When Warren Buffett placed The Intelligent Investor at the top of his reading list with a quote on the cover that reads, “By far the BEST book on investing ever written”, I would think we HAVE to take notice of it.
We here at Value Invest Asia also rate The Intelligent Investor rather highly – In our opinion, it ranked among our top five books that an investor has to read.
“Serious physicists read about Sir Issac Newton to learn his teachings about gravity and motion. Serious investors read Benjamin Graham’s work to learn about finance and investments”
Who Is Benjamin Graham?
Benjamin Graham was known as the “father of value investing” and the “Dean of Wall Street”. He was one of the pioneers that took the concept of investing from an art form to a ‘science’ with famous disciples spanning from Warren Buffett, William Ruane, Walter Schloss and many others. He was so influential to Buffett that Buffett’s named his son Howard Graham Buffett after him – That says a lot!
Graham was also the author of “Security Analysis” which was considered as the investment bible. However that might be rather technical for investors who have just started investing. Let’s first start with The Intelligent Investor 😀
Why We Think The Intelligent Investor Is A MUST READ!
Even after 65 years (Yep it was first published in 1949!), the principles within the book still held strong till today. How The Intelligent Investor stood the test of time was primarily due to its easy-to-read nature with a minimal use of confusing financial jargons. All of the examples used in the book are real-life examples (Of course during his time) and not some hypothetically cases that we often see in financial textbooks.
In our opinion, some examples of what the book teaches us include:
1) This isn’t a get rich quick book, there isn’t any
2) Investing doesn’t require a high IQ, unusual insights or inside information
3) What you need is a sound intellectual framework and emotional discipline
4) Know the difference between investing and speculation
5) We have to use the market instead of depending on it (More on Mr Market later!)
6) Approach investing as business-like as possible
7) Avoiding pitfalls are as important as getting a finding opportunities and many more!!!
What Makes The Intelligent Investor Timeless?
In our opinion, we felt that why its principles stood the test of time was due to the fact that it was tailored more towards our attitude towards investing than setting a definite quantitative target.
Let’s consider Graham’s definition of investing (Which we think is the best out there so far!):
“An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative“.
This simple yet broad definition pretty much sums up how investing is. Given the fact that everyone is different, different levels of wealth, different priorities in life etc., it just isn’t possible to specify a definite target in terms of risk and return. What is deemed adequate by me may be too risky or too conservative by you.
This is where the fun part about investing comes in:
Sorry to burst any bubbles out there but there isn’t any ‘correct’ intrinsic value of a company. Two investors can be given exactly the same variable and come to vastly different conclusions.
At the end of the day if we have a structured and easily replicated framework to approach investing, that’s all that matters. Knowing yourself is really half the battle won!
Let’s focus on Chapter 8 and 20 of The Intelligent Investor
Why did Buffett mention to pay attention to these two chapters?
Chapter 8: The Investor and Market Fluctuation
Benjamin Graham coined this term Mr Market to describe the market. Basically Mr Market is a hypothetical investor who has some emotional issues and approaches investing based on his mood instead of any fundamental reason. And that is essentially how the stock market works. The market is based on the optimism or pessimism of the collective at any point in time. And being human, we are all irrational – meaning to say that more often than not, fluctuations in the market may be due to nothing other than emotional reactions.
The takeaway here would be that we have to learn how to use Mr Market and not rely on it.
Chapter 20: “Margin of Safety” as the Central Concept of Investment
If we only have ONE takeaway from The Intelligent Investor we better remember these three words – Margin of Safety!
We cannot only concentrate on getting our analysis right, we always have to ensure against loss in the case that our analysis goes south. At the end of the day, the future is unpredictable and the probability of making at least one mistake is frankly 100%. Remember when you lose 50%, you need to make 100% just to breakeven.
What the margin of safety concept teaches us would be to take a buffer for our analysis to cushion for when things go south. If we factor in the downside and even then the investment still looks interesting, we are on to something!
Value In Action
We hope that we have ‘leaked’ enough to intrigue you into reading this investment classic! Now we leave you to uncover the gems within The Intelligent Investor.
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All views and opinions articulated in the article were expressed in Mun Hong’s personal capacity and do not in any way represent those of his employer and other related entities. Mun Hong does not own any shares in the companies mentioned above.