Buying bonds is not a strategy Benjamin Graham is well known for, but he was definitely a proponent.
Benjamin Graham is widely acknowledged as the father of modern security analysis and the father of value investing. His timeless books, Security Analysis and The Intelligent Investor, are considered the bibles for both individual investors and Wall Street professionals. Warren Buffett says he’s read Security Analysis at least four times. He was a student of Graham’s in the 1950s when he enrolled in graduate school at Columbia, and he learned well. In fact, Buffett has often said that after his father, Benjamin Graham was the most important influence in his life.
Buying Bonds vs. Buying Stocks
In his book, The Intelligent Investor, Graham advised investors to always hold bonds in their investment portfolios. His recommendation is clear: “We recommend that the investor divide his holdings between high-grade bonds and leading common stocks; that the proportion held in bonds be never less than 25% or more than 75% with the converse being necessarily true for the common-stock component.”
We believe Benjamin Graham’s bond/stock allocation is the best approach to follow, regardless of the type of market we face, and with the proliferation of fixed income funds and ETFs, it has never been easier to allocate your portfolio based on the current market conditions.
(1) When the stock market is low and undervalued, hold 25% bonds and 75% stocks.
(2) When the stock market is high and overvalued, hold 75% bonds and 25% stocks. When the stock market begins to go from undervalued to overvalued, gradually reduce your stock portion, and fill the void by buying bonds or bond ETFs.
How do we determine when the stock market is undervalued or overvalued? Benjamin Graham detailed methods to estimate the current value of stocks. We apply Mr. Graham’s methods to determine the current value of the 30 stocks that make up the Dow Jones Industrial Average. The value investing methodology is based upon the 10-year financial history of each company, including the P/BV and P/E ratios.
In 1987, we attended an investment conference and heard Andrew Tobias speak. Tobias is the author of The Only Investment Guide You’ll Ever Need and many other books. He advised investors to lighten common stock holdings when the stock market is making new highs (buying bonds instead), and invest more heavily when the stock market is making new lows. Sell when the market is high and buy when the market is low is certainly good advice. However, not all of us have as good a “feel” for the stock market as does Andrew Tobias.
Whichever approach or method you choose, Graham or Tobias, stick with it, and you will prosper.
We used to have an advisory here at Cabot that closely adhered to Benjamin Graham’s investing principles, titled Cabot Benjamin Graham Value Investor. Now, we have a different value investing advisory run by Bruce Kaser and titled Cabot Value Investor. Bruce’s advisory includes some of Benjamin Graham’s principles, but with a twist, focusing on both growth and value.
Who do you follow, and why? Leave a comment below.
*This post has been updated from an original version.