" and "The Intelligent Investor," and their enduring influence on renowned investors like Warren Buffett.
Benjamin Graham, a luminary in the field of finance, was not only a distinguished finance professor but also a mentor to Warren Buffett, one of the most successful investors of all time. Graham's influence is prominently reflected in his coauthored textbook, "Security Analysis," and his accessible guide for ordinary investors, "The Intelligent Investor," published in 1949.
In the cited article, Graham imparts a crucial piece of advice on asset allocation, emphasizing that an investor should never have less than 25% or more than 75% of their funds in common stocks. This principle is a cornerstone of Graham's investment philosophy, offering a balanced approach to portfolio management.
Graham differentiates between the "enterprising" investor, willing to actively engage with securities to beat the market, and the "defensive" investor, focused on avoiding serious mistakes and losses while minimizing effort and decision-making frequency. The Bogleheads investment philosophy aligns with Graham's "defensive" investor approach.
In "The Intelligent Investor," Graham suggests a standard allocation of 50/50, maintaining an equal division between bond and stock holdings. He introduces a practical guideline for maintaining this balance, involving periodic adjustments based on market movements.
Furthermore, Graham advocates staying within the range of 25/75 to 75/25 in terms of stock and bond allocations. This range reflects his belief in the importance of maintaining a diversified portfolio while allowing for some flexibility based on market conditions.
Graham is cautious about tactical asset allocation, cautioning against attempting to time the market by varying stock exposure in response to market conditions. He acknowledges the difficulty of consistently following such strategies due to the inherent challenges posed by human nature and the extremes of bull and bear markets.
In essence, Graham's teachings, as presented in "The Intelligent Investor," provide a timeless framework for investors to approach asset allocation, emphasizing prudence, diversification, and a long-term perspective. The 75-25 rule, along with Graham's insights, continues to be a guiding beacon for investors seeking a rational and disciplined approach to managing their portfolios. All quotations referenced in this discussion are from "The Intelligent Investor," Rev. Ed, by Benjamin Graham, edited by Jason Zweig, HarperCollins, 2009, and are derived from the 1973 edition, with additional commentary by Zweig.
