There is no shortage of books on investment, markets, or finance. You can find a plethora of books giving investment & financial advice each claiming to have been written by experts. But there are only a few books that can truly say that it has been written by experts.
Today we are going to be discussing a book that has been followed by legendary investors like Warren Buffet, Irving Kahn, and Walter Schloss. Warren Buffett even went on to say, “By far the best book on investing ever written.”
Yes, we are talking about “The Intelligent Investor” by Benjamin Graham. Initially published in 1949, it has been known as the ‘ value investing bible’ in the investment world. Benjamin Graham started teaching the ‘value investing principle that he describe in the book at the Columbia Business School in 1928. The book remains one of the most popular and insightful books on investing.
Let us understand the investing principles & lessons that the book talks about:
1) Two types of investors:
The book talks about two types of investors, Defensive or Passive investors, and enterprising or active investors.
Defensive investors are careful and conservative investors that are primarily focused on minimizing risks and preserving capital while enterprising investors dedicate time and effort to analyzing and selecting stocks. They do their research and are more active in their investments.
2) Price ≠ Value:
The book emphasizes that the intrinsic value of a company is different from its market price. It’s crucial to analyze a company’s fundamentals and long-term prospects rather than rely on market sentiment. This means that a company could be undervalued or overvalued.
A good investor should do his due diligence and look at various aspects of the company to understand if it is undervalued or overvalued. An undervalued stock can be highly profitable for an investor in the long run.
“Price is what you pay; value is what you get.” – Benjamin Graham.
3) Margin of Safety:
This principle advises investors to buy stocks trading below their intrinsic value. This “safety net” reduces risk and provides better returns.
This means that if you have identified that the stock price is running lower than its intrinsic value, then you should buy stock as this not only reduces the risk (since you have bought it at a lower price) but also provides the opportunity to earn better returns when the stock value eventually appreciates, in the long run, to match its intrinsic value.
“The stock market is filled with individuals who know the price of everything, but the value of nothing.” — Phillip Fisher
4) Financial Analysis:
The book highlights the importance of understanding financial statements, earnings, dividends, and assets. Analyzing these elements helps investors identify undervalued companies with strong financials.
This is the main focus of value investing, unless you learn to look at the company data available to the public, understand it, analyze it and compare it with the industry standards, you will not be able to decide if the company is undervalued or overvalued.
Financial analysis of the company or companies play a major role in this type of investing.
“An investment in knowledge pays the best interest.” — Benjamin Franklin
5) Mr. Market:
The book used this metaphor for the stock market. Mr. Market offers to buy or sell stocks at varying prices each day, often driven by emotions. Smart investors take advantage of Mr. Market’s moods instead of being influenced by them.
The book cautions against market volatility triggered by various events like current news, changes in the management of the company, etc. You should always see the larger picture and not be swayed by immediate events.
“The individual investor should act consistently as an investor and not as a speculator.” — Ben Graham
6) Diversification:
To reduce risk, Graham suggests a diversified portfolio of at least 10 to 30 stocks across different industries. This way, even if a few investments perform poorly, your overall returns can still be positive.
He warns against investing in one single category of companies, the diversification should be done to cover different types of companies across industries, sizes,s and sometimes even regions. This way no particular event can affect your entire portfolio drastically.
For example, if all your investments were to be in the banking sector then the recent banking crises would have drastically affected your entire portfolio.
7) Dollar-Cost Averaging:
Consistently invest a fixed amount of money at regular intervals, regardless of market conditions. This strategy can lower the average cost per share and reduce the impact of market volatility.
Let’s say you want to invest in a stock and decide to invest $100 every month. In the first month, the stock price is $10 per share, so you buy 10 shares with your $100. In the second month, the stock price drops to $8 per share, so you can buy 12.5 shares with your $100. In the third month, the stock price increases to $12 per share, so you can only buy 8.33 shares with your $100.
By investing the same amount of money consistently over time, regardless of whether the stock price goes up or down, you are effectively averaging out the cost of your investment. When the price is low, you buy more shares, and when the price is high, you buy fewer shares. Over time, this strategy can help reduce the impact of market volatility and potentially lower your overall average cost per share. The key idea behind dollar cost averaging is that you’re spreading out your investment over time.
8) Rebalancing:
Periodically review and adjust your portfolio to maintain your desired risk level and investment strategy. New data come into the light, the company changes positions, and the entire basis on which you bought the stock changes.
All of this means that you need to rebalance your portfolio to keep it at the most optimum level as per your investment strategies. You should sell any stock that has become overvalued and use the proceeds to buy new undervalued ones.
9) Patience and Discipline:
Graham stresses the importance of staying patient and disciplined in your investment approach. Emotions and short-term market fluctuations should not influence your long-term investment strategy.
Conclusion
“The Intelligent Investor” is a timeless guide to value investing, teaching important principles to help navigate the stock market. Every investor should understand the principles mentioned in the book and try to apply them to their investing journey.
Interested in how we think about the markets?
Read more: Zen And The Art Of Investing
Watch/hear on YouTube: Investing with Legends: Warren Buffett
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