Ben Graham's three approaches to investing

[Steve]

Benjamin Graham, who lived through and studied the stock market crash of 1929 developed three approaches to investing. These three were labeled by him as the cross section approach, the anticipation approach, and the margin of safety approach. The cross section approach is now seen as index investing. This cross section or indexing approach is all about having a diverse portfolio. To do this, an investor would purchase equal portions of 30 companies listed on the Dow Jones Index. The anticipation approach was broken down into short term selectivity and growth stocks. With short term selectivity, the investor purchases stocks of companies that look to have the most favorable outlook in the next six months to year period. Graham did not like this approach because he felt the value of an investment should not be based on what it can earn in a short period of time, but instead over a long period of time. Short term sales can be volatile and should not be used to base the value of an investment on. The margin of safety approach was one that Graham subscribed to. To do this, Graham would analyze the history of a company. He would only purchase the stock if it was priced at less than 2/3 the value of the company's net current assets. He felt this discounted price would provide him with a margin of safety enough to protect him from an unexpected decline in revenue.

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