An Ode to Sound Investing Advice from the Intelligent Investor – Part 1

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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.

Part 2 of Intelligent Investor Quotes

21 Best Personal Finance Quotes from The Psychology of Money by Morgan Housel

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The Psychology of Money by Morgan Housel is filled with gems on personal finance. If you are new to investing, wondering how you should go about “thinking” about your money, this is a book worth buying. It prompts you to reanalyze your financial strategies and question your investments. It makes you sit back and introspect whether you are following your own dream or someone else’s.

Without further ado, here are some of my favorite quotes from the book:

Go out of your way to find humility when things are going right and forgiveness/compassion when they go wrong. Because it’s never as good or as bad as it looks. The world is big and complex. Luck and risk are both real and hard to identify. Do so when judging both yourself and others.

We all think we know how the world works. But we’ve all only experienced a tiny sliver of it. An investor Michael Batnick says, “some lessons have to be experienced before they can be understood.” We are all victims, in different ways, to that truth.

Every financial decision a person makes, makes sense to them in that moment and checks the boxes they need to check. We all do crazy stuff with money, because we’re all relatively new to the game and what looks crazy to you might make sense to me. But no one is crazy—we all make decisions based on our own unique experiences that seem to make sense to us in a given moment.

If you want to do better as an investor, the single most powerful thing you can do is increase your time horizon. Time is the most powerful force in investing. It makes little things grow big and big mistakes fade away.

Years ago I asked economist Robert Shiller, who won the Nobel Prize in economics, “What do you want to know about investing that we can’t know?”

“The exact role of luck in successful outcomes,” he answered.

I love that response, because no one actually thinks luck doesn’t play a role in financial success. But since it’s hard to quantify luck and rude to suggest people’s success is owed to it, the default stance is often to implicitly ignore luck as a factor of success.

Save. Just save. You don’t need a specific reason to save. It’s great to save for a car, or a downpayment, or a medical emergency. But saving for things that are impossible to predict or define is one of the best reasons to save.

Bill Gates once said, “Success is a lousy teacher. It seduces smart people into thinking they can’t lose.”

Failure can also be a lousy teacher, because it seduces smart people into thinking their decisions were terrible when sometimes they just reflect the unforgiving realities of risk.

Define the cost of success and be ready to pay it. Because nothing worthwhile is free.

At a party given by a billionaire on Shelter Island, Kurt Vonnegut informs his pal, Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel Catch-22 over its whole history. Heller responds, “Yes, but I have something he will never have… enough.”

Avoid the extreme ends of financial decisions. Everyone’s goals and desires will change over time, and the more extreme your past decisions were the more you may regret them as you evolve.

There are a million ways to get wealthy, and plenty of books on how to do so. But there’s only one way to stay wealthy: some combination of frugality and paranoia.

Define the game you’re playing, and make sure your actions are not being influenced by people playing a different game.

Gettng money requires taking risks, being optimistic, and putting yourself out there. But keeping money requires the opposite of taking risk. It requires humility, and fear that what you’ve made can be taken away from you just as fast.

Smart, informed, and reasonable people can disagree in finance, because people have vastly different goals and desires. There is no single right answer; just the answer that works for you.

Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.

A good definition of an investing genius is the man or woman who can do the average thing when all those around them are going crazy.

“It’s not whether you’re right or wrong that’s important,” George Soros once said, “but how much money you make when you’re right and how much you lose when you’re wrong.” You can be wrong half the time and still make a fortune.

The highest form of wealth is the ability to wake up every morning and say, “I can do whatever I want today.”

When you see someone driving a nice car, you rarely think, “Wow, the guy driving that car is cool.” Instead you think, “Wow, if I had that car people would think I’m cool.” Subconscious or not, this is how people think.

There is a pardox here: people tend to want wealth to signal to others that they should be liked and admired. But in reality those other people often bypass admiring you, not because they don’t think wealth is admirable, but because they use your wealth as a benchmark for their own desire to be liked and admired.

