Benjamin Graham’s book, “The Intelligent Investor,” is a compilation of the lessons he learned as a young investor. Even though the book was written in 1949, it is still in print and considered something of a bible by many value investors.
Graham’s main principles require a long-term approach in order to be more risk-averse but it’s one that works as Warren Buffett and countless others who have made their fortune using the intelligent investor strategy can attest to.
With Benjamin Graham’s principles, you’ll learn why you should ignore Mr. Market, why it’s better to examine long-term value, and how to use “dollar-cost-averaging” strategy in order to mitigate the risks of higher volatility.
Key Points From The Intelligent Investor
- Intelligent investors take their time to examine a company’s long-term value. They analyze the long-term development and look at the bigger picture.
- Intelligent investors diversify their investments to protect themselves against losing everything at once. They play it steady and carefully. They buy only when an asset price is undervalued.
- Crashes are inevitable so intelligent investors are prepared for high and low points both financially and mentally. They ensure they can take a hit and survive it as it will happen at one point or another.
- Intelligent investors take the inflation rate into consideration. (If, for example, you calculate a 7% return on your investment within 1 year, but inflation is at 4%, you’ll only earn a return of 3%, this calculation might make you realize that this investment may not be worth the effort).
- The market is a pendulum that forever swings between unsustainable optimism (which makes assets expensive) and unjustified pessimism (which makes them too cheap).
- With every new wave of optimism or pessimism, we are ready to abandon history and time-tested principles, but we cling tenaciously and unquestioningly to our prejudices.
- The intelligent investor doesn’t trust, nor follow, the crowd of investors or the market. Intelligent investors are realists who ignore Mr Market’s mood swings and resist the temptations he puts their way.
- A sound investment is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.
- An intelligent investor is neither right or wrong because others agreed or disagreed with him; he is right because his facts and analysis are right.
- Intelligent investors know their personality and risk profile. (For example, if you’re more of a defensive investor, for example, then don’t overstretch yourself).
- Intelligent investors use “dollar-cost-averaging” strategy in order to mitigate the risks of higher volatility.
- Intelligent investors thoroughly analyze an asset and the soundness of its fundamentals on an ongoing basis. They invest only if they would be comfortable owning an asset even if they had no way of knowing its daily price.
- An intelligent investor does not panic as soon as there’s a drop in the market. He sells only when the fundamentals and the long-term view of the asset change.
- Those who do not remember the past are condemned to repeat it.
- Intelligent investing isn’t about beating others at their game. It’s about controlling yourself at your own game.
- A stock is not just a ticker symbol; it is an ownership in an actual business, with an underlying value that does not depend on its share price.
- Some speculation is necessary and unavoidable. But there are many ways in which speculation may be unintelligent. Of these the foremost are: (1) speculating when you think you are investing; (2) risking more money in speculation than you can afford to lose.
Lesson #1. Don’t Rush In
Intelligent investors take their time to examine a company’s long-term value and evaluate whether investing is worth the risk. Intelligent investors buy an asset only when its price is undervalued — remember, you’re in this for the long run.
This method is in contrast with the short-term game of speculating, in which investors focus on short-term gains made possible by fluctuations in the market (i.e investing in a stock just because the trend is up or because there are rumors). This is a risky game due to nobody being able to predict what the market will do tomorrow and one that the intelligent investor steers clear of. The key is to
Lesson #2. Look At The Bigger Picture
Analyze the long-term development and business principles of the assets you’re considering investing in because an asset’s long-term value depends on how well the company behind it is performing.
Forget its short-term earnings and instead look at the bigger picture - the company’s financial structure and financial history, whether it’s making consistent profits, and whether the dividends it pays are steady.
You should look at the management too, all of this will help you learn how well the company performs so that you can find some hidden gems to invest in. These companies might be unpopular now, but this allows a prudent investment as the currently undervalued company is likely to become popular in the future - be the early bird and grab the worm.
