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.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV