According to Warren Buffett, The Intelligent Investor is “by far the best book on investing ever written. Benjamin Graham is a true visionary who made investing simple and accessible to everyone, but 99% percent of people still don’t follow his advice. Read on to find out all the most important concepts of the Intelligent Investor.
Investing & Speculation
The first thing that Graham discusses is the difference between investing and speculation. Investing is buying stocks with a long-term view and with the intention of holding them for many years.
This approach focuses on fundamental analysis and value investing principles.
Speculation, on the other hand, is buying stocks with the intention of selling them quickly for a profit.
This involves taking on higher risks with the hope of earning higher returns in a shorter time frame.
While it may be wise to avoid speculation altogether, Graham says there’s nothing wrong with speculating using a small portion of your portfolio but the problem is when people start confusing the two and start speculating while thinking they’re investing.
So it’s best to have separate mindsets for them and even keep the money in different accounts.
To what extent you should speculate depends on your personal investment goals, risk tolerance, and investment philosophy, but guessing what will happen next especially in the short-term is not an approach many people will find success with
Another key concept is the importance of understanding the intrinsic value of a company and how to calculate it.
One of the great things Ben Graham did in the book was translating difficult concepts like net working capital and return on equity into simple language like price and value.
He explained how to identify a company’s value while realizing that it is not something that can be easily identified exactly.
However he makes it clear that you can do a pretty good job if you put your mind to it.
Intrinsic value is the true value of a company based on its assets, earnings, and potential for growth.
Graham believes that investors should only buy stocks that are trading at a discount to their intrinsic value.
This is tricky nowadays when some of the top companies tend to be always overpriced but this explains why Tesla for example is much closer to a speculative investment because its stock market value relies on the brand’s popularity rather than the company’s assets or sales.
Margin of Safety
Another thing Graham talks about is the margin of safety. Graham learned the importance of this the hard way when he lost 70% in the Great Crash between 1929 and 1932 when he himself tried to play the market with leverage but the market just kept going down.
This principle means you should buy stocks that are priced well below their intrinsic value, giving you a cushion in case things don't go according to plan. This is important because even the best companies can face temporary setbacks, and having a margin of safety can protect your investment.
Graham also talks about the different types of stocks and the different ways to approach investing based on an individual's goals and risk tolerance.
He talks about the concept of defensive investing, which involves buying stocks that are less risky and more stable. This is a great approach for investors who are more risk-averse or looking for more consistent returns.
Graham talks about Mr. Market to describe the stock market's tendency to swing between optimism and pessimism, sometimes with little regard for the underlying value of the companies being traded.
Mr. Market is portrayed as a character who comes to you every day and offers to buy or sell stocks at different prices. The prices he offers can be influenced by a wide range of factors, including news events, investor sentiment, and the overall health of the economy.
Graham's advice to investors is to view Mr. Market's offers as opportunities to buy or sell stocks at prices that may be higher or lower than the intrinsic value of the underlying companies.
The Intelligent Investor does not buy or sell stocks just because the price changes.
But Graham believes that by taking advantage of Mr. Market's irrational swings, investors can buy stocks at a discount during times of pessimism and sell stocks at a premium during times of optimism.
This metaphor highlights the importance of remaining calm and rational in the face of market fluctuations and using them to your own advantage.
By focusing on the intrinsic value of companies and taking advantage of market volatility, investors can potentially generate strong returns over the long term.
The Intelligent Investor teaches the importance of long-term investing and avoiding speculation.
The need to understand the intrinsic value of investments you make.
And it’s always great to have a margin of safety if you can.
Finally, have a plan based on your goals and risk tolerance and use the whims of Mr. Market to your advantage rather than reacting emotionally.
Even though the book was first published many decades ago, its teachings and the understanding of fundamental analysis are the same as before. The value investing approach hasn’t changed even if some of the company’s valuations would seem strange to Ben Graham if he were alive today.
Still it's a great book for anyone who wants to learn more about the principles of investing in a smart way.
Being ahead of his time, he wrote about how our psychology affects our decisions, which later became the study of behavioral finance.
All the best and see you soon!
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