[Namsan Ddalggakbari] Advice from 'Buffett's mentor' Graham... Ant investors, focus on investing, not speculating

Wise Investor Revised 4th Edition / Written by Benjamin Graham / Translated by Lee Geon / Supervised by Shin Jin-o / Gukil Securities Economic Research Institute / 23,000 KRW

[Asia Economy Reporter Oh Ju-yeon] Since the outbreak of the novel coronavirus disease (COVID-19) this year, unprecedented records have been pouring out in the domestic stock market, fueled by abundant liquidity in the market. Investor deposits have exceeded 60 trillion won, setting an all-time high, and the scale of individual investors' 'debt investment (borrowing money to invest in stocks)' has surged to 17 trillion won, breaking historical records. As forecasts suggest that the KOSPI could rise to 3000 next year, everyone is rushing into the stock market.

The COVID-19 crisis is certainly an opportunity for 'jurini (stock beginners).' Stocks related to COVID-19 diagnostic kits, which attracted attention, soared nearly tenfold, and success stories of investment excited jurini. There were posts certifying that 200 million won, originally saved for apartment down payments, was 'all-in' and grew to 800 million won. Sensational articles flooded the media, such as employees of companies that hit the jackpot through IPOs this year earning enough to buy an apartment in Gangnam.

However, what are the chances of individual investors succeeding in such extreme volatility? Why do some people earn more than double investing in the same stock while my account is in the red?

The Investment Bible Written by the 'Father of Value Investing'
Introducing Scientific Stock Investment through 'Security Analysis'
Still the Best Value After Over 70 Years

For individual investors who want to invest successfully, American economist Benjamin Graham (1894?1976)'s The Intelligent Investor is the bible that teaches the fundamentals of investing.

Before The Intelligent Investor, Graham published the classic of value investing, Security Analysis. It introduced a scientific framework of securities analysis to stock investment, which had been done by 'gut feeling,' elevating it to the level of science. Graham was the mentor of investment masters like Warren Buffett. His principles of value investing still hold the highest value even after more than 70 years.

In The Intelligent Investor, Graham advises beginner investors on investment principles and attitudes so they can establish and execute sound investment strategies. Notably, he distinguishes between 'investment' and 'speculation.' He defines investment as "an act which, upon thorough analysis, promises safety of principal and an adequate return," and anything failing to meet these criteria is speculation.

Investors must clearly recognize that stocks inherently carry speculative elements during the holding period. Therefore, investors should suppress this to a low level and be prepared financially and psychologically for potential long-term losses.

Diversify into 10?30 Stocks Without Excess
Investment Principles for Defensive Investors

Recently, individuals in Korea have been using securities company margin loans with annualized interest rates of 4?9%, and these loans have surged to the point of depletion. What would Graham say? Of course, unlike past 'ants,' individual investors now have much more information. They have become 'smart ants' who faithfully follow the author's advice to 'buy low and sell high.'

If one can earn returns exceeding the annualized interest rate, debt investment is not necessarily negative. However, Graham divides investors into defensive and enterprising types and explains how to invest according to the investor's temperament and disposition.

The author warns about three types of 'foolish speculation.' He lists "speculation done under the illusion of investment, speculation carried out seriously despite lack of knowledge and ability, and speculation involving huge amounts beyond one's capacity."

Graham also presented four stock selection criteria for defensive investors: "Diversify sufficiently but not excessively (10?30 stocks), select financially sound and well-known large companies, choose companies that have consistently paid dividends over a long period, and buy stocks priced below 25 times the average earnings of the past seven years and below 20 times the earnings of the most recent 12 months."

Regarding 'growth stocks,' Graham said that enterprising investors might challenge them, but defensive investors should prefer companies that "may not be flashy but provide sound returns."

You, the Enterprising Investor Chasing a 'Big Hit'
Invest Large Amounts in Conviction Stocks and Hold Until 100x Increase
Patience and Learning Make a 'Wise Investor'

However, if you are eyeing a 'big hit,' you should ask yourself whether you can "invest a large amount early in stocks you strongly believe in for the future and hold them unwaveringly until the stock price rises more than 100 times." If you can answer yes, investing is acceptable.

Almost all investors who hit the jackpot by investing solely in one company are closely related to that company. Otherwise, you will not be able to shake off constant temptations and doubts.

The author advises enterprising investors to focus on neglected large-cap stocks, undervalued stocks whose intrinsic value is much higher than the market price, and companies in special situations or under workout.

What advice would Graham give about the 2020 stock market? Market volatility has increased more than ever. The author's teachings, which have endured past volatility, transcend time.

"Stocks have high price volatility, so you should pay attention to the profit opportunities arising from it. You can seize opportunities through 'timing' and 'price.'” “The truly terrible losses in recent years occurred in stocks bought without regard to price."

According to Graham, a wise investor is patient, practices diligently, and never neglects learning. Such an investor does not get swayed by market fluctuations as long as profits are generated without major issues in held stocks and adheres to the principles of buying low and selling high.

So, am I just an 'ant' now, or a 'wise investor'?