I have been reading Intelligent Investor by Benjamin Graham, as many of you have as well. Very often when we read something, we forget them if we do not take down notes. I found these 6 Principles from Benjamin Graham extremely applicable and timeless, thus the sharing!
1) Not just a ticker symbol
“A stock is not just a ticker symbol, it is an ownership interest in an actual business, with an underlying value that does not depend on its share price.”
Especially for traders, this would serve as a good reminder that it’s not just a symbol (eg. APPL, BABA, GOOG). Every listing on the stock exchange is a business and it has an underlying value to it. (Balance Sheet, Income Statements, etc.) I used to be an active trader and I too fell prey to this point. It didn’t matter to me what company it was, because my mindset was to grab my profits and run. What happens if your Technical Analysis was wrong and you lose instead of profiting then? While it works for some, it’s definitely not the best way to start out your investment journey because more often than not, you lose from capital loss and commissions unless you have a trade plan in place, and deep pockets for learning.
2) The market is a pendulum
“The market is a pendulum that forever swings between unsustainable optimism and unjustified pessimism. The Intelligent Investor is a realist who sells to optimists and buys from pessimists.”
Mr. Market will present to you the same stock at different prices. It’s up to you to selectively pick at what price you want to buy it at. If you knew the value of the stock was around $5, would you pay $10 for it or $1 for it? The price you buy it at typically reflects the amount of patience you have. You’ll never know how low a stock can go or how high it can get but if there’s something you can be somewhat certain. The fair value of the company. Use it to your advantage, as a benchmark to compare against the price you are paying! Is it justifiable?
3) Price is what you pay, value is what you get
“The future value of every investment is a function of its present price. The higher the price you pay, the lower your return will be.”
If you decide to sell a stock at $10 no matter what price you buy it at, your entry price will determine your return. If you bought at $1, your returns would be 1000%. If you bought it at $5, your returns will be 100%. Mr. Market doesn’t care at what price you buy his stocks, so buy it cheaply! Buy it below the true worth, and he still doesn’t even care! So don’t feel bad to buy a stock at a huge discount!
4) The one risk you can’t eliminate
“No matter how careful you are, the one risk no investor can ever eliminate is the risk of being wrong.”
Even the greatest investor himself, Warren Buffett, made mistakes. What makes you think you won’t? If you can’t eliminate the risk, mitigate it! Only by insisting on ‘margin of safety’, no matter how exciting an investment may be, can you reduce the damage of your error. Say you bought a stock at $0.60 thinking it was worth $1, but in fact it’s only worth $0.80 (40% margin of safety in this case). Even if you were wrong, when it goes to $0.80 you’ll still profit. Assume you bought at $1, and market decides to be perfectly efficient at it’s pricing, reflecting it’s true value of $0.80, you’ll be facing with a 20% loss.
5) Be a critical thinker
“Become a critical thinker who takes no Wall Street ‘facts’ by faith, and invest with patient confidence, you can take steady advantage of even the worst bear markets.”
The secret to your financial success is inside yourself. Don’t simply accept what is presented to you, spend the time to dig into the figures, to test the ‘facts’. Don’t be too gullible and take everything with a pinch of salt! Engage in your own study despite being bombarded with ‘facts’ or hot tips.
6) See what others can’t
“Obvious prospects for physical growth in a business do not translate into obvious profits for investors.”
While it seems easy to foresee which industry will grow the fastest, that foresight has no real value if most of the other investors are already expecting the same thing! The growth would have been priced in before the news is out! Therefore, it’s not simply choosing a growing industry. Can you see it before the majority sees it? (Think contrarian) It’s usually easier to find these industries when you approach the industries with a contrarian thinking, loving an industry that everyone seems to dislike. With patience, it could pay off handsomely because of the sell off!