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Benjamin Graham’s Value Investing Principles in the Modern Economic Climate Relevance: A Case Study of the 2008 Financial Crisis

The 2008 financial crisis shocked the US policy makers who thought they had full control of the economy. Under normal circumstances, the annual world per capita output expands by 2.2%; however, the 2008 financial crises caused a 1.8% contraction of the annual world per capital output. Money and asset markets across the globe felt the effect of the 2008 global financial crises for at least five years and some countries are still experiencing immerse interference of the crises. In assessing the massive destructions, economists have often desired to review the various value investing principles by Benjamin Graham, Warren Buffett, Joel Greenblatt and David Dodd.

Benjamin Graham’s value investing principles and the modern investing principles insist that investors ought to take a stringent analysis of the economic condition before they can make a wise investment decision (Scott 12). The US economy started showing ill signs in mid 2007. Stock markets around the globe had fallen drastically, and there was a sign of a crisis when universal markets started falling. United States is one of the wealthiest nations, and prior to the 2008 global financial crises, the US government had started introducing rescue packages that would help in securing their financial systems (Mendoza 48). According to Benjamin Graham, that was a very risky period, and wise investors should not have invested during that period. The investors who invested in money and stock markets later in 2007 were not wise investors because they invested when the economy was unstable. While investors ought to be risk takers, excessive risk taking can make one to suffer massive losses. In the real sense, the investors should have sought rescue packages just as the US government did.

After the global financial crisis, economists sought to identify the underlying cause of the crisis. According to research reports, the main cause of the crises was the inappropriate financial regulations. Certain prominent financial intermediaries had taken excessive risks that portrayed unproductive rewards. The esteemed financial sector of the US pursued a very risky path that eroded major financial institutions (Ohanian 15). In early 2007, the principal mortgage system of the US collapsed, and soon after that, prominent financial institutions started becoming bankrupt. The scenario presented much insecurity in the value of assets and wise investors decided to hoard their capital investments. In fact, for Benjamin Graham, that was the wisest decision for investors because it is not worthwhile for one to invest in an unstable economic climate. Many institutions depend on finances invested by shareholders, and if shareholders hold back their monies, the organization’s liquidity may dry up. Therefore, the organization’s demand for employees’ decreases and some employees are laid off. Therefore, the money supply in the economy reduces and people’s purchasing power decreases drastically. Benjamin Graham is an eminent investor who insists that investors, whether individuals, organizations, or government representatives should always seek investment advice from experts to prevent the adverse consequences of the reckless investment decisions.

In relation to the 2008 global financial crisis, investors ought to consider Benjamin Graham and David Dodd’s investment principles. In investing, investors takes risks, and they are psychologically prepared that they may either make profits of losses. However, it is necessary for the investor to take a stringent analysis of the company to invest. Investors ought to consider investing in institutions that have a strong financial position to be at a safe margin. It is necessary to study the financial trend of an organization. The probability of an organization with a stable financial trend to collapse is lower as compared to an organization with an unstable financial trend. Benjamin Graham insists on 10 value investments principles.

  1. Investors should consider buying low price-to-earning shares. Research indicates that the low price-to-earning shares have a low investment risk, and they outperform in the market in the end.
  2. Low price-to-cash flow shares are worthwhile because strong cash flows places the company at a strong liquidity position.
  3. Low price-to-book value shares are worth purchasing because investors are protected from the potential downside risk.
  4. It is necessary to understand the intrinsic value of a company so that investors can buy stocks when they are trading at a discount.
  5. Study the long-term debts of a company because low-debt companies can manage their debts effectively during tough economic conditions as compared to high-debt companies.
  6. Consider the company’s catalysts as some companies may have political, consumer or environmental catalysts that would affect stock prices at particular times.
  7. The ownership and management of a company is worth accessing as it determines the strength of the company.
  8. The business strategy to meet certain goals is worth investigating, as the set strategies will determine the future of the company.
  9. It is necessary to access stock prices as companies that have recently exhibited improved earnings are more likely to maintain the trend as compared to those displaying sluggish earning.
  10. It is necessary for an investor to take a technical analysis of the historic stock prices. Stocks that trade within a narrow upward trend are more likely to maintain the trend as compared to stocks with inconsistent trends.

Benjamin Graham’s 10 investment principles apply in the modern economic climate. Since shocks are probable happenings in any economy, the 10 principles would act as a shield to protect the investors (Scott 14). Many investors would regard the US economy as a very stable economy, and investors may take little protective measures. However, the 2008 global economic crises was a revelation to investors and governments. The 2008 financial crisis reveled that maintenance of a stable economy is not an insulator to external shocks. Like many other nations, the global economic crises adversely affected the US economy. Investors lost millions of dollars, where some went to the extent of committing suicide because they could not withstand the massive losses. The 2008 crises should act as a baseline for smart investors. If investors employ the 10 investment strategies in their investment decisions, then a financial crisis would subject them to a lower risk of losses as compared to making reckless investments.

Despite the risks associated with investments, the most motivating part is that smart investors reap millions of dollars without necessarily having to work hard. All that investors need to know is that investment is a risky game (O’Neill and Xiao 18). The probability of generating millions of profits is equal to the probability of engendering losses worth millions. In any case, companies heavily depend on funds from investors to run their daily activities and expand their businesses. While the government has the responsibility of enforcing policies that ensure that the country is at a sound economic state, the investors have the responsibility of ensuring they invest wisely.

References

Mendoza, Enrique. “Sudden Stops, Financial Crises and Leverage.” American Economic Review Journal 5.6 (2010): 45-49. Print.

O’Neill, Barbara and Jing J. Xiao. “Financial Behaviors Before and After the Financial Crisis: Evidence from an Online Survey.” Journal of Financial Counseling and Planning 23.1(2012): 15-27. Print.

Ohanian, Lee. “What or Who Started the Great Depression.” Journal of Economic Theory 11.5 (2009): 1-68. Print.

Scott, Maria Crawford. “Value Investing: A Look at the Benjamin Graham Approach.” AAII Journal 11.6 (2005): 12-15. Print.

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OctoStudy. (2022, March 23). Benjamin Graham’s Value Investing Principles in the Modern Economic Climate Relevance: A Case Study of the 2008 Financial Crisis. https://octostudy.com/benjamin-grahams-value-investing-principles-in-the-modern-economic-climate-relevance-a-case-study-of-the-2008-financial-crisis/

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OctoStudy. "Benjamin Graham’s Value Investing Principles in the Modern Economic Climate Relevance: A Case Study of the 2008 Financial Crisis." March 23, 2022. https://octostudy.com/benjamin-grahams-value-investing-principles-in-the-modern-economic-climate-relevance-a-case-study-of-the-2008-financial-crisis/.

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OctoStudy. 2022. "Benjamin Graham’s Value Investing Principles in the Modern Economic Climate Relevance: A Case Study of the 2008 Financial Crisis." March 23, 2022. https://octostudy.com/benjamin-grahams-value-investing-principles-in-the-modern-economic-climate-relevance-a-case-study-of-the-2008-financial-crisis/.

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OctoStudy. (2022) 'Benjamin Graham’s Value Investing Principles in the Modern Economic Climate Relevance: A Case Study of the 2008 Financial Crisis'. 23 March.

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