Investing Advice From Benjamin Graham

One of the underpinnings of Benjamin Graham’s financial advice to investors is that, at a certain price, ninety-nine out of one hundred companies in existence become attractive at a certain price. This is true even for the companies that you identify as mediocre, simply because they could theoretically reach a price so low that you can’t help but do all right.

Take a company I would never want to own over the long-term: Best Buy. Under a Graham analysis, there is a point where the company gets so cheap that it would necessarily become a successful investment over the intervening years. Let’s stipulate that the investors in the marketplace somehow decide to value the shares at $10 each. That would knock the valuation down from the current $14 billion down to $3.5 billion. Meanwhile, the company is still pumping out $850 million in annual profits. It’s hard not to get rich when you buy a stock with a 24% earnings yield. Best Buy could simply pay out all of its profits as dividends, you’d have your investment returned to you within four years simply due to the cash extracted from the enterprise.

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Colgate-Palmolive: The Tenbagger Peter Lynch Did Not Predict

In 1989, Peter Lynch referred to Colgate-Palmolive as a stalwart stock, and quipped: “How much can you expect to squeeze out of Colgate-Palmolive? You aren’t going to become a millionaire off it. . .unless there is some startling new development you would have heard about by now. With the stalwarts you have to consider taking profits more readily.”

Incidentally, the beginning of January 2014 marked the moment when a $20,000 investment in Colgate-Palmolive would have become worth over $1,000,000 had it been purchased at the moment when Lynch said that in the summer of 1989.

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