Warren Buffett stated that all you need to know for profitable long term investing is Chapter 8 and Chapter 20 of Benjamin Graham’s book The Intelligent Investor. The Chapter is titled “The Investor and Market Fluctuations” which is something we are all always following and intrigued by. The key is to prepare both financially and psychologically for stock market fluctuations.
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Stock Market Fluctuations - Take Advantage - The Intelligent Investor Book
Transcript
Good day for investors. We continue with our coverage. Summary discussion of Graham's book The Intelligent Investor. And today we talk about the chapter that Warren Buffett says is the most important chapter of the book. Chapter 8 The investor and market fluctuations so what to do in relation to the market that goes up and down all day long. There are two ways you can go about market fluctuations. One is look at try to time the market and the other is try to price the market. Graham is straightforward about timing. He says that all the strategies in the past worked for sometime but they don't. They don't work and then investors usually get in to a strategy at the wrong point in time. It's easy to look at past patterns and expect them to replicate themselves in the future. If we just checked the S&P 500 over the last 20 years everybody expects that after a crest stock rebound stocks rebound immediately but you never know if a crash will happen or if stocks will rebound again immediately. So therefore grand strategy is to look at the price and the value of what it's offered. The earnings the business. So again a business attitude is key and that's the key message of the chapter business attitude. You have to look at a stock as that you are a private owner a private partner in the business if there wouldn't be no stock exchange no stock prices that go up and down you wouldn't care about anything else and you would stick to OK what are the earnings what are my dividends. What is the value that I get.
What's the improvement in the book value per year that I get per year. That's it. Furder can you buy low sell high. We are all attracted by market cycles. Looking at past stocks chart makes you wish you sold out in 2007 and bought more in 2009 but it all looks is in hindsight. If we look at it from the last 10 years one would have been extremely happy if sold in 2011 if you bought in 2009 because the market doubled by then and then crashed into 2011 12. However since then stocks have again doubled. So he will have missed on 100 percent gains if sold back then. So Graham is against selling a stock just because it went up or selling a stock just because it went down. Here's the key is always. OK look at the intrinsic value to you as an investor what's the return you expect. What's the risk. And then when the stock is way above that intrinsic value you want want to reduce your exposure. And when the stock is way below that intrinsic value you want to increase your exposure. This is a key statement that he says most probably our holdings will advance 50 percent or more from their low point and decline for 3 percent or more from the high point in the next five years.
