The Intelligent Investor:
The Definitive Book on Value Investing, written by economist Benjamin Graham, is widely regarded as one of the most important books on the subject. This book is widely regarded as the greatest investment advisor of the twentieth century, and it has taught and inspired people all over the world.
Even though this book is over 70 years old, market developments have proven the wisdom of Graham’s strategies over the years. The stock market bible, ‘The Intelligent Investor,’ was described by legendary investor Warren Buffett, who Graham famously mentored, as “by far the best book on investing ever written.” So, here are some of my valuable learning from the book.
1. The author distinguishes two types of intelligent investors: enterprising investors and defensive investors. Enterprising investors seek to outperform the market by identifying and purchasing highly undervalued stocks, whereas defensive investors aim to match the market by diversifying. To outperform the market, enterprising investors must be smarter and better informed than the vast majority of their competitors. If someone without the necessary skills and knowledge attempts to outperform the market average, they are likely to perform worse. As a result, the vast majority of us would be wise to accept the stock market’s approximate 10% annual return.
2. Investment, according to Benjamin Graham, is distinct from trading or speculating. Some may refer to it as ‘fundamental’ investing, which simply means that one must study the company’s fundamentals (finances/management) before investing in it. Normally, the investment is for the long term, and the only time to sell is if the company’s direction or management no longer meets the needs of the investors. Or, if the intrinsic value is greater than the market value—that is, the stock is undervalued in the market—the investor should buy and hold, and then sell when the stock is trading at its intrinsic value.
3. Also, Benjamin Graham introduces the concept of Margin of Safety or the room for human error for the investor. The idea is that even if a stock looks cheap on paper, you still can get screwed by the irrational Mr. Market who prices it lower and lower. So a stock that looks borderline cheap is always not good enough. He recommends having a bigger Margin of Safety and buying it really cheap. The irrationality of investors, the inability to predict the future, and the fluctuations of the stock market can be tackled by providing a margin of safety for investors. The most important approach to include a margin of safety in your investment portfolio is to invest in mutual fund schemes and diversify their portfolios.
4. Another important takeaway from Graham is asset allocation. Appropriate asset allocation across equity and fixed-income products is critical for long-term principal protection and easy access to capital when needed. We have no way of knowing what markets will do in the short term due to the uncertainty of events; however, in the long term, the market will revert to the mean and reflect intrinsic value. We should allocate a percentage of our portfolio to what is considered safer or longer-term investments and also reserve a small portion to riskier or speculative assets only if we could stomach that risk. We should allocate a portion of our portfolio to safer or longer-term investments, while also reserving a small portion for riskier or speculative assets only if we can stomach the risk.
The Intelligent Investor is an excellent book for beginning investors, especially because it has been constantly updated and revised since its initial publication. It is regarded as a must-have for new investors attempting to understand the fundamentals of the market. The book is intended for long-term investors. This book may not be for those looking for something more glamorous and potentially trendier. It gives a lot of common sense advice rather than how to make money quickly through day trading or other frequent trading strategies.
“Invest only if you would be comfortable owning a stock even if you had no way of knowing its daily share price” – Benjamin Graham, The Intelligent Investor.
Writer: Suraj Bansal