5 Key Takeaways from The Intelligent Investor by Benjamin Graham
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5 Key Takeaways from The Intelligent Investor by Benjamin Graham
The Intelligent Investor by Benjamin Graham, recommended by Warren Buffett
The Intelligent Investor by Benjamin Graham is not just any ordinary book on investing.
It’s the book that inspired Warren Buffett, one of the most successful investors of all time.
Buffett once said that he had read and re-read this book more than any other investment book and called it the best book on investing ever written.
In today’s content, We’re going to share with you 5 key takeaways from this must-read classic that will help you become a smarter, more successful investor like Warren Buffett.
Now, we’ll be following the 5 different stories to learn 5 different key takeaways from this timeless classic that will help you become a better, more successful investor.
Welcome to Sunfortzone, our goal is to help value investors understand more about their investments. If you want to grow on the path of value investing, please subscribe to our channel and click the like button on the video. Wall streets make money on activities, we, as value investors, make money on inactivities.
Here we would like to recommend a great book called The Intelligent Investor by Benjamin Graham. The book is suggested by value investor Warren Buffet. As Warren Buffet said, Chapters 8 and 20 in this book have been the bedrock of my investing activities for more than 60 years. We suggest that all investors read those chapters and reread them every time the market has been especially strong or weak. The link of the ebook is in the description below, you can read it a little bit for free in the Kindle.
Understanding the Difference between Aggressive and Defensive Investing
The first key takeaway is understanding the difference between aggressive and defensive investing.
Imagine you’re at a horse race, and you have two options.
Bet on the favorite horse, which has the highest chance of winning, but with a low payout, or bet on the underdog, which has a lower chance of winning, but with a higher payout.
Which option would you choose?
Well, just like in a horse race, investing involves making choices between risk and reward.
And the first key takeaway from The Intelligent Investor is understanding the difference between aggressive and defensive investing.
Aggressive investing involves taking on more risk and volatility in pursuit of higher returns.
This strategy is similar to betting on the underdog at a horse race.
You may not win every time, but if you do, the payout can be substantial.
Defensive investing, on the other hand, prioritizes preserving capital and minimizing risk.
This strategy is similar to betting on the favorite horse at the race.
You may not win big, but you’re less likely to lose your investment.
Now let’s say you decide to bet on the underdog horse.
You may feel a rush of excitement as the race begins, but as the horses round the first turn, your horse falls behind.
The crowd grows louder, and your heart races as you hope for a comeback.
But as the race continues, your horse falls further behind, and you start to worry about losing your bet.
You realize that you took on more risk than you could handle, and the potential reward may not be worth the stress.
This scenario illustrates the importance of understanding your risk tolerance and investment objectives before investing.
Just like at the horse race, it’s essential to weigh the potential rewards against the potential risks and make an informed decision.
Of course, both approaches have their pros and cons, and Graham recommends finding the right balance between the two based on your financial goals and risk tolerance.
As he famously put it, the essence of investment management is the management of risks, not the management of returns.
The most important rule in investing is not to lose money.
To have a higher chance of not losing money, we would try to understand more of a business behind the securities, in order to reduce risks.
One point behind aggressive and defensive investments is that the higher the risks, the higher the returns, and vice versa.
However, we do believe that there are times when you are able to get much higher returns potential with little risks.
For instance, you’ve been tracking a couple of decent businesses for a long time like several years. You know their positions in the industry. You know their competitive advantages and why they’re better than its peers and their future prospects.
Suddenly there is a systematic risk like the Covid 19 pandemic which makes almost all stock prices drop. That is when the good opportunity comes to buy the stocks you’re tracking for a long time.
the Mr. Market concept
The second takeaway is understanding the concept of Mr. Market.
Imagine you’re a homeowner, and you have a neighbor named Mr. Market.
Every day, Mr. Market knocks on your door and offers to buy your house or sell you his own house.
His mood changes frequently.
Sometimes he’s excited and offers a high price for your home, and other times he’s anxious and offers a low price for his home.
At first, you may be tempted to take Mr. Market’s offers at face value and react accordingly.
But soon, you realize that Mr. Market’s moods and opinions are not always based on rational or objective factors, but rather on his emotions and subjective perceptions.
This scenario illustrates the concept of Mr. Market, which is a metaphor used in The Intelligent Investor to describe the stock market’s daily fluctuations and volatility.
The stock market, like Mr. Market, can be emotional and irrational, and it’s up to the investor to remain rational and disciplined in the face of this volatility.
As an investor, you should not let Mr. Market’s moods influence your investment decisions.
Instead, you should focus on the intrinsic value of the company and its long-term prospects.
Just like the value of your home is determined by its location, size, and condition, the value of a company is determined by its financial health, management, and growth potential.
So when Mr. Market offers to sell you a company’s stock at a low price, it doesn’t necessarily mean that the company is not valuable.
It may be that Mr. Market is feeling anxious or pessimistic about the company’s short-term prospects, but as a long-term investor, you should look beyond Mr. Market’s emotions and focus on the company’s underlying value.
The key lesson here is that investors should not let their emotions dictate their investment decisions.
Just like Mr. Market’s mood swings, stock prices can be volatile and unpredictable, and it’s important to maintain a level head and make rational decisions based on sound analysis.
We recommend investors practice staying calm at all times.
There are times when stocks sell at silly prices.
It may be caused by fears, irrational behaviors, or algorithmic trading.
When that time comes, it’s our great chance to buy cheap good businesses.
the Concept of Margin of Safety
The third takeaway is the importance of a margin of safety.
