The Intelligent Investor
-By Benjamin Graham
Benjamin Graham is often called the father of value investing.
Graham attended Columbia University before starting a career on Wall Street.
He then founded the Graham-Newman partnership and employed Warren Buffet.
Warren Buffet benefited greatly from Graham’s approaches and subsequently wrote the foreword for this book.
Buffet is the most successful investors of all time with a net worth of over $101B as on June 2021.
Graham’s investment philosophy was always based on investor psychology, minimal debt, buy-and-hold investing, concentrated diversification, and buying within the margin of safety.
Key Learnings –
Learning 1 – Intelligent investors remember these three rules
1. An intelligent investor always analyzes the long-term evolution and management principles of a company before investing.
2.They always protect themselves from losses by diversifying investments.
3.Intelligent investors never look for crazy profits, but focus on safe and steady returns.
Learning 2 – Intelligent investors do not Rush in
One can make tonnes of money in the market but can lose a lot too. History is full of both successful and not so successful examples. So, does the investment in a stock market worth taking the risk. Well, the answer is YES, only If we are willing to learn and follow the strategies of intelligent investing.
Learning 3 – Investors don’t speculate
Intelligent investors use thorough analysis and don’t focus on short term gains. Short term gains can be termed as speculation. Its impossible to predict the market in short term and hence speculation is very risky.
Example – A Speculator might hear a rumour that a technology company will be launching a revolutionary product next month, thereby enhancing its profitability. Basis this information and assumption, a speculator might invest a large part of his or her savings in this stock. Not if this rumour turned out to be false or there is a change in the plan by the company, or market may behave negatively due to geopolitical tensions or a global crisis – like covid 19 – the entire assumption about the profitable product launch can be in doldrums and speculator might lose heavily.
Learning 4 –The Real Price of a stock
The intelligent investor understands, the Margin Between what is the value of the company or stock and pay is the margin of safety. If this margin of safety is narrow then risk increases and vice versa.
Learning 5 – Long term development and Business Principles
An intelligent investor always focuses on the real business principles of the company. It's critical to note how the company behind the stock is performing. Whether a company is paying steady dividends, what’s their quality of management and financial performance.
For example – A company that is not very popular and therefore has a lower share price but has shown consistent performance in terms of profits, and prudent management practices will be a better investment.
Learning 6 – Diversify, diversify, diversify
An intelligent investor diversifies its risk by investing in multiple companies and industries. Example A particular company might look extremely attractive today but it will make no sense to still invest 100% investable corpus in that company. Just in case this company has some unforeseen issue, huge wealth can be eroded in no time.
Learning 7 – Avoid Fast Money/ quick profits
An intelligent investor understands that they may not make extraordinary profits but focus on average and steady profits.
Learning 8 – Unpredictable Mr Market
Graham’s most famous analogy is the one of Mr Market, where he pictures the entire stock market as a single person.
If you imagine Mr Market showing up on your doorstep every day, quoting you different prices for various stocks, what would you do?
According to Benjamin Graham, you’d be best off ignoring him altogether, day in and day out. Sometimes the prices he’d tell you would seem suspiciously cheap, sometimes astronomically high. That’s because Mr Market is not very clever, totally unpredictable and suffers from serious mood swings.
As humans, we’re so good at recognizing patterns, even when nothing exists. That’s why we naturally a stock price that’s been going up for 10 days must go up further – which is of course not true.
If you want to be an intelligent investor, rely on your research and ignore the market altogether.
Learning 9 – Formula Investing
In case you want to be free from the stress of investing each month, the better idea is to stick to a Formula – Dollar Cost Averaging.
It’s simple, like a SIP – Simply Pick up the stocks you want to invest in and then allocate a certain amount monthly, weekly or even daily to invest. This will help average out since you will buy more stocks when the market in a downturn.
This is a great way to protect yourself against big loss which might occur in case you invest a large amount just before a BIG crash.
Learning 10 – Don’t let your age influence your investing decision
General wisdom suggests that as you age, you should start allocating more towards fixed income-generating bonds. But Graham believes, that choosing which type of investor you should be is based on your willingness to put time and effort into your portfolio and your circumstances. It should not be dependent on your appetite for risk or your age.
Before choosing how you invest, you should consider the following factors:
· Are you single or married? Does your partner work, and how much money do they earn?
· Do you have children? If not, do you want children? When will high costs, such as college education, kick in?
· Will, you inherit money at some point? Or, will you have to spend money keeping a parent in a care home?
· Is your job secure?
· Do you need your investments to supplement your cash income for you to survive? If so, you should have more money in bonds
· How much money can you afford to lose on investments?
The Intelligent investor core principle lies in investments basis research and understanding of the fundamentals of the company. Two ways of doing this can be - One investing in low costs index funds and second, a talented and capable financial advisor.
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