For many of us, the time prior to and after the discovery of
Graham's investment philosophy can be compared to orienteering
without and with a map and compass.
Although the investment world has changed significantly
since that time, the main principles behind Graham's teachings
are as relevant today as they were 80 years ago.
Daily liquidity and price setting are in principle positive
for investors in the stock market. Rational investors may check
market prices every day to decide whether it is a profitable time
to buy or sell.
Herd mentality and gut reactions mean, however, that
fluctuations in share prices can become a yoke around many
investors' necks. When euphoria reigns and stocks are expensive,
one is tempted to buy. When fear dominates, and stocks are cheap,
one is more inclined to press the sell button.
Graham's advice is to make the most of the market's
irrationality. This can be illustrated by imagining you have a
business partner by the name of Mr. Market. Every day Mr. Market
offers a given price at which to buy your stocks from you or sell
you his. Imagine that Mr. Market is a manic depressive when it
comes to investments. Some days he is in a fantastic mood and
offers his stocks at sky-high prices. On other days he feels
terribly depressed and offers a very low price for the stocks.
The best thing about Mr. Market is that he doesn't mind
being ignored. You can take advantage of his mood swings. In
other words, you should not be influenced by his daily up and
downturns, but rather benefit from them; buy low and sell high.
Focus on the companies
"Investing is most intelligent when it is most business
like," wrote Graham in his book Intelligent Investor. In a
world in which the focus is on immediate price updates and daily
fluctuations in the market, it is easy to forget that a stock
represents part ownership in a company.
That is why the analysis of a company's assets, earnings,
market position and competitive advantage should be the basis of
investment decisions. Over time it is the company's earnings that
determine the shareholders' returns. That is something that is as
relevant today as it was 80 years ago.
Margin of Safety
Last but not least Graham insisted that each investment must
have a sufficient margin of safety. The future is, by
definition, uncertain. Even for companies that have seemingly
done everything right, unforeseen events can suddenly put a spoke
in the wheel.
According to Graham the best protection against future
uncertainty is to use common sense by buying stocks cheaply
enough that the return will be good even if not everything goes
to plan. In SKAGEN the purchase of securities at a significant
discount to their intrinsic value stands at the heart of our
Learning from Graham
The stock market has changed significantly since Graham's
time. Technological developments and the internet mean that
information is only a keystroke away. It has therefore become
harder to have an edge when it comes to information gathering.
The availability of information varies from market to market and
from company to company, however. One can thereby gain an
advantage, for example by looking among under-researched and
unpopular companies as we do in SKAGEN.
Another success factor has been to look for situations where
the high level of complexity means that most people capitulate
rather than try to untangle the web. Our investment in the
Turkish Yazicilar Holding, with its complex ownership structure
is a good example.
What has not changed over all these years is investors'
behaviour patterns: Focusing more on the upside than the
downside; being carried away by the latest popularity wave to
make a quick profit when your neighbour starts earning more on
his biotechnology shares than you do on your boring old
companies; relying on the argument that this time is different;
and not being able to see beyond the next quarter. These patterns
of behaviour never change.
In SKAGEN we try to exploit investors' irrational behaviour.
Two good examples are the Chinese and Korean car manufacturers
Great Wall Motor and Hyundai, that we bought at the peak of the
financial crisis. The pricing indicated that the world was about
to go under and no one would ever buy a new car. Not for some
When we first bought into Great Wall Motor the company was
priced at less than the value of its net cash. All the other
assets – including the value of future production and sale –
were thrown in for free. This was a classic value investment in
the spirit of Graham which has subsequently provided fantastic returns.
For those of you who have not read Graham's Intelligent
Investor, run to your nearest bookstore. It is one of the world's