Are You Breaking One of Benjamin Graham's Key Rules?

Just how long should you expect to wait to profit using Benjamin Graham’s favorite investment strategy?

I was out at dinner with a friend last week. While he had no real investment experience or knowledge outside of a university finance course, he decided to sign up for a free net net stock checklist soon after the site was launched and then eventually full Net Net Hunter membership. We were sitting in one of my favorite pizza places devouring a large BBQ chicken pizza when his tone shifted. In a quiet, serious, almost secretive voice, he said, “So how much should I put down on Universal Power Group? I want to make some real money over the next couple of months.”

I sat back for a moment and wondered why anyone would consider such a short time horizon when it came to investing. He had read nearly everything I wrote on the site, and even downloaded our net net scorecard. Yet, for some reason, he still had it in his head that significant investment profits only take a matter of months.

It wasn’t long until it hit me. Two of the stocks I had mentioned in our site's newsletter have done brilliantly over the last few months. InfoSonics was recommended on our Members’ Forum in mid-autumn and subsequently has risen by roughly 400%. Another major stock suggestion, Sangoma Tech., has risen 50% in only a couple of months. With results like that you would be forgiven for thinking that all net net stocks show these types of amazing returns in the same amount of time.

Benjamin Graham's Strategy is Highly Profitable... But Only If You Have Patience

During my initial research into Benjamin Graham’s net net stock strategy, I combed through a number of different primary documents. Buffett’s Partnership letters, two different versions of Benjamin Graham’s own Security Analysis, and nearly 10 different academic studies looking at Graham’s highest performing value investment strategy all shed a lot of light on how, exactly, this strategy performs.

The first notion that I have to squash is that investment profits are just a month or two away. When it comes to achieving the out-sized returns that net net stocks offer, a couple of months just doesn’t cut it. In Warren Buffett’s 1964 partnership letter, he mentions that most of the stocks in his “generals” investment category – a category primarily composed of classic Benjamin Graham net net stocks, tend to work out within three years. To put it another way, if you invest in net net stocks then you should have at least a 3 year time horizon if you want to see your stocks rise in price. That’s not to say that it will always take this long – the two above picks show that fairly clearly – but you should be prepared to wait 3 years for any given stock you buy.

Classic Benjamin Graham Value Investors Should Play Probabilities

Buffett also avoids saying that all of his holdings will work out within this time-frame. Investing amounts to playing probabilities. Ultimately, any group of securities will have picks that do spectacularly well and picks that don’t work out nearly as well. In Warren Buffett’s case, 70-80% of the “generals” that sat in his portfolio tended to work out within 3 years. Your own results will probably be lower but should still be fairly good. Looking back at the stocks that I’ve purchased over the last 3 years, roughly 70-80% of my picks have worked out within the 3 year time-span, as well.

What Would Benjamin Graham Say About Your Short Term Focus?

It is very important that you keep that 3 year time-frame in mind. The shorter your investment horizon, the more volatile your portfolio, and less certain you can be about your expected returns.

Net net stocks work out exceptionally well on average over a long period of time. To reap the rewards of investing in Benjamin Graham's favourite stocks you have to look at employing the strategy over a large number of years – I would say a minimum of ten years but ideally longer. The longer you employ the strategy the more that periods of underperformance and outperformance balance out to arrive at the quoted returns of net net stocks as a group.

At an investment horizon of less than 10 years, the returns available to you using Benjamin Graham’s famous strategy become much less certain. You may, for example, experience one of the 3 year periods of underperformance that pretty much every outstanding investment strategy inevitably suffers. During 3 year periods, while the tendency is towards outperformance, success is by no means certain. At periods of less than a year pretty much anything can happen.

Take Benjamin Graham's Advice: Be Patient

I used to be dragged out on hiking trips with my family when I was a kid. When we got to our destination, some lake or a mountain somewhere, I would stare at the distance that needed to be covered and immediately feel fatigued. When we set out on the hike, I would be in a rush to finish so I could get back home and play Nintendo, so I would head straight onto the trail at a furious pace, only to tired out and lag behind later.

I get the feeling that some investors see investing the same way so try to take shortcuts to building wealth by buying lottery ticket type stocks or taking on debt to fund stock purchases. This has a nasty tendency to backfire – just ask Warren Buffett what happened to Rick Guerin’s investment career.

Investing is a long-term game. You can’t expect to have outstanding results overnight – even if it does happen sometimes. What you need as an investor in order to do well is a deep knowledge about your well-chosen investment strategy, the emotional temperament to be able to stick with it no matter what the market is doing, and patients to stay the course during periods of underperformance.

You also need access to stocks that fit your strategy. With net net stocks, those can be tough to find. You can solve this problem by joining Net Net Hunter. Click here to join now.

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Article Author: Evan Bleker