Do Your Investments Make You Rich? If Not, Then I Have a Way Out

How about starting today's piece with this shocker from Charlie Munger?

• 'I have to say, Ben Graham had a lot to learn as an investor. His ideas of how to value companies were all shaped by how the Great Crash and the Depression almost destroyed him, and he was always a little afraid of what the market can do. It left him with an aftermath of fear for the rest of his life, and all his methods were designed to keep that at bay.'

This quote shattered me when I first read it.

I consider Ben Graham as my most favorite investment guru. I owe a big part of my career to his ideas and principles.

Hence, reading about him being criticized was too much to take. Even if the man doing the criticising was also among my favourite.

I initially put it down to Munger's pride. I thought that Munger hasn't read Graham as well as Buffett has. Or for that matter as well as even I have. And therefore, his comments lacked complete knowledge of the man.

To be fair to Munger, he did acknowledge that Graham was a very good writer and perhaps the only intellectual in the investment business of the time.

However, he was adamant that both he and Warren Buffett were better investors than Graham. This man really doesn't hold back, does he?

Few days back, I came across the same quote by accident. This time though, I did not feel the kind of unease I felt the first time.

To be honest, I now think that Munger could well be right. Yes, you read that right.

My all-time favorite investment hero was a genius no doubt, but he was still a product of the time he was living in. And Munger's assessment, despite being brash, seemed to be bang on after all.

You see, Benjamin Graham had seen 'The Great Depression' up, close and personal.

In fact, he was close to being wiped out when the US stock market fell almost 90% top to bottom.

This experience scarred him for life. Although he did invest in stocks even after the mauling he had received, his approach turned extremely conservative.

He insisted on multiple layers of safety and became extremely obsessed with the idea of preservation of capital first and foremost and think of returns only thereafter.

And although this approach did work during periods of volatility and side-ways markets, it tended to underperform during bull markets. There's nothing wrong with this in my view. An investment strategy is not designed to work in all kinds of markets.

Therefore, a strategy that outperforms in a bear or a sideways market and underperforms in a bull market is perfectly fine according to me.

However, the real problem arises when there is a prolonged bull market.

One can certainly live with a bull market that lasts for 2-3 years or even a little more for that matter. But what if a bull market lasts for 5, 10 years or even more.

During such times, Ben Graham's strategy that has conservatism written all over it, may tend to underperform. Quite significantly so if you ask me.

A great example of this is Ben Graham's own last fund.

You see, just before he passed away, Ben Graham had collaborated with another investor who went by the name of James Rea.

Exchanging notes, they had settled upon the broad ideas around which this fund would be run and needless to say, it was a deep value fund that had Ben Graham's stamp all over it.

Unfortunately, Graham passed away soon after the fund was launched. However, he wouldn't have been too happy to see the fund's performance if he had been around.

As per the information I found on the internet, the Graham-Rea partnership which was later converted into a fund, was a picture of poor performance.

Between 1982 and 1999, the fund had eked out a mere 7% return. In contrast, the US benchmark index had knocked the daylights out of the fund by compounding at a whopping 19% per annum.

This is a massive underperformance whichever way you look at it.

So, what must have possibly gone wrong for Graham and Rea? Faulty stock selection? Deviation from the main principles? Or a flawed exit strategy?

Well, to my mind, the biggest reason the fund underperformed is because it ran into a massive headwind of one of the strongest bull markets in history.

As I said earlier, a strong, persistent bull market is a big risk to a Graham style ultra-conservative value investing strategy. And this risk pretty much stuck its fangs deep into the Graham-Rea fund during its ill-fated tenure.

Mind you, Graham's approach may not lose you money. It protects capital extremely well. However, for it to outperform the market, it needs a strong bear market every few years. Absent the same, its performance could turn lacklustre as we just saw.

I am sure you are aware that I have recommendation services that are inspired by the principles of Ben Graham. And their performances since inception is pretty encouraging to be honest. In fact, both of them have earned market beating returns for my subscribers.

However, the thing that keeps me up at night the most is not whether I will do a good job protecting investor capital in both these services. This, I am pretty confident, I will handle well.

What worries me is however is whether I will be able to continue outperforming. What if, like Graham-Rea fund, I run into a huge bull market that shows no signs of stopping for a good few years.

If that happens, then my services will certainly have a strong chance of underperforming. And it is the solution to this conundrum or problem if you will, I have been so desperately seeking over the last few months.

One option is of course, increase the risk in my services by trying to include growth stocks even if they don't come cheap. I can also reduce the amount of cash I am supposed to hold at any given point in time.

To be honest, I am not too comfortable with either of these choices. I don't know for sure whether the increased risk will certainly transpire into greater returns down the line. For all you know, they may end up reducing returns.

Thus, I would not want to tinker with a strategy that's working so well for my subscribers.

It is because of this reason I have decided to go with the other option.

This is the option of employing a completely different strategy, the one that works the best in a bull market and is therefore, a perfect foil to value investing.

However, does a strategy of this kind really exist? And if it does, why has not everyone copied it and benefited from it?

Well, I will provide the answer to these questions and more in the next article in the series.

I will talk about how this new strategy has an excellent long-term track record not just across the world but in India as well, where it has done particularly well over the last few years.

I will also talk about how this is one of the best times to practice this strategy in India and how it can prove to be a perfect complement to my Ben Graham style of investing.

However what I am going to reveal in the next article and the one after that, is just the trailer.

If you want to watch the full movie, join me at my online special event on Monday 20 March.

At this session, I will reveal the full details of how I have created a worry-free investing system based on this brand new strategy and how you can get access to this system.

Trust me, it will be totally worth your while.

So, here's hoping that you won't miss this opportunity and will certainly join me at this event.

Warm regards,


Rahul Shah
Editor and Research Analyst, Profit Hunter