Recommended Read: Benjamin Graham On Value Investing
Benjamin Graham is known as the father of value investing. This book was given to me by an old boss who was a portfolio manager at Invesco. He molded and shaped my view on investing and business. This book, if you're a reader will give you some insight into my brain and how I look at investing your capital.
There is a quote from the book on page 113 that stuck out to me and applies to the higher inflationary times we are living in.
“The volatility of money is of fundamental importance to an investor, because if the market goes up but the value of the dollar declines, the investor makes no real gain. Ben began to theorize that recessions and depressions were triggered by the inability of consumers to purchase the increased production that results from an economic boom”
Interpretation: The quote emphasizes the importance of considering the effects of inflation on investment returns. Graham points out that even if the stock market rises, a decline in the dollar's value means investors may not experience real gains in purchasing power. He theorizes that economic cycles, particularly recessions and depressions, are often triggered by a disconnect between increased production during economic booms and consumers' inability to purchase those goods. This highlights the need for investors to focus on real returns and the broader economic context when making investment decisions.
This made me reflect on today’s economic environment, particularly inflation. In recent years, the U.S. and many other economies have experienced significant inflation, driven by post-pandemic consumer demand and expansive fiscal policies under both the Trump and Biden administrations. This aligns with Benjamin Graham’s warning that nominal stock market gains can be deceptive if inflation erodes purchasing power. One of the clearest examples is the housing market, where prices have skyrocketed. Homes that sold for $200,000 in 2020 are now priced at $400,000—without any value-add improvements or increased demand in the area. While I won’t dive into all the leading indicators, many top analysts and investment funds are signaling a potential recession in the coming months. If that happens, high-multiple growth stocks will likely face steeper declines than quality businesses with reasonable valuations and sustainable growth rates.
A well-balanced portfolio should include both value and growth stocks or funds. This diversification helps cushion against downturns—when high-multiple tech stocks struggle, the value-oriented portion of the portfolio tends to experience smaller drawdowns or even gains. As one of my former bosses once told me, 92% of a portfolio’s return comes from asset allocation, not just stock selection. While picking a home run stock is great, a well-diversified portfolio of quality companies will outperform a portfolio concentrated in speculative assets over time. Take ARKK as an example—it soared during its peak, but when interest rates rose in 2022, it came crashing down. The key takeaway? A strong portfolio isn’t just about maximizing paper gains; it’s about minimizing drawdowns through proper risk management and diversification. Your long-term success depends not just on what you earn in bull markets, but on how well you protect your capital when conditions turn negative.
