According to Graham, what behaviors should investors primarily avoid?

Graham's Warning: Smart Investors Should Never Do These Things!

Hello! Great to discuss the wisdom of Benjamin Graham, the "Father of Wall Street." As Warren Buffett's teacher, his ideas have shaped the entire investment world. If you want a steadier, longer journey in investing, understanding what he believed investors should avoid might be more important than learning what to do.

Think of learning to drive: an instructor spends significant time telling you what not to do, like "don't run red lights" or "don't jerk the steering wheel." Graham’s advice serves the same purpose—helping you dodge the "potholes" on your investment journey.

Here are the key behaviors he emphasized that investors must avoid, explained in plain language:

1. Confusing "Speculation" with "Investment" (The Absolute Core Principle!)

This is foundational to Graham’s philosophy. Many think they are investing when they are actually speculating—like mistaking a casino for a bank.

What is Speculation?
- Ignoring a company’s fundamentals, only caring if the stock price will rise or fall tomorrow.
- Jumping in based on tips or stock charts, hoping to strike gold quickly.
- Obsessing over “buying low and selling high,” trying to predict short-term market sentiment.
- Plain speak: You’re not buying “a company,” you're buying “a lottery ticket,” betting it will win.
What is Investment?
- Basing decisions on thorough research, prioritizing capital preservation, and seeking reasonable returns.
- Buying a “fractional ownership” of a business, focusing on its ability to generate sustainable profits.
- Plain speak: You're acting like a part-owner, buying into a business you understand and believe has a future.

Graham Warns: Never confuse the two! You might occasionally gamble with pocket money (if you must), but never risk your retirement savings or hard-earned capital on speculation while deluding yourself it's "value investing."

2. Being Led by the Nose by "Mr. Market"

Graham created a vivid fictional character called “Mr. Market.”

Imagine you and "Mr. Market" co-own a company. This partner is emotionally unstable, like someone with bipolar disorder:

In euphoria: He excitedly offers wildly inflated prices to buy your shares, convinced the future is endlessly bright and everything is valuable.
In despair: He dejectedly offers ridiculously low prices to sell you his shares, convinced the sky is falling and everything is worthless.

The Behavior to Avoid:

Euphoric with him (FOMO - Fear Of Missing Out): Seeing prices skyrocket, you chase the rally in a panic, terrified of missing out. Result: Buying high, becoming the "bag holder."
Despairing with him (Panic selling): Watching prices plunge, you frantically dump solid companies at rock-bottom prices.

The Smart Approach: Treat him as a tool, not a mentor. When he's depressed, buy good companies cheaply. When he's euphoric, either sell shares to him or ignore him entirely, calmly carrying on as a shareholder.

3. Buying Without a "Margin of Safety"

This is core to Graham's risk management. What is "Margin of Safety"?

An analogy: A bridge is designed to hold 30 tons, but regulations limit traffic to 10-ton vehicles. That 20-ton buffer is the margin of safety. It ensures the bridge won’t collapse easily despite surprises (like an overloaded truck or structural wear).
In investing: Analyze a company’s assets, earnings, etc., and estimate its intrinsic value per share is $10. If you only buy when the price falls to $5-6, that $4-5 difference is your margin of safety.

The Behavior to Avoid: Paying $10 or even $11 for a company worth only $10. If your calculation is slightly off or the company faces trouble, your capital faces immediate loss risk. Without that cushion, the fall hurts badly.

4. Obsessing Over "Predicting the Market"

Graham believed no one can consistently predict short-term market movements. Those claiming they can are either frauds or fools.

The Behavior to Avoid:

Wasting energy analyzing macroeconomic trends or policy shifts to guess next month’s market direction.
Believing so-called "stock gurus" who predict specific price levels.

The Smart Approach: Focus energy on what you can control—researching the company itself and assessing its value. We can't predict the weather, but we can carry an umbrella. That "umbrella" is your margin of safety and deep company understanding.

5. Chasing "Hot Stocks" and Seductive "Growth Stories"

Many love buying "glamour stocks" splashed across headlines, often boasting compelling "growth narratives" (e.g., "We'll disrupt the whole industry!").

Graham Warned:

Too Expensive: Market optimism is usually baked into their sky-high prices, reflecting overly optimistic years of future growth. Buying now leaves little or no "margin of safety."
The Growth Trap: Many so-called "growth stocks" fail to deliver their promised growth. A single earnings miss can trigger a catastrophic plunge.

The Smart Approach: Focus more on unglamorous, overlooked companies with solid businesses, clean finances, and reasonable valuations. It’s like sifting sand for gold, not grabbing wildly overpriced diamonds at jewelry stores.

To Sum Up

What Graham urged us to avoid reflects human weaknesses: greed, fear, laziness (avoiding research), and overconfidence (thinking we can predict markets).

He taught us discipline:

Distinguish Investment from Speculation: Be a business owner, not a gambler.
Manage Emotions: Use the market, don’t let it use you.
Insist on a Margin of Safety: Buy cheaply, leaving room for error.
Focus on Company Value: Study what you understand; skip what’s unpredictable.

Uphold these principles, and you're on the path to becoming an "Intelligent Investor." Best wishes for your investment journey!