I recently started my investing journey and I have been trying to educate myself on the various nuts and bolts that go into building a solid investment. It has been an interesting educational experience so far. I am treating this blog as my note-taking app of sorts, to write down helpful and insightful points from the books I have read.
I recently finished The Intelligent Investor by Benjamin Graham, the person considered Warren Buffett’s investment muse.
Here are some key investment takeaways from Benjamin’s book. This is the first of 3 parts. I hope you enjoy this series as much as I did, curating and compiling it.
No matter how careful you are, the one risk no investor can ever eliminate is the risk of being wrong. Only by insisting on what Graham called the “margin of safety”—never overpaying, no matter how exciting an investment seems to be—can you minimize your odds of error.
By developing your discipline and courage, you can refuse to let other people’s mood swings govern your financial destiny. In the end, how your investments behave is much less important than how you behave.
The famous warning of Santayana: “Those who do not remember the past are condemned to repeat it.”
“If you have built castles in the air, your work need not be lost; that is where they should be. Now put the foundations under them.”
Henry David Thoreau, Walden
What exactly does Graham mean by an “intelligent” investor? Back in the first edition of this book, Graham defines the term—and he makes it clear that this kind of intelligence has nothing to do with IQ or SAT scores. It simply means being patient, disciplined, and eager to learn; you must also be able to harness your emotions and think for yourself. This kind of intelligence, explains Graham, “is a trait more of the character than of the brain.”
As Graham puts it, “while enthusiasm may be necessary for great accomplishments elsewhere, on Wall Street it almost invariably leads to disaster.”
Most painfully of all, by losing their self-control just when they needed it the most, these people proved Graham’s assertion that “the investor’s chief problem—and even his worst enemy—is likely to be himself.”
Obvious prospects for physical growth in a business do not translate into obvious profits for investors.
Why do you suppose the brokers on the floor of the New York Stock Exchange always cheer at the sound of the closing bell—no matter what the market did that day? Because whenever you trade, they make money—whether you did or not. By speculating instead of investing, you lower your own odds of building wealth and raise someone else’s.
Graham’s definition of investing could not be clearer: “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return.”
Graham urges you to invest only if you would be comfortable owning a stock even if you had no way of knowing its daily share price.
People who invest make money for themselves; people who speculate make money for their brokers. And that, in turn, is why Wall Street perennially downplays the durable virtues of investing and hypes the gaudy appeal of speculation.
As Graham never stops reminding us, stocks do well or poorly in the future because the businesses behind them do well or poorly—nothing more, and nothing less.
On the other hand, if the formula actually did work in the past (like the January effect), then by publicizing it, market pundits always erode—and usually eliminate—its ability to do so in the future.
Americans are getting stronger. Twenty years ago, it took two people to carry ten dollars’ worth of groceries. Today, a five year-old can do it.
Henny Youngman
While mild inflation allows companies to pass the increased costs of their own raw materials on to customers, high inflation wreaks havoc—forcing customers to slash their purchases and depressing activity throughout the economy. There is a fine passage near the beginning of Aristotle’s Ethics that goes: “It is the mark of an educated mind to expect that amount of exactness which the nature of the particular subject admits. It is equally unreasonable to accept merely probable conclusions from a mathematician and to demand strict demonstration from an orator.” The work of a financial analyst falls somewhere in the middle between that of a mathematician and of an orator.
The Monkey Dilemma 