An article on the principles of money management based on the book by Benjamin Graham.
A Fortunate Day in 1949
I’m very pleased to talk to you today about Ben Graham. In my life, there have been several fortunate days, but one of the most fortunate occurred in 1949 when I was 19 and first picked up the book “The Intelligent Investor.” This book not only changed my investment philosophy but truly changed my entire life. I would be a different person in a completely different place if I hadn’t seen that book. I got the foundation of an investment philosophy that has not changed at all since I first read that book.
Ben Graham’s Ideas and Their Impact
Yes, I might have embellished some moments, but it was indeed Ben Graham’s ideas that guided me onto the right path. These ideas had a significant impact on the profession of securities analysts, an impact that has likely affected you and your own portfolios as well, and certainly impacted me.
Modern Markets and Principles of Intelligent Investing
Markets have been reaching new heights lately, and some stocks have soared so high that now is the time to avoid making hasty moves and to remember the principles of intelligent investing. Therefore, we suggest you review the key points from Ben Graham’s book. By the way, I was fortunate enough to author a special condensed version of “The Intelligent Investor” for AST Publishing, where I aimed to present all the content of “The Bible for Investors” in a simple and clear manner. I’ll leave the link in the description.
Values and Principles of Investing
I think at the very beginning, “The Intelligent Investor” won’t teach you how to beat the market. However, it will teach you how to minimize risks, protect your capital from losses, and reliably generate steady returns over the long term. The book “The Intelligent Investor” gives you everything you need to arm yourself with the investor’s mindset necessary to avoid panic during market fluctuations, which affects the average investor.
Investments vs. Speculations
Don’t be an ordinary investor; become an intelligent investor. Speculators differentiate investments from speculations. According to Graham, investments are based on thorough analysis, which promises first and foremost the preservation of capital and then adequate profit. This definition has three crucial components: first — base purchases on thorough analysis of a company’s core activities; second — focus on preventing significant losses; third — aim for adequate rather than extraordinary returns.
Avoiding Losses and Speculative Risks
Interestingly, preventing losses should have a higher priority than increasing profits. Suppose an investor buys stocks at the peak of a bull market, which might bring returns 5% above the market average. The bull market ends, and the next year, the stocks fall by approximately 50%. Even if the stocks then grow at 10% each year, it will take more than 7 years to recover your losses. Speculators buy stocks based on anticipated future price growth or current trends. Every amateur who uses leverage or buys hot stocks is essentially speculating or gambling. Speculation reduces your chances of building wealth. Don’t speculate. Set aside a small portion of your capital in a separate fund. Graham advises keeping this amount to less than 10% of your investment capital.
Speculative Approaches and IPOs
Speculative approaches that don’t work: first — betting on growth stocks. Many investors are tempted by growth stocks. The fact that growth stocks have shown above-average results in the past and are expected to continue showing similar results in the future doesn’t mean it will be so. This is a major risk. There’s no reliable way to pick and focus on the most promising companies in the most reliable industries. Common stocks with good reputations are sold at a corresponding premium. An investor may be correct about a company’s prospects and still gain no benefit because they have likely overpaid for the stocks.
Dangers of IPO Markets
Initial Public Offerings (IPOs). Graham warns investors against buying IPOs, especially in bull markets, for two reasons: first, IPOs often come with higher built-in commissions; second, new issues are almost always sold at the peak of a bull market. The first IPO in a rising market leads to profits, which fuels enthusiasm for subsequent IPOs. An obvious sign of a bull market is when small and lesser-known companies have a higher stock value than well-established companies with a stable history.
Principles of Defensive and Enterprising Investing
According to Graham, there are two types of investors: defensive (or passive) and enterprising (or active). Defensive investors aim to avoid losses, achieve decent returns, and minimize the time spent on the stock market by creating a portfolio that works almost on autopilot. Enterprising investors are willing to spend more time and effort studying securities, hoping to achieve higher average returns in the long run compared to passive investors.
Passive and Active Investors
An enterprising investor according to Graham is not someone who is willing to risk more than a defensive investor. Playing with risk is the domain of speculators. An enterprising investor must have sufficient knowledge about securities to consider their investments as a full-time business. The enterprising approach requires physical and intellectual effort, while the passive approach requires emotional effort. The passive approach demands that an investor does nothing for many years. There is no middle ground between defensive and enterprising investors. An average investor might achieve a decent result with minimal effort, but even a slight improvement requires extraordinary knowledge.
Principles of Value Investing
If you spend a little more time and effort to improve results by choosing stocks, it will almost certainly lead to lower-than-average returns. Therefore, most investors should acknowledge that they are defensive investors and use the appropriate strategies. The principles of value investing: predictive and protective approach. Investors can take advantage of market fluctuations in two ways. Future revenue growth of a company using mathematical methods. Speculators try to time the market by buying based on growth forecasts and selling based on predicted declines. Forecasting is dangerous because the future is uncertain, and inflation, economic downturns, pandemics, and geopolitical upheavals often come without warning. Graham asserts that attempting to profit from market timing for an average investor is sheer folly. Meanwhile, investors who do not try to time the market can find and invest in well-conservatively financed companies.
Analyzing Stocks and Investment Approaches
Consider yourself a partner in a business rather than a speculator. You can view yourself as a buyer and seller of stocks whose price fluctuates based on time, or as a minor partner in a private business whose value depends on the company’s assets and profits. Although many companies are worth much more than their net assets, stock buyers become dependent on stock market fluctuations. For practical and psychological reasons, investors should limit themselves to securities currently sold not much above the value of their tangible assets. When an investor pays significantly more for a stock than the net asset value of the company, they become a speculator in the stock market. An investor who buys stocks close to the value of the company’s net assets can consider themselves a co-owner of a reliable and growing business bought at a reasonable price.
Conservative Investment Approaches
This conservative policy is likely to work better than speculation and market timing. It is surprising how many people have chosen a ridiculous investment approach, relying on analyst forecasts or trendy stocks. These people behave as though market forecasts are accurate and reliable and ignore that market fluctuations narrow their chances of success. Graham advises approaching investments rationally and carefully. Ultimately, intelligent investing requires patience and discipline. Avoid choosing stocks based on fashion or speculative forecasts.
Conclusion: Lessons from “The Intelligent Investor”
Don’t forget the fundamental principles from Ben Graham’s book. They remain relevant today. Reading “The Intelligent Investor” and following its recommendations will help you make more informed investment decisions and avoid mistakes that can be costly. Consider this your path to successful and intelligent investing.
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