This kicks off a 3 part blog mini series on personal finance philosophy. I’m not a genius statistician, or into formulas involving the “greeks”, delta, alpha beta etc.. I’m logical and I adopt and adapt to logical views of investment that I have instilled in my everyday values and life in general. Most of my philosophy comes from the likes of Benjamin Graham, John Bogle, Warren Buffett, Robert Kiyosaki and even Dave Ramsey. Those individuals are all logical and about getting back to the essence of good investment, patience and prudence.
The first part is stocks and bonds. This part derives its philosophy primarily from the aforementioned Graham, Bogle and Buffett. Buffett says, simply buy good companies at fair prices and reinvest your dividends, taking advantage of the compounding interest factor that the dividends provide. In Ben Graham’s book, the best way to design a good portfolio back in the early part of the 20h century was to simply buy all the companies in the Dow Jones and keep a portfolio allocation of about 70-80% stocks and 20% bonds. This was the original concept of the index fund.
At this time there was no mutual fund that would offer you an index fund that simply followed the index, they were always actively managed and had fees that eat away at your return in the long run. The truth is that few if any fund managers can beat the long term average return of the S&P 500 or Dow Jones. John Bogle picked up on this and created the first low cost index funds from Vanguard, with fees on NAV equivalent to .05%, versus 1-3% for most actively managed funds. The most recent versions of Graham’s “Intelligent Investor” advises one to keep the majority of their portfolio in these passive index funds for the long term, Buffett even expounds upon this saying that he would up his equity to bond ratio to be equivalent to 90%/10%. That’s how confident they are in this method.
Of course simply putting money into a low cost S&P index fund like Vanguard’s VOO, can take a bit of the fun out of investing. If you are going to buy individual stocks, there can be more upside to the value and larger dividends, it is advised to do this in small amounts and always look to put a bottom under your purchase price. The traditional Graham number can simply be calculated by taking the square root of the book value*earnings per share*22.5. To identify these stocks without looking at the balance sheet, the price to book should not exceed 1.5X and earnings not exceed 15X (or a combination of the two multiplied should not exceed 22.5). This tells you that the assets are probably under performing and have an upside if the business is tweaked a bit. On the other hand, if you look at a company like Face Book with a PE of 76 and a PB of 7.5+, this indicates a company that is sucking every last dime of potential out of their assets and investors that are willing to pay way too much for it. It’s hard to be patient with a company like that when you never know when the company will cease to be able to produce earnings, and forget about dividends with companies like FB, they don’t exist. Where’s the logic?