Spending money to show people how much money you have is the fastest way to have less money.

Academic finance is devoted to finding the mathematically optimal investment strategies. My own theory is that, in the real world, people do not want the mathematically optimal strategy. They want the strategy that maximizes for how well they sleep at night.

My Perception of Money Has Changed Over The Years

I decided to go through an experiment to see if it would add any value to my life. I have had heard of minimalism and seen a couple of videos. Though I was not ready to sacrifice every bit of materialistic pleasure in my life, I was willing to start small to see what it would do. It became an epiphany of sorts.
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I remember feeling ecstatic whenever I bought an expensive dress.

I remember feeling accomplished after buying an expensive laptop.

I remember feeling disappointed when my fiancé gifted me inexpensive jewelry.

My happiness was derived from things. I was money-minded. And quite disgustingly so.

For me, happiness was directly correlated to the brand and the cost of the product. If someone didn’t gift me something extravagant and expensive, it meant the person didn’t love me enough.

That was me in my 20s.

Now I am in my late 30s, and things have shifted. I am no longer the person I used to be. People change over the years as they come across new life-changing experiences, perspectives, and emotions. It is practically impossible to stay the same throughout your life. I would even consider a comment like “You haven’t changed at all” an insult because that would mean I haven’t evolved with the times.

Over the years, I understood that expensive things only brought me happiness for a while. After that, I was on the lookout again for my next purchase, thinking it would bring me everlasting happiness. When I figured out what was happening, a lightbulb went off.

I decided to go through a self-initiated experiment to see if it would add any value to my life. I had heard of minimalism and seen a couple of videos. Though I was not ready to sacrifice every bit of materialistic pleasure in my life, I was willing to start small to see where it would go. I started cutting back on my purchases, not looking at shopping sites, seeking solace in the simple pleasures of life – like reading a book, going for a walk outdoors, engaging with nature, and enjoying fresh, clean air.

It was an epiphany of sorts.

I never knew so much of happiness could be derived from so little – from things that cost so little.

The little things in life that do not cost much, yet have the power to bring pure happiness. Why hadn’t I indulged in life before? Why did I only indulge in things? If I had not deliberately cut back on my purchases, seeking elsewhere for my joy, I might not have discovered the inexpensive side of happiness.

I second guess all my purchases now – I look for things that are bang for my buck. I compare prices and choose products that are the most cost-effective. I ask myself a couple of questions before spending my money on anything – “Am I buying this for myself? Or to show someone else that I can buy it?“, “Do I see myself using this product 2-3 months from now, or is it just a fad?” “Do I really need this product right now? Will my life become easier with this product?” If the answers are positive, I go ahead with the purchase without hesitation.

Life has a way of grounding you. It teaches you ultimately how important it is to save or invest and not spend unnecessarily.

With minimalism came the change in thought process. I do not wish for anyone to gift me anything expensive anymore. I instead wish people gifted me something handmade. I realize now that the most valuable thing anyone can gift you is their time. And what better than a handmade gift to beautifully represent time – the time that the giver graciously spent on making the gift for you. Time is beautifully unique. Each second of your time is a part of your life that you will not get back. It becomes even more exclusive when a person dedicates it solely to you. When someone’s time is spent on you, with you, or making something for you – that undoubtedly becomes the best one-of-a-kind personalized gift that anyone could offer.

This realization about handmade gifts made me recommend the same to others. To my surprise, I found little takers for handmade gifts. This lack of enthusiasm might be because it is not easy to gift someone your time. I am a sucker for handmade gifts, though. I get misty-eyed each time I get one – this precious time wrapped with a bow.

I came to recognize boredom as an enemy to my wallet. Retail therapy happened whenever I got bored. To get rid of this habit, I began learning new, interesting things. I learned from books, classes, online videos  – again, stuff that did not cost much money.

