“Buying Low” is one piece of sound advice that has stood the test of more than 100 years. Be it Warren Buffett, Benjamin Graham or other legendary investors such as John Templeton, they all stressed “buying low” for successful investing. From the Tulip Mania of 1636 to the ongoing CoViD-19 pandemic, markets have constantly exhibited boom-and-bust cycles.

As Graham said, like a pendulum, the cyclical nature of the market has never changed though reasons for optimism and pessimism could be different, and keep changing. That is precisely the reason that something as simple as “Buying Low” has worked wonderfully across market cycles.

Opportunity in stress

The father of value investing, Benjamin Graham, who lost heavily after the US Great Depression of 1929, studied deeply the nature and behaviour of the market. He understood that, for successful investing, buying at a low price and having an edge in terms of valuation provide huge advantages in the long run. He coined the term “Margin of Safety”, which in his most celebrated book “Security Analysis” he defines as buying securities below their intrinsic value.

 

Interestingly, Warren Buffett, considered this as one of the pillars of his investing style, the most important idea that Graham has offered this world.

“Be fearful when others are greedy and greedy when others are fearful” –Warren Buffett

 

Both, excessive fear and greed are enemies of prudent investors. When we wait for the right price and have an adequate margin of safety, we have a sound advantage in protecting capital and ensuring adequate returns. Securities tend to trade at a discount, sometimes a deep discount, to their intrinsic value when excessive fear floods the market.

 

Invest at the point of maximum pessimism” –John Templeton

At times of fear and heightened pessimism, securities can be bought at a deep discount. What is interesting is that this discount could be purely based, other than on fundamentals, on factors such as risk-aversion, sentiment, liquidity and speculative selling.

How does this help?

Ben Graham clarified that, if one purchases with enough of a margin of safety, the impact of unknowns or errors can be minimised in a falling market. Mistakes are part of investing, and a decent safety margin can suffice for these errors of misjudgement and miscalculation. Moreover, it can offer a shelter when stock prices are pummelled by the mistakes of others. A crisis such as CoViD-19, which has arisen suddenly, has crippled markets. No one had thought or predicted something like this could happen and throttle the markets so markedly. The epicentre of the 2008 sub-prime crisis was the US, but it nevertheless tore at global markets and gobbled up vast sums of investors’ notional money.

The important lesson that all these crises and successful investors have taught us is that, most times, investors have to do nothing but wait for prices to turn attractive. One does not have to handle fickle markets. One can sit back, relax and watch others dancing the fandango.

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