Imagine you are building a bridge, and you want to make sure that it’s strong enough to support the weight of people and vehicles that will cross it.
What would you do?
Well, just like building a bridge, investing also requires a margin of safety.
The third key takeaway from the intelligent investor is understanding the importance of having a margin of safety in your investments.
Now, let’s say you’re building a bridge, and you know that it needs to support a weight of 10,000 pounds.
Instead of building a bridge that can only support 10,000 pounds, you decide to build a bridge that can support 15,000 pounds.
This gives you a margin of safety, ensuring that the bridge can handle unexpected events like heavy traffic or storms.
Similarly, when investing, it’s important to look for companies with a strong financial position, stable earnings, and a good track record.
By investing in companies with a margin of safety, you can protect yourself against potential losses and increase your chances of long-term success.
Graham recommends always investing with a margin of safety in mind in order to protect against unforeseen events and potential losses.
By calculating the intrinsic value of a stock and buying it at a significant discount, investors can increase their chances of success in the long run.
One way we use the concept of margin of safety in personal finance is to set aside 6 to 12 months of cash. This amount is equal to your monthly basic expenditure times 6 to 12. It’s a good way to keep you from bankruptcy in case you encounter a layoff or serious illness.
The fourth takeaway is the importance of diversification.
Imagine you have a basket filled with a dozen different types of fruit.
You have apples, oranges, bananas, grapes, and more.
Each fruit has a different taste, texture, and nutritional value.
If one type of fruit goes bad, you still have plenty of other options to choose from.
Now, imagine if you had a basket filled with only one type of fruit.
If that fruit goes bad, you’re left with nothing.
The fourth key takeaway from the intelligent investor is understanding the importance of diversification in your investment portfolio.
Diversification means investing in a variety of different assets, such as stocks, bonds, and real estate, to spread your risk and reduce the impact of any one investment performing poorly.
Just like the basket of fruit, investing in a variety of different assets can help protect your portfolio from the negative impact of any one investment underperforming.
By diversifying your portfolio, you can potentially increase your returns and reduce your risk of loss.
Let’s say you only invested in one type of stock, like technology.
If the tech industry experiences a downturn, your portfolio will suffer significant losses.
However, if you had diversified your portfolio with stocks in different industries, such as healthcare, energy, and finance, then the negative impact of a tech downturn would be less severe.
Furthermore, diversification not only helps reduce risk, but it can also lead to increased returns.
By investing in a variety of assets, you’re exposed to more opportunities for growth and returns in different industries and markets.
Graham believed that a well-diversified portfolio should include a mix of stocks, bonds, and other investments, with no single investment accounting for too large a portion of the portfolio.
By diversifying, investors can benefit from the potential growth of multiple sectors while minimizing the impact of any one sector’s downturn.
We have a somehow different opinions on diversification.
We think too much diversifications will not do you any good.
Imagine you’re building a portfolio of 50% stocks and 50% bonds.
And there are 50 kinds of stocks and 50 kinds of bonds invested.
We doubt you can understand all the 50 stocks and 50 bonds well.
Furthermore, if one stock in your portfolio performs really well, it will not contribute much returns for your portfolio as a whole because you invest too little percentage.
We believe if you can just focus on stocks, focus on just 3 or 4 industries that you know pretty well and are of your interests, invest concentratedly in like 5 to 10 stocks, your portfolio will perform better over a long time.
The fifth takeaway is the importance of fundamental analysis.
Imagine you’re considering buying a used car from a friend.
The car looks great on the outside, but you’re not sure if it’s worth the asking price.
You start to ask questions about the car’s history, like how many miles it has, if it’s ever been in an accident, and if it’s been well-maintained.
These questions are part of your fundamental analysis of the car.
By examining the car’s history and condition, you can determine if the asking price is reasonable.
The fifth key takeaway from the intelligent investor is the importance of fundamental analysis in investing.
Fundamental analysis is the process of examining a company’s financial health, industry position, and competitive advantages to determine its intrinsic value.
By doing so, investors can identify undervalued or overvalued stocks and make informed investment decisions.
Fundamental analysis involves analyzing a company’s financial statements, such as its income statement, balance sheet, and cash flow statement, to understand its financial health.
Investors also examine a company’s industry position and competitive advantages to assess its long-term prospects.
For example, let’s say you’re interested in investing in a technology company.
You would start by examining the company’s financial statements to understand its revenue growth, profitability, and debt levels.
You would also research the technology industry to understand trends, competition, and the company’s market share.
By conducting a thorough fundamental analysis of a company, investors can identify if the company is undervalued or overvalued.
An undervalued company may present a buying opportunity because its stock price is lower than its intrinsic value.
On the other hand, an overvalued company may be a selling opportunity because its stock price is higher than its intrinsic value.
So remember to conduct fundamental analysis before making any investment decisions and build a strong foundation for long-term success.
We think fundamental analysis is one of the most important part in value investing. That’s why we build the Sunfortzone.com website to facilitate financial statement analysis. In the website, one can easily see the sales, net income, margins, ROE etc for a specific company. And you can also compare a metric with other stocks. For instance, in the Watchlists tab, one can easily compare the gross margins of your selected stock pools.
So there you have it, five key takeaways from The Intelligent Investor by Benjamin Graham.
By understanding and applying these concepts, investors can make more informed and rational investment decisions and build a portfolio that is better positioned for long-term success.
Remember, investing is not a get-rich-quick scheme, but a long-term journey that requires patience, discipline, and a commitment to ongoing learning.
By following the wisdom of Graham and other investment legends, you can become a smarter and more successful investor, and have a better life in every aspect.
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