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MARGIN OF SAFETY
  Karl Arnold Belser
7 November 2016



I finally read Benjamin Graham's book The Intelligent Investor, which Warren Buffet considers the most important financial book ever written. See the book summary (Click Here).

I have been investing for more than 30 years. Even so, I learned a few new things and I confirmed that my conservative investment philosophy is sound.

Graham's main point is that investors should seek to buy undervalued and historically consistent shares that have a good margin of safety. If one buys good companies at a bargain price and holds them for the long term, one will on the average make, not loose, money. It takes confidence and courage to follow this approach.

What constitutes a bargain?

I use the stock's Cyclically Adjusted Price to Earnings ratio (CAPE) to guide my purchase and selling decisions. Robert Shriller has shown statistically that low CAPE issues do better than average for share price appreciation over the long term. I also look for a relatively high and consistent dividend because I live off of the dividend and I don't usually intend to sell the shares. However. if the Price to Earnings ratio (PE) rises above 20 or so I may sell because I consider the share price too richly valued. I do understand that in the current very low interest rate environment that higher PEs might be tolerable. My philosophy is consistent, in part, with that of Graham.

I rely on the analysis given in the Value Line Survey of stock issues to guide me. However, I have not been considering the Price to Book ratio (PB) as another indicator of value even though this information is readily available from my value Line Survey. Graham suggests that the PB should be less than 2.5 and that the PE times PE should be under 25.

Graham suggests that most investors should use Index Funds for a majority of their investment dollars, unless one is interested in putting in a lot of work. I do put in the work and I have 75 percent of my investments in a diversified selection of shares. The bond portion I have in my IRA and I have a large cash cushion to take advantage of opportunities as they arise..

I am not a speculator and I do consider myself an intelligent investor. I have been able to maintain my inflation adjusted capital constant since my retirement more than 20 years ago, while paying myself about 3 percent of the asset value every year.
    
Last updated November 7, 2016
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