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The Intelligent Investor
The Definitive Book on Value Investing
The potential rewards of investing are well-known, but so are the risks. While some investors have made a fortune, many others have lost everything. However, investing can be worth the risk if you follow the strategy of intelligent investing. This involves using thorough analyses to secure safe and steady returns, rather than speculating for short-term gains based on unpredictable market fluctuations. Intelligent investors focus on pricing and only buy the stock when its price is below its intrinsic value, with a margin of safety in place. In other words, the price paid should provide a probable return on investment as the company grows, much like shopping for an item that is worth the price paid.
Intelligent investors follow three principles: analyzing a company’s long-term development and business principles before investing, diversifying their investments to protect against serious losses, and aiming for safe and steady revenues rather than extraordinary profits. Analyzing a company’s financial structure, management quality, and dividend payouts gives a better idea of its long-term value independent of its current market value. Diversification ensures that investors don’t lose everything at once by not putting all their money into one stock. And finally, investors should aim to meet their personal needs rather than trying to outperform professional stockbrokers, as chasing fast money can lead to greed and carelessness.
Before investing, it is important to consider the history of the stock market, which has always been defined by regular ups and downs. Economic crises can happen from time to time, so investors should be financially and psychologically prepared to take a big hit. This means having a diverse stock portfolio and being mentally prepared for crisis. Once the market stability has been determined, investors should focus on the history of the company they are considering investing in. This includes examining the correlation between stock price and the company’s earnings and dividends over the past ten years, as well as considering the inflation rate to determine the real return on investment.
To understand the whims of the market, it’s sometimes easier to imagine the entire stock market as being a person, let’s call him Mr. Market. As far as people go, Mr. Market is unpredictable, very moody, and not very clever. Mr. Market is easily influenced, and this causes him to have major mood swings. You can see this in practice in the way the market always swings back and forth between unsustainable optimism to unjustified pessimism. When a new iPhone is released, for instance, people lose themselves in their excitement. Mr. Market is no different, and we see this reflected in the stock market when something exciting is about to happen: prices go up and people are more willing to overpay. As result, when the market is too optimistic about future growth, stocks become too expensive. On the other hand, sometimes the market is too pessimistic, warning you to sell in unwarranted circumstances. The intelligent investor needs to be a realist and stop herself from following the crowd. She should likewise ignore the mood swings of Mr. Market.
Moreover, when Mr. Market is happy, he makes you see future profits that aren’t really there.
As an intelligent investor, it’s important to resist this temptation and focus on the long-term value of a company, rather than short-term gains. It’s also important to recognize that the market is not always rational or efficient and that stocks can be overvalued or undervalued for irrational reasons.
Instead of trying to predict market fluctuations, the intelligent investor should focus on building a diversified portfolio of quality companies with a strong financial history, good management, and a consistent record of paying dividends.
By taking a patient and disciplined approach to investing, the intelligent investor can weather the ups and downs of the market and achieve safe and steady returns over the long term.
It’s important to note that while hiring an expert can be helpful, it’s also important to do your own research and understand the investments you’re making. Blindly following an expert’s advice without understanding the rationale behind it can lead to poor investment decisions. Additionally, keep in mind that investing always carries a degree of risk and there are no guarantees of profit. It’s important to have a long-term perspective and not to panic during short-term market fluctuations.
It’s also a good idea to regularly review the companies you’ve invested in to ensure that they’re still performing well. Keep an eye on their financial statements, news, and any changes in management. If a company isn’t performing well, it might be time to sell your shares and invest in something else.
In summary, formula investing is a great way for defensive investors to invest in the stock market without taking on too much risk. By diversifying your portfolio, investing in safe stocks and bonds, and regularly checking your portfolio, you can ensure that your investments are working for you and not against you.
As an enterprising investor, you will need to be more hands-on with your investments compared to a defensive investor. You will need to be proactive in researching and analyzing potential investments, looking for undervalued companies with strong potential for growth. This may require more time and effort on your part, but it can also lead to greater rewards.
In addition, enterprising investors may also consider alternative investments, such as real estate, commodities, or private equity. These types of investments can offer unique opportunities for diversification and potentially higher returns, but they also come with higher risks and may require specialized knowledge or expertise.
Overall, the key for an enterprising investor is to strike a balance between taking calculated risks and maintaining a diversified portfolio. By partnering with a financial planner, conducting thorough research, and continually monitoring your investments, you can position yourself for long-term success.
Trying to time the market is risky and difficult, even for experienced investors. Instead of trying to buy and sell stocks based on their current price fluctuations, it is often a better strategy to focus on the long-term and invest in quality companies with solid fundamentals.
If the price of a stock you own falls, it’s important to analyze the reason behind the decline. Is it a temporary setback, or is it a sign of deeper issues with the company? If it’s the latter, it may be wise to sell the stock and cut your losses. However, if you believe the company is still fundamentally sound and has the potential for growth, it may be better to hold on to the stock and wait for the price to recover.
Similarly, if you are considering investing in a new stock, it’s important to do your research and analyze the company’s financials and growth potential. Don’t simply invest in a stock because it’s currently popular or has seen recent price gains. You want to invest in companies with strong fundamentals and a solid long-term outlook.
In summary, as an investor, it’s important to focus on the long-term and invest in quality companies with solid fundamentals. Don’t try to time the market or chase after the latest hot stock, as this can be risky and often leads to poor investment returns. Instead, focus on building a well-diversified portfolio and regularly monitor and adjust your investments as needed.
Practicing with virtual investments allows you to gain experience without risking your actual money. It can also help you identify your strengths and weaknesses in investment decision-making.
It’s important to remember that investing always comes with risks. Even with careful analysis and research, it’s impossible to predict the future with complete accuracy. However, by following the principles of value investing and being disciplined in your approach, you can increase your chances of success and minimize your risks.
Final Summary –
The key to success in investing is to stay informed, stay disciplined, and stay focused on the long term. Remember to diversify your portfolio, invest in undervalued companies, and resist the temptation to make impulsive trades based on short-term market trends. With patience and a sound strategy, you can become a successful investor and achieve your financial goals.
About the Author –
Benjamin Graham (1884-1976) began his career as an investor in 1914, after which he had to deal with substantial losses during the economic crash in the 1920s. His book The Intelligent Investor is a compilation of the lessons he learned as a young investor.