Lesson #3. Be prepared both financially and mentally
There have been ups and downs in the market since it was invented with the fluctuations unpredictable and crashes inevitable this means that the intelligent investor needs to be prepared for high and low points both financially and mentally. Ensure you can take a hit and survive it as it will happen at one point or another.
You should consider the stability of the overall market you’re investing in and look back at its trends through history before looking closer at the stock in question. Additionally, the correlation between asset price and the company’s earnings or dividends over the last decade is an important factor when making your decision as is
Lesson #4. Don’t Follow The Sheep
Imagine that the market you’re investing in as a person called Mr Market for a moment - This man is moody, unpredictable, not that intelligent, and is easily influenced which causes his erratic mood swings that swing from optimism to pessimism.
Sounds just like the real market doesn’t it?! Mr Market gets caught up in the excitement of a new product release - He becomes overly optimistic about future growth and we see the stock prices go up with people willing to overpay to get their hands on them. His happiness makes people see future profits that don’t exist. On the other end of the scale, Mr Market’s mood changes and he becomes too pessimistic, warning people to sell despite the circumstances being unwarranted.
The intelligent investor doesn’t trust, nor follow, the crowd of investors or the market. Intelligent investors are realists who ignore Mr Market’s mood swings and resist the temptations he puts their way. They remember that an asset that is performing well does not necessarily remain high forever due to demand inflating the price to breaking point. They know that even when they think they see patterns, they are not always going to continue, no matter how much the mind wants to believe it.
Lesson #5. Know Your Risk Profile
Generally speaking, there are 2 strategies to choose from when you become an intelligent investor, you can be a defensive investor or an enterprising investor, the one you pick should be based on your personality and how much you love or fear risk.
The defensive investor hates risk so seeks safety which is achieved by diversifying investments. It’s not only your overall portfolio that should be diversified between asset classes, the defensive investor also has a diversified stock portfolio. It can be mind boggling to decide which stock to invest so you can look at the portfolios of well-established investment funds with a long history of success and copy what they’re doing.
Compared with the defensive investor, the enterprising investor is not as scared of risks so opts for investing more in high growth stocks since these can be more profitable. The enterprising investor prepared to take risks with a certain amount of money, never investing more than a certain percentage (for example, 10%) of their overall portfolio in these high risk assets.
Lesson #6. Use Dollar-Cost-Averaging
Once you’ve selected the companies and assets you want to invest in, and determined how much you want to invest in each, most of the hard work is complete, all you have to do now is check the assets on occasion to see how they’re performing.
Using dollar-cost-averaging you can easily determine how much money to invest and how often. This should be strictly followed according to the predefined formula whereby you invest the same amount of money every week/month/quarter.
When you’re happy that the asset is performing well and have determined it to be a safe and sound investment you can set your investments on autopilot.
By selecting a figure that you stick to rigidly you won’t end up gambling your money away by investing too much in one go. It can be emotionally demanding to stick to that figure when the price of the stock you want is a steal and you want to buy more but it’s a formula that keeps the defensive investor out of harm’s way.
Lesson #7. Focus on Fundamentals
An intelligent investor does not panic as soon as there’s a drop in the market. He or she does not sell immediately only to then invest in a rising asset like a typical speculator. They know not to trust Mr Market and pause to ask themselves “what’s my conviction in the fundamentals of the company?”, “What are my long-term views?”, or “Is the management still doing a good job?”. Only when the intelligent investor realizes that the fundamentals of the company and its long-term view change do they sell.
Favorite Quote from The Intelligent Investor
investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”
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Tal Gur is a location independent entrepreneur, author, and impact investor. After trading his daily grind for a life of his own daring design, he spent a decade pursuing 100 major life goals around the globe. His most recent book and bestseller, The Art of Fully Living - 1 Man, 10 Years, 100 Life Goals Around the World, has set the stage for his new mission: elevating society to its abundance potential.