I am in the middle of re-reading Benjamin Graham’s classic book, The Intelligent Investor, and I came across a quick blurb that I can’t stop thinking about (well maybe that is an exaggeration, but I l do really love the quote). For the uninitiated, Benjamin Graham is basically the father of value investing. He is the main reason that Warren Buffett chose to go to Columbia University, and in the Fourth Edition foreword, Warren Buffett is quoted as saying the book is the best book about investing ever created.
In the introduction Mr. Graham states,
In an article in a women’s magazine many years ago we advised the readers to buy their stocks as they bought their groceries, not as they bought their perfume. The really dreadful losses of the past few years (and on many similar occasions before) were realized in those common-stock issues where the buyer forgot to ask “How much?”
The book is well-footnoted, but for some reason, this paragraph does not give any indication as to where I can find the article, as such, I feel it necessary to provide my own interpretation that will be read by tens of hundreds of people.
What Does It Mean to Buy Stocks Like Your Groceries?
While grocery shopping most people ask, how much is that pound of meat? A gallon of milk? six packs of beer? etc. While keeping in mind the price they then remember the perceived value and the actual utility of the staple they are buying stocks. For example, the pound of steak will provide 2 nights of dinners.
This is not the same for some consumer goods. The difference between a $30 bottle of perfume and a bottle of $120 perfume is likely not to be based on ingredients alone. It is the perceived value that the marketer is paying.
As mentioned, since I didn’t read the actual article I believe that Graham may be telling us, as investors, to:
- Look for “Sales” or “Deals” – A pound of meat is usually priced at $X, but if we can buy it at $X-Y then we are getting a deal. The same could be said for actual companies.
- Not be swayed by hype and marketing – There are some consumer goods, like perfume, that people buy where how much is almost not even asked, and as important, WHY is it priced that high? If the underlying equity is trading at a 3-digit price-to-earning ratio (or heaven forbid a negative one) you may be buying the hype.
- Remember previous transactions – The grocery shopper in the household remembers that he or she bought eggs at $X last week, and as such, you need to remember that if they move significantly higher or lower you have to ask yourself, “Why?”
Do you think there are any other interpretations I could be missing?