3 Big Ideas From The Intelligent Investor

Valuewalk, Ben Graham, Benjamin Graham, writing, reading, books, The Intelligent Investor, Value investing, value investors, Berkshire Hathaway, Warren Buffett, investor psychology, minimal debt, buy-and-hold investing, fundamental analysis, concentrated diversification, margin of safety, activist investing, contrarian mindsets

Billionaire investor Warren Buffett once said, “The best thing I ever did was choose the right heroes.”

Who we follow greatly affects where we end up.

Get The Full Warren Buffett Series in PDF

Get the entire 10-part series on Warren Buffett in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues

  • Q3 2017 Hedge fund letters, conferences, interviews, features etc
  • Hailed by many the "Next Warren Buffett",  some are calling a bluff 
  • Baupost Letter Points To Concern Over Risk Parity, Systematic Strategies During Crisis
  •  Public Pension Situation Is As Bad As You Think: Moody’s

 

One book that has had probably the single greatest impact on Buffett’s life and successful career is The Intelligent Investor by Benjamin Graham.

Buffett read it after picking it up in a Nebraskan library at the age of 19. He adopted its principles and has never looked back since.

The concepts in the book are rich. They are timely and invaluable.

Here are 3 big ideas from The Intelligent Investor that changed the entire path that Warren Buffett took in life.

1. Mr. Market

Graham simplifies this concept by relating it as a story. Basically, there is you (the investor) and the stock market (Mr. Market) who own a business together. Mr. Market is moody. Sometimes he’s positive, other times he’s negative. And he usually keeps that negative attitude over short periods of time (weeks, months, and even a few years).

The key is not to let him pressure you and to use his mood to your advantage. When he’s got a bad attitude about the company, you buy stocks from him. When he’s got a good attitude about it, you sell to him. Just remember, it usually takes a long time for him to develop a positive attitude about the company.

So be patient. Buy and wait. Then when you think he’s getting into a good mood… wait some more. Let him show you that his attitude has changed over a consistent period of time. And when you are sure that it has, sell the stocks. His happy attitude is sure to guarantee a huge profit – one of much higher returns than what you initially paid.

2. Margin of Safety

Every stock has two prices: the price Mr. Market thinks it’s worth and the price you, as the investor, think it’s worth. Graham refers to your price on the stock as intrinsic value. The secret is to buy stocks that are priced far below their intrinsic value.

This limits your liabilities – or potential losses and thus provides you with a margin of safety on your investments.

3. Active vs. Passive Investors

It is important for one to determine how much time and effort one wants to put into investing and balance that by how much one hopes to gain.

Active investing involves researching, analyzing, and constantly watching the market. This basically becomes one’s full-time job. The potential to earn greater with this style of investing is apparent. You put more into it, so it is possible to get more out of it.

However, not everybody wins like this. In fact, this could work against some investors who aren’t fully committed to the process or overlook certain aspects of the market, the economy, or the particular business they are buying. It all depends on one’s knowledge, experience, and willingness to commit to a time-consuming endeavor.

The other option is the passive or defensive style of investing. Unlike, the active approach that requires full-time commitment, this investor buys and waits. (S)he doesn’t do much with the stocks other than allow them to grow and accumulate returns. It requires less time and effort.

It’s easy to ask, “why doesn’t everyone just take that approach?” The downside to this is that the potential returns are usually not as great for defensive investing as they are for active approaches. It is a long-term, slower way of accumulating wealth.

Neither of these options are better or worse than the other. The key is to understand yourself. Know your goals. Determine what you are looking to do and to accomplish with your investments. And to move forward based on which type of investor you see as a better fit for yourself.

Key Takeaway

Overall, The Intelligent Investor is packed with wisdom and key insights that provide timeless advice for investors today. Whereas these 3 ideas are huge concepts from the book, it is certainly advisable that anyone serious about investing consider reading the entire book.

You won’t be disappointed with the results.

