Benjamin Graham: Stocks Ugly, Bonds Uglier
Correction: The original version of this article erroneously cited the present value of a 1981 Treasury bond as if interest was compounded at the issued rate (Treasury bonds pay simple interest). This example has been updated to use a zero-coupon Treasury bond (first available in mid-1982), that, when purchased at a discount, exhibits the characteristics of compound interest (in this case, yield to maturity).
NEW YORK (TheStreet) -- For all of the complex investment products in the world, a successful retail investor only needs two: a S&P 500 index fund and U.S. government bonds. These two investments together provide adequate diversification among equities as well as interest payments and principal guaranteed by the U.S. government.
In The Intelligent Investor, Benjamin Graham touted this approach as the best way for an Average Joe to succeed in the market (Graham's text pre-dated index funds but suggested holding a diverse basket of 10 to 30 large-cap stocks).
Warren Buffett, Graham's greatest student, has often recommended that aspiring investors start their research with Graham's book, specifically: Chapter 20: "Margin of Safety" as the Central Concept of Investment.Graham's "Margin of Safety" principal can be used to confidently guide asset allocation decisions and is easily summarized in two simple points:
- Never hold less than 25% in stocks, and
- Judge the attractiveness of stocks vs. bonds by dividing the earnings yield of the stock by the yield of the bond.
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