The intelligent investor written by Benjamin Graham is considered as the holy Bible of Investing. Each and every Investor should read this book first hand before starting their journey. It has 20 sweet chapters and we will discuss one chapter a week. Today it’s all about the preface and Introduction of the book.
The Warren Buffett we know today has mastered this book inside out at the age of 19 and went on to become the man he is today. Benjamin Graham is not only the author but also the professor of Warren Buffett.
Buffet read the first edition of this book in 1950, he thought then it was by far the best book about investing ever written. He still think it is.
My personal view is that if you manage to read the “Intelligent Investor” atleast 10 times(it’s a pretty huge book actually) you’ll be the master. Because in each and every read you’ll find something new which you missed in the last one. It’s my third time and I’ve learnt a lot in each time!!!
So let’s get to it!
Warren Buffett words in preface:
To invest successfully over a lifetime does not require stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.
Key takeaways from the introduction :
- A stock is not just a ticker symbol or an electronic blip; it is an ownership interest in an actual business, with an underlying value that does not depend on its share price.
- The market is a pendulum that forever swings between unsustainable optimism (which makes stocks too expensive) and unjustified pessimism (which makes stocks too cheap). The intelligent investor is a realist who sells to optimists and buy from pessimists.
- 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.
- No matter how careful you are, 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 Investments behave is much less important than how you behave.
- He says it is almost impossible to predict the future even with your advanced valuation and projection models. Because no one know what will happen to the industry in the future. One of the classic example is COVID. No one expected the amount of damage it caused to the society and the economy. So never try to predict the future no matter what.
- Obvious prospects for physical growth in a business do not translate into obvious profits for Investors.
- The so called experts do not have dependable ways of selecting and concentrating on the most promising companies in the most promising industries.
- The investor’s chief problem – and even his worst enemy – is likely to be himself. ” The fault, dear investors is not in our stars – and not in our stocks – but in ourselves…”
- The habit of relating what is paid to what is being offered is an invaluable trait in investment.
- Buy Stocks as you buy your groceries not as you buy your perfumes. Never forget to ask “How Much ? “
He also narrates a story of world’s greatest physicist Sir Issac Newton.
Sir Newton owned shares in the South Sea Company, the hottest stock in England in 1720. Sensing that the market was getting out of hand, the great physicist muttered that he “could calculate the motions of the heavenly bodies, but not the madness of people.” Newton dumped his South Sea shares for a profit of 100% totaling €7,000. But just a month later due to extreme enthusiasm he jumped into the shares at much higher price and lost €20,000 ( or more than $5 million in today’s money). For the rest of his life he forbade anyone to speak the words of South Sea in his presence.
Sir Isaac Newton was one of the most intelligent people who ever lived, as most of us would define intelligence. But in Graham’s terms, Newton was far from an intelligent investor. By letting the roar of the crowd override his own judgement, the world’s greatest scientist acted like a fool.
“While enthusiasm may be necessary for great accomplishment elsewhere, On Investments it almost invariably leads to disaster.”
– Benjamin Graham