The Intelligent Investor by Benjamin Graham stands as a classic in the field of investment literature, imparting timeless principles that have guided generations of investors. Initially published in 1949, the book continues to be useful today, offering insightful and practical advice for navigating the world of finance and investing. Renowned investor Warren Buffett has hailed it as “By far the best book on investing ever written,” having first read it at the age of 19 and using its wisdom to shape his future investment philosophy. This article provides a brief glimpse into the book and some of its key takeaways.
Investing vs. Speculating:
Graham draws a clear distinction between investing and speculating in the stock market. As Graham sees it, Investing involves a thorough analysis of a company's fundamentals, while speculating relies on market trends and price movements. Investors are often enticed by growth stocks, assuming past performance guarantees future results. However, this belief is risky, as there's no foolproof way to predict promising companies.Overpaying for stocks with good records is common, and rapid growth is unsustainable, leading to under performance of high growth stocks. The speculative nature of growth stocks is evident in their volatility, which has historically led to significant losses for investors. Graham suggests that if one is looking to speculate, they should allocate no more than 10% of their capital into a separate fund to reduce sizable losses.
Value Investing:
Value investing involves determining a stock's intrinsic value regardless of its market price by analyzing its assets, earnings, and dividends. If the intrinsic value exceeds the market value, indicating undervaluation, investors should buy and hold until the market and intrinsic prices align. Purchasing a stock below its intrinsic value offers a discount,and selling is recommended when the stock reaches its intrinsic value. While this approach may not seem as glamorous and profitable as growth-based investing, the risk is considered to be lower with a higher long-term return.
Mr. Market:
Graham's key allegory, Mr. Market, represents the fluctuations in stock prices in the marketplace. Mr. Market is what we would today call a manic-depressive meaning he is often emotional and moody. Along with wide variation of ‘mood’, Mr. Market is mostly but not always efficient and acts as a voting machine in the short run and a weighing machine in the long run. Investors can choose to accept or reject Mr. Market's offers even if the price is overly high or low, giving them an advantage over those constantly invested. The patience of a value investor allows them to take advantage of low prices when Mr. Market is in a ‘pessimistic’ mood (Pricing a stock below its underlying value) but not fall into the trap of short-term sentimental fluctuations. Focusing on a company's real performance and value is advised,rather than being swayed by Mr. Market's short-term changing sentiments.Investors are neither right nor wrong based on the similarity between others' sentiments and their own, only facts and analysis determine their accuracy.
Overall, The Intelligent Investor is the definitive guide on value investing by Benjamin Graham. It emphasizes analyzing a company's fundamentals while ignoring market noise driven by investors' (and speculators) emotions. The key strategy is to identify price-value discrepancies, buying when the market price is below intrinsic value and selling when aligned. The book also recommends a balanced portfolio for the defensive investor of 50% stocks and 50% high-grade bonds (Although these can fluctuate either direction between 25% and 75% based on financial need, risk tolerance and market condition), cautions against day trading pitfalls,encourages leveraging market fluctuations, and warns against trendy stock purchases.
Copies of The Intelligent Investor can be found online or at the SAIT Reg Erhardt Library through the links below:
Online: https://shorturl.at/adfxE
Physical: https://shorturl.at/jkCNR
