7 Timeless Value Investing Principles From 1922 - Novel Investor

12/03/2023, 21:30 7 Timeless Value Investing Principles from 1922 • Novel Investor
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7 Timeless Value Investing

Principles from 1922
July 13, 2022 by Jon
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The stock market is a giant distraction machine that drives

investors to act against their best interests. The daily price
swings. The clickbaity headlines. The 280-character hot takes on
social media. Every bit of it feeds speculative urges and
subtracts from long-term success.
What does matter? Timeless investing principles exist to remind

us of the simple concepts that drive success. Focusing on the
long run, avoiding excessive risks, keeping costs low, limiting the
number of trades, and understanding what’s in your portfolio
are examples of common sense ideas that have kept investors
out of trouble for a few centuries.
A case in point is a list of investment principles by Morrell

Walker Gaines in his 1922 book, The Art of Investment, that could
have been written yesterday. He intended for the book to be a
foundation for the average investor to learn from and build off.
What’s interesting is that Gaines had similar beliefs as Ben

Graham. His seven principles are based on value, prioritize
investment over speculation, and proposed that investing
should be treated as a business.
“ These principles are based upon the rotation of values

and upon investment for the long pull.
https://novelinvestor.com/7-timeless-value-investing-principles-from-1922/ 1/6
1. The first principle is that business will come back. It will

neither remain depressed nor exalted.
2. The second principle HOME

is that security prices are LIBRARY
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governed by the course of business and the related
changes in credits. The extremes of high and low in stocks
are displays internal to the market and are ironed out
after a time by stronger external forces. It is only in a
limited sense that the stock market forecasts business…
The ends of market movements, the height and depth of
speculation, almost invariably over-run the real trend of
business and go counter to the true outlook, because
speculative forces have been aroused into motion and
have gained a momentum which carries them to
extremes. When business changes become too imminent
to be ignored, there is a sudden discounting of what
should have been gradually discounted before, and a
sudden wide change in prices follows.
3. The third principle of investment is that only the

upbuilding companies, already strong against storm and
depression, are worth investing in. Fairweather
companies, weak in the cash box and poor in credit, may
serve excellently as pawns of speculation but are false
media of investment. It is in the speculator’s sphere to
take chances of bankruptcy in return for chances of
making quick profits. But the investor wants to take no
chances of having to make a fresh start from the bottom.
It is, however, true that this rule of investment values

should not be rigid. In time of prosperity, when increased
risks can be looked for later, strong companies should be
adhered to. In time of depression, after the storm is over
and it can be clearly seen that business improvement will
lighten risks, it is safe enough and quite profitable to take
on second-grade companies, provided one knows they
are not in danger of difficulties…
There are times of greater and times of less risks, and

there are ways of analyzing and appraising risks and of
protecting against them. For most people, and at most
times, the simple principle of sticking to investment in
solid, progressive companies and first-class securities is
by far the best; and of avoiding the dangerous attempt to

increase income by purchasing securities of extra high
yield. It is quite common for investors to run a
disproportionate risk asHOME
to principal,ABOUT
which is all that they
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have, for the sake of an inconsequential increase in
income, from holding inferior bonds and stocks.
4. The fourth principle of investment is that the type of

securities should be chosen which best suits the purpose
of the investor. He should have a definite object in mind
and choose a fit security of a fit company. The investor
has to run his investments like any business undertaking.
If he has all of his money in stocks, which are a proper
investment in their place and time, he has subjected
himself unreservedly to the major risks of the unexpected
changes in markets and conditions…
The investor should have a cash reserve, so that if there is

a slump in security prices he can go into action and buy
cheap, instead of being put out of action by being loaded
up with securities that have depreciated. He also should
have a solid substratum of bonds or notes, long bonds if
bonds are cheap, short bonds or notes if bonds are high.
These securities should be diversified and strong, so that
they may bring him assured income through any
depression and be available for realizing cash at need, or
to buy other securities at low prices.
5. The fifth principle of investment is that the value and

the price of a security are to be weighed and the risk of
loss set over against the chance of profit. At the price paid
the risk should be less than the chance of profit. It is no
uncommon mistake to take major risks for minor profits
both with bonds and with stocks. The real skill and
discernment of investment exhibit themselves nowhere
more than in appraising risks. If it can be discovered
when and where risks have been exaggerated in the low
ness of price, the major profit follows as a natural
corollary.
6. The sixth principle to be observed by the investor,

partly covered in the preceding paragraphs, is that the
phase of business cycles and security prices which
determines both value and risks also determines the kind

of security to be bought. Each stage of the business
progress – prosperity, depression, and transition has its
most appropriate type of securities.ABOUT
HOME Each phase ofLIBRARY
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security market cycle also presents its best types and
opportunities…
He is in position to watch the tides of the market, not too

closely nor with too much absorption, and to change
deliberately from what has become high to what has
become cheap; or, if nothing is cheap, then to a Treasury
note or some other short maturity that will not decline in
price. He can take opportunities as he sees them,
governing himself by the long-distance view.
7. The seventh principle of investment, the most general

and underlying all others, is that the investor must know
all the elements of his investment — the company, the
security, the stage of business and of market prices, and
the outlook for credit and banking. He must understand.
Where he knows, he can invest. Where he does not know,
he is only speculating…
Really to know any security requires solid work; to have

wide knowledge of securities requires a great deal of work
— simple but abundant work. Such knowledge is the
basis of sound investment.
Source:
The Art of Investment
Related Reading:
The Timeless Art of Investing from 1888
100-Year-Old Investment Advice
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12/03/2023, 21:30 7 Timeless Value Investing Principles from 1922 • Novel Investor

HOME ABOUT LIBRARY QUOTES TOOLS

7 Timeless Value Investing

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The stock market is a giant distraction machine that drives

What does matter? Timeless investing principles exist to remind

A case in point is a list of investment principles by Morrell

What’s interesting is that Gaines had similar beliefs as Ben

“ These principles are based upon the rotation of values

1. The first principle is that business will come back. It will

2. The second principle HOME

3. The third principle of investment is that only the

It is, however, true that this rule of investment values

There are times of greater and times of less risks, and

by far the best; and of avoiding the dangerous attempt to

4. The fourth principle of investment is that the type of

The investor should have a cash reserve, so that if there is

5. The fifth principle of investment is that the value and

6. The sixth principle to be observed by the investor,

determines both value and risks also determines the kind

He is in position to watch the tides of the market, not too

7. The seventh principle of investment, the most general

Really to know any security requires solid work; to have

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Sign up for more weekly wisdom.

Want to compound your investing wisdom?

Find Out More

Learning Return Tables

Search this website

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