28. The four principles for thriving in investment
There are no magical formulas to guarantee returns, but we can discuss principles for thriving in investment. In this article, we’ll share the basic recommendations of one of the most successful investors in history: Benjamin Graham.
Graham is an iconic figure in the world of investment, with an influence that extends to the present day. Recognized as the father of value investing, Graham laid the foundations for a solid and disciplined investment philosophy that has withstood the test of time. In his book “The intelligent investor” first published in 1949, he popularized fundamental concepts such as the intrinsic value of a company and the search for undervalued investment opportunities in the market.
Another of his key contributions is the concept of a margin of safety, which constitutes the secret to sensible investing. Benjamin Graham was characterized by a cautious and long-term approach that allowed him to achieve consistent results and protect the capital of his investors. Not only was he one of the first to apply an analytical approach to stock selection, but he also developed tools and techniques that are still used today: Warren Buffett is one of his most famous disciples.
The principles for thriving in investment
Towards the end of “The intelligent investor”, Graham recommended adopting a business-like approach to investing. If someone expects to profit from buying and selling securities, Graham wrote, “they will be embarking on a business activity that must be managed in accordance with generally accepted business principles if they want a chance to thrive.” We summarize them below.
1. Know what you’re doing
Graham’s first recommendation is one that we often emphasize at Urbanitae: understand the business. In other words, thoroughly comprehend what the investment you are about to make entails, examine the project, and know what can go wrong and what must go right to achieve the expected return.
In the case of stock investment, Graham advocated acquiring expert knowledge before attempting to achieve “business profits.” Trying to achieve “a return above ordinary interest and dividends” through buying and selling stocks doesn’t make much sense “unless you have as much knowledge about the value of securities as you would need to have about the value of the merchandise you intended to manufacture or trade.”
2. Don’t let others decide for you
The second principle for thriving in investment is related to the first. If we have made our investment decisions after thorough study, why entrust the management to a third party? From a business perspective, Graham urges investors not to allow “anyone to run their business,” with two exceptions: either we have the capacity to oversee its management properly or we have unusually strong reasons to trust it.
In the case of Urbanitae, it is evident that the selection of projects is in the hands of a team of experts. However, the decision to invest in them is made by each investor. Additionally, we provide investors with all the information about each project so they can exercise the kind of supervision advocated by Graham.
3. Avoid risky projects
The third principle is also based on prudence. Graham recommends avoiding operations in which there is “a good chance of achieving reasonable profit” once studied in depth. In other words, the intelligent investor should stay away from projects where there is little to gain and much to lose.
At Urbanitae, we adhere to this principle when selecting projects. We avoid operations that prioritize profitability over security. The goal is not to squeeze out an extra percentage point from the return on investment but to protect the investors’ money by establishing strict criteria and guarantees that align the interests of investors and developers for the project’s success.
4. Don’t follow the crowd
The fourth principle for thriving in investment is, in reality, more positive. Benjamin Graham encourages us to be brave and move forward if our investment decision is well-founded: “If you have reached a conclusion from the facts and know that your judgment is sound, put it into effect, even though others may doubt or disagree.” If our analysis is solid, the majority’s opinion should not concern us.
By placing the final decision in the hands of the investor, Urbanitae provides the opportunity to put this fourth principle into practice in each project. If the investor is unsure, believes that the business plan is too optimistic, or is not convinced by the timelines or returns, they have an easy choice: they can choose not to invest, even if hundreds or sometimes thousands of other investors have done so.
Do you think you adhere to Graham’s four principles for thriving in investment? Fortunately, Graham himself concludes that, for the typical investor, it is not usually necessary to adhere to all of them. However, “as long as he limits his ambition to his capacity and confines his activities to the safe and narrow path of ordinary defensive investment.” In other words, one that prioritizes security over performance, as we do at Urbanitae.