8 Investing Rules That Have Stood the Test of Time

IT’S A CRAZY WORLD. AS MARKET AVERAGES VAULT EVER higher, a gold-rush mentality has taken hold. Since June there have been ten initial public offerings that have climbed at least 1,000%. Upstarts you had no chance to own have produced a decade’s good returns in a day.

But despite the rampant optimism, there’s a sense of impermanence. How can all these highfliers stay aloft when they generate no profit? How can all the market’s dot.com darlings ever make good on their promise to become dominant fixtures in cyberspace when there are so many of them? And turning to blue chips, what kind of climate is this when missing a penny on analysts’ consensus earnings estimates can send solid performers into a tailspin that chops a third from their valuation?

In such a world you need grounding in reality, a guide to what will truly make you prosperous. So we’ve distilled eight lessons that a serious investor should diligently follow. No, we’re not saying the stock market will melt down tomorrow–only that if and when a big correction occurs you must be equipped, financially and emotionally, to deal with it. We believe that you should stay with the market in good times and bad, and that if you do you will be amply rewarded.

We draw seven of our lessons from Benjamin Graham, the godfather of value investing. His teachings, first promulgated in the 1930s, had a run of popularity in the 1980s (thanks in no small part to the successes of his disciple Warren Buffett) but are out of fashion today, particularly among the day-trading set. They shouldn’t be. His soberly analytical approach and disdain for faddish nonsense provide a sure compass in the most uncertain of times.

Our eighth lesson comes from an even more unlikely source: John J. Raskob, best remembered for his spectacularly mistimed advice on getting rich in the market, delivered two months before the 1929 crash. Despite this lollapalooza of a bad call, his thoughts on the virtue of steady investing perfectly complement Graham’s practical philosophy. In Raskob’s Lesson 8 we do the math on exactly how everything we’re saying will make you rich.

Of course if you’d followed FORBES’ counsel in recent years, you wouldn’t have made a killing on the Net. Not everyone, though, can be an Internet-stock millionaire, let alone stay one. That’s why we stay committed to Graham’s notion that you shouldn’t buy a stock just because it’s going up.

Graham, a lecturer at Columbia’s business school and also a steadfast investor, cast a baleful eye on the giddy market of 70 years ago. A consummate realist who learned from failure as well as success, he had the intellectual honesty to put his own money at risk based on his theories. His first book, Security Analysis, appeared at the low point of the Depression, when a serious look at stocks had as much appeal as an undertaker’s manual.

Undaunted, he said stocks should be bought because the odd psychology of investing had, at a time when no one wanted to buy stocks, made it possible to buy shares in corporations at valuations a small fraction of what those corporations would have been worth if sold as entire businesses. Forget upward earnings or price trends. Forget breathtaking forecasts for the national economy’s bountiful future, heralded by promising technologies–in Graham’s time this meant radio, television, air-conditioning and universal telephone service.

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