This one Ben Graham investment principle could make you richer

Warren Buffett at a Berkshire Hathaway AGM

Legendary investor Warren Buffett attracts a lot of admiration for his market wisdom. But Buffett himself frequently says he learnt his key investing lessons from someone else. That person was investment guru Ben Graham, who taught Buffett and wrote The Intelligent Investor. “All of the important ideas in investing really are in that book,” says Buffett.

Like the Sage of Omaha, I follow many of Graham’s principles when investing. I think one of those could help make me richer over time, despite its apparent simplicity.

Making gains versus avoiding losses

Many people assume that successful investing is all about making money. I do not disagree that generating money matters – but I think that only tells one half of the story. For me, successful investing is about not losing money, as well as making it. After all, it can be harder to make up for a loss than it is to incur it in the first place. If I invest £1,000 in shares, for example, and they lose 50% of their value, they then need to jump 100% just for me to get back to even.

That helps explain why Graham emphasises the principle of always investing with a margin of safety.

The idea is exactly as it sounds. Rather than investing in companies that seem quite good and could help me turn a profit, I hold fire and wait to find great companies whose valuation is so attractive it offers me a margin of safety. That does not mean every investment will work out well, of course. But by focusing on what I think are great opportunities rather than merely good ones, hopefully I am less likely to make big, costly mistakes.

Warren Buffett on the margin of safety

Buffett recognises the margin of safety as one of the three core concepts in The Intelligent Investor.

Speaking to shareholders of his company Berkshire Hathaway, he explained the idea like this: “Don’t try and drive a 9,800 lb truck over a bridge that says its capacity is 10,000 lbs”.

In other words, Warren Buffett thinks that there is no point in sailing close to the wind when it comes to choosing shares to buy. He is not looking for situations where he can make a fairly modest profit if lots of things go right. Instead, he is trying to find shares that might lead to him making a big profit even if things go worse than hoped.

My take on Ben Graham

I am doing the same. I think always aiming to have a margin of safety might help me avoid some tempting but risky investments that could end up losing me money hand over fist.

Success as an investor is partly about finding rewarding shares to buy. But a key part of it is also trying to avoid losing money by steering clear of investments that do not meet my risk profile. A lot of investors are in too much of a hurry to try and build their wealth, forgetting that important principle. But I think Ben Graham’s emphasis on a margin of safety could boost my investing returns and therefore my wealth, just as it has for Buffett.

The post This one Ben Graham investment principle could make you richer appeared first on The Motley Fool UK.

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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.