Looking back on Ben Graham

Markets climb higher in the inaugural week of Trump 2.0, but are apolitical in the long run

As of the closing bell on Wednesday, the Dow is up 1.5% and the S&P 500 1.5% since Friday’s close and 1.0% and 1.8%, respectively, since November 6th, 2024. Some have read this as a sign the outcomes of Trump’s second term will favorably impact the future cash flows American companies. Historically, however, whoever is in the White House seems to have minimal impact on the market in the long run.  

Reuters put it succinctly in an article entitled Mr. Market meets Trump 2.0: “Often, market performance through presidential terms reverts to more reliable relationships with economic trends, but Trump tends to inject volatility and has foreshadowed bold policy shifts.”

The markets continued to rally during much of Trump’s first term and also through Biden’s Presidency. Time will tell if Trump 2.0 has an atypical impact one way or the other.

The Key Tenants of The Intelligent Investor

With markets at historically rich valuations, higher levels of geopolitical risk, and a potential recession looming, it is always important to keep at the forefront of our minds, the key tenants of The Intelligent Investor, a major influence on our work here at The Evolved Investor, whose moniker is a nod to Graham’s magnum opus.

So let’s recap:

A) Buy great companies — What makes a company “great.” Well, Graham defined such a company as 1) having a strong financial condition (i.e., current assets at least 1.5x current liabilities, and debt not more than 110% of net current assets), 2) having earnings stability (no deficit in the past five years), 3) a strong record of dividends (some current dividend), 4) earnings growth (at least 33% growth over last ten years), and 5) attractive price (less than 120% net tangible assets). Of course, the exact metrics we use to determine if these criteria hold for today’s companies could be updated (more on that in a future newsletter), but the principles remain the same.

B) Take advantage of the irrationality of Mr. Market — It’s important to remember that the price of a stock does not necessarily reflect the value of the company. Mr. Market is the term Graham used to describe how the collective wisdom of the crowd, is sometimes irrational. The crowd can price in too much exuberance and send the price soaring way above what’s reasonably possible (e.g., used car retailer Carvana’s current PE ratio is over 23,000% — talk about an optimistic view of the future!) and conversely, a stock price can be lower than its intrinsic value because Mr. Market is overly pessimistic about the company’s future performance (e.g. when GOOG dropped below $100 / share upon the “Google Killer” Chat-GPT’s arrival on the scene). As Evolved Investors, we must understand the underlying value of great companies, buy during times when the price is attractive, and sell during times when the market overvalues the asset. Buy low, sell high!

C) Ensure appropriate asset allocation and diversification — Graham recommended a standard allocation of 50-50 for stocks and bonds and urged caution to have more than 75% of one’s portfolio in either. As stocks appreciate, the “Enterprising Investor” should trim their positions (sell) and buy bonds and vice versa. From a diversification perspective, Graham recommended a portfolio of between 10-30 different stocks. Everyone is familiar with the benefits of diversification, but diversifying too much means you end up owning a lot of companies that will underperform. At Berkshire Hathaway, only 10 holdings represent 85% of the portfolio. Most of Buffet and Munger’s returns were made on a handful of trades over decades. Thus, fewer trades on fewer companies can lead to extraordinary results.

D) Always have a margin of safety — No one knows for certain what will happen in the future. We will never be correct 100% of the time in investing. To mitigate this, Graham discussed the importance of the margin of safety. “This past ability to earn in excess of interest requirements constitutes the margin of safety that is counted on to protect the investor against loss or discomfiture in the event of some future decline in net income.” In other words, we want the stocks that we select to be so grossly undervalued by the market, that even if something unpredictable happens, you likely won’t lose money, your gains will be a bit more modest, or your losses (if any) should be limited.

The Intelligent Investor is, bar none, the best starting framework to think about how to invest. In future newsletters, we’ll discuss the reasons why the market is fundamentally different today than it was for much of the 20th century and how the principles above can be modified slightly to allow for successful value investing today.

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Top-line revenues have grown by a 12% CAGR from 2016 to 2023. Although ROIC declined substantially in 2022 due to the IHS Markit acquisition, SPGI is spearheading initiatives to leverage AI technologies to drive cost efficiencies which could lead to higher ROIC in future years. Analyst price targets currently range from a low of $530 to a high of $620, with a median of $585 upside.

SPGI may be a bit overvalued at the current price of around $510 a share, 45 PE ratio, and 0.71% dividend yield. This is one to add to a watchlist of great companies with a strong business model, history of performance, and quality leadership team. If there’s a broader contraction in the markets and the price of SPGI falls pulls back to around $400-430/share range, consider adding a position.

Disclaimer: TEI has no current positions in SPGI

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_{Legal Disclaimer: The Evolved Investor is for information purposes only and is, by law, not personal investment advice. Concepts and ideas are for your consideration only. We encourage our readers to do their own due diligence. Investing has inherent risk, and investments can lose value.}