Article by Vintage Value Investing

For exclusive info on hedge funds and the latest news from value investing world at only a few dollars a month check out ValueWalk Premium right here.

Multiple people interested? Check out our new corporate plan right here (We are currently offering a major discount)



About the Author

VintageValueinvesting
Ben Graham, the father of value investing, wasn’t born in this century. Nor was he born in the last century. Benjamin Graham – born Benjamin Grossbaum – was born in London, England in 1894. He published the value investing bible Security Analysis in 1934, which was followed by the value investing New Testament The Intelligent Investor in 1949. Warren Buffett, the value investing messiah and Graham’s most famous and successful disciple, was born in 1930 and attended Graham’s classes at Columbia in 1950-51. And the not-so-prodigal son Charlie Munger even has Warren beat by six years – he was born in 1924. I’m not trying to give a history lesson here, but I find these dates very interesting. Value investing is an old strategy. It’s been around for a long time, long before the Capital Asset Pricing Model, long before the Black-Scholes Model, long before CLO’s, long before the founders of today’s hottest high-tech IPOs were even born. And yet people have very short term memories. Once a bull market gets some legs in it, the quest to get “the most money as quickly as possible” causes prices to get bid up. Human nature kicks in and dollar signs start appearing in people’s eyes. New methodologies are touted and fundamental principles are left in the rear view mirror. “Today is always the dawning of a new age. Things are different than they were yesterday. The world is changing and we must adapt.” Yes, all very true statements but the new and “fool-proof” methods and strategies and overleveraging and excess risk-taking only work when the economic environmental conditions allow them to work. Using the latest “fool-proof” investment strategy is like running around a thunderstorm with a lightning rod in your hand: if you’re unharmed after a while then it might seem like you’ve developed a method to avoid getting struck by lightning – but sooner or later you will get hit. And yet value investors are for the most part immune to the thunder and lightning. This isn’t at all to say that value investors never lose money, go bust, or suffer during recessions. However, by sticking to fundamentals and avoiding excessive risk-taking (i.e. dumb decisions), the collective value investor class seems to have much fewer examples of the spectacular crash-and-burn cases that often are found with investors’ who employ different strategies. As a result, value investors have historically outperformed other types of investors over the long term. And there is plenty of empirical evidence to back this up. Check this and this and this and this out. In fact, since 1926 value stocks have outperformed growth stocks by an average of four percentage points annually, according to the authoritative index compiled by finance professors Eugene Fama of the University of Chicago and Kenneth French of Dartmouth College. So, the value investing philosophy has endured for over 80 years and is the most consistently successful strategy that can be applied. And while hot stocks, over-leveraged portfolios, and the newest complicated financial strategies will come and go, making many wishful investors rich very quick and poor even quicker, value investing will quietly continue to help its adherents fatten their wallets. It will always endure and will always remain classically in fashion. In other words, value investing is vintage. Which explains half of this website’s name. As for the value part? The intention of this site is to explain, discuss, ask, learn, teach, and debate those topics and questions that I’ve always been most interested in, and hopefully that you’re most curious about, too. This includes: What is value investing? Value investing strategies Stock picks Company reviews Basic financial concepts Investor profiles Investment ideas Current events Economics Behavioral finance And, ultimately, ways to become a better investor I want to note the importance of the way I use value here. It’s not the simplistic definition of “low P/E” stocks that some financial services lazily use to classify investors, which the word “value” has recently morphed into meaning. To me, value investing equates to the term “Intelligent Investing,” as described by Ben Graham. Intelligent investing involves analyzing a company’s fundamentals and can be characterized by an intense focus on a stock’s price, it’s intrinsic value, and the very important ratio between the two. This is value investing as the term was originally meant to be used decades ago, and is the only way it should be used today. So without much further ado, it’s my very good honor to meet you and you may call me…

Be the first to comment on "3 Big Ideas From The Intelligent Investor"

Leave a comment

Your email address will not be published.