Human beings are adaptive creatures – so adaptive that our desires can expand manifold if there is enough space to accommodate them. Consider a room with furniture and décor filled up in each and every corner. The room would tend to look stuffy and closed. The room is your breathing space. The furniture – your desires. The more furniture in the room, the more stuffy it gets, the more difficult it is to navigate without tripping over something. This room is magical and will try to expand itself to bring in more breathing space, but we tactlessly keep stuffing it with more inessential things to fill the space up.

How to unstuff a stuffy room? Very simple. Remove some of the furniture. In other words, reduce your desires.

Desires can be trimmed by steering clear of things you are most likely to splurge on. For example, if you tend to spend a lot of money on shopping sites, the simple remedy is to stop browsing shopping sites. If brands tempt you, stop visiting the stores that display those brands. It might seem difficult at first, but over time, you will master the skill of avoiding materialistic temptations. Delayed gratification will become second nature. You will become a pro in saying “no” to things that you are not ready for or do not add any value or meaning to your life.

This strategy worked well for me. I can now be happy with little. I have no intention of going back to my old self. If happiness is so cheap, why even bother looking elsewhere?

This behavior is not akin to being a miser. It is about finding a way that is more sustainable. A route to happiness that anyone and everyone, of any income level, can attain without emptying their pockets.

An Ode to Learning Personal Finance On Your Own

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I am no personal finance guru.

I am no millionaire. Far from it.

I am just another person hoping for financial freedom one day.

But since the last few years, I have been enjoying reading about personal finance, researching and then taking action. As mentioned in my previous post, I have no clue where this journey will take me, but it has been an enlightening one so far.

I must have been 10 or 11 when a friend’s father asked a question to a bunch of kids (including me) at a party – “How much of your salary should you save once you start earning?” I remember just staring back at him. I had no clue. To be fair, which 10-11 year old would? Our parents don’t usually ask us such things. He answered “20%” and since then that percentage has stuck in my mind, living rent-free, refusing to leave.

20%. I took this number with me. When I started working, it was the first thing I thought of. Makes me wonder – if only kids were taught personal finance at school. They would grow up to be better at managing money.

I am 36. There are times I wish I had started my journey on learning about personal finance a bit sooner. I try to comfort myself saying I did not have the resources I do now back then. Our resources were our parents, relatives, friends and all those people we regularly interacted with. In short, people who were not financial experts. My 20s and early half of my 30s were mostly spent in a bubble, thinking Fixed Deposits (FDs) are the way to go. When I started researching, all the info I got just blew my mind.

If you are in your 20s, this is the best time to learn about personal finance and invest because there are so many valuable free guides online. Plus, you have age on your side!

It was only recently, in the last couple of years, that I learnt saving your money alone is just not enough. You need to invest as well to create wealth.

Here are a couple of things I have learnt from my personal finance journey so far:

  • Read books, watch videos, listen to podcasts, read personal accounts on Quora and Reddit.
  • Diversify not just your investments, but your knowledge sources as well. Get your knowledge on personal finance in various formats. Don’t just stick to one.
  • Latch on to the things that the different sources keep repeating. I find these repeated pearls of wisdom are of more value and reliability than the things that do not get repeated.
  • Use social media to gain knowledge. Follow “Personal Finance”, “Investing” topics on Twitter. Related tweets will pop up on your feed. You will find some of the best personal (and honest) anecdotes and tips this way.
  • If you are on Instagram, search for personal finance pages/experts and follow them. Same for Facebook and any other social media platform.
  • Start investing in equity as early as you can.
  • Be patient with your investments. When I started off investing, the value of my portfolio went down considerably, but then picked up in 3 years. My emotions varied from “Did I make the right choice? Maybe I should exit.” when I first started off to “Why didn’t I start this sooner?” after 3 years.
  • Live below your means. I am trying not to increase my standard of living as my income increases. Instead, I am trying to increase my savings/investments.
  • 20% – always keep this percentage in mind.
  • Do not trust every advice you see on the Internet (including this post!) – do your own research, and customize your own personal finance itinerary depending on your risk profile. Whatever step you take, make sure you take it as soon as you can after doing a proper research.