Top 5 lessons from "The Intelligent Investor"

A well-known quote says that “If you want to give someone a gift that they can open again and again, then gift them a book ”. 

In this blog, we shall comment upon one such gift that all investors must deep dive into someday in their investing careers. The book is titled “The Intelligent Investor” by Benjamin Graham aka Father of fundamental analysis. 

Many investing sages and learned legends have got innate motivation from the book. Warren Buffett who has penned down the appendix and preface of the book has mentioned at several public forums that - The Intelligent Investor is the best book that he has ever read and he truly reaps the philosophies of the book to formulate his investing modus operandi. The book has been amongst the best-selling books of Wall Street for a very long period of time and is probably the best book given by Benjamin Graham.

Let us dive deep, into the snippets from the ocean of wisdom that this book imparts-:

One Man's Trash is Another Man's Treasure

In one of the chapters, Benjamin quotes that “The intelligent investor is a realist who sells to optimists and buys from pessimists”. At a given price a stock seems to be trash for one and treasure for another and that's the reason for the existence of two opposite forces that compete against one another - the bulls and the bears. 

An investor is not right or wrong because others agreed or disagreed with his connotations; his facts and analysis are right and that makes him right. This brings us to the fact that there are too many things in the stock market that are pretty subjective, valuation of a stock is just one amongst many others at a given price valuation a stock is cheap/fairly priced for one and expensive for another, this is where the two antithetical forces- the demand and the supply enter the game.

The Silver Lining

During the phase when the entire world was chained within their homes amidst nationwide lockdowns no prices seemed too low for the stocks, and now with stimulus packages flooding liquidity into the markets and with an unending bull run, no price seems to be too high for the same stock. 

The people who were the ones selling their stakes in the pandemic are now the ones running after the same stocks even when the prices have rallied 2x times. Benjamin says- An Intelligent investor is one who realises that the stock becomes riskier, not less as its price rises- and less risky, not more, as its prices fall. 

Hence he says that the death of the bull run is not the bad news that people consider it to be but the fact that they are diverging from the fundamentals of the stock. The more a stock has gone up, the more it looks likely to go up. 

His method was to object to the widely held belief that markets are efficient, and instead he vouched to identify undervalued assets via the art of fundamental analysis and long-term investing strategy. 

Investment Vs Speculation

Benjamin says that “People who invest make money for themselves; people who speculate make money for their brokers”. Intelligent investors are the ones who are clear about their goals, who work upon their analysis to scrutinize their investments, and then patiently wait to reap the fruits of the seeds they have planted.

In chapter 1, he further adds - “In the short term the market is a voting machine; in the long term it is a weighing machine.” 

Through this analogy, he wishes to preach - in the short term, we have no way of figuring out what markets will do, but eventually over time, in the long term, markets will return to prudence and reflect their true intrinsic value. 

Benjamin suggests investors to discover assets that will be in huge demand over the long term, buy them, and hold on to them. That concisely is intelligent investing as per him.

Margin of Safety

“We venture the motto, MARGIN OF SAFETY ”, are the three most precious words of wisdom from the book. Benjamin says that both abnormally good and bad times don't last forever; hence, rational investing is one that is done with the end objectives in mind.

The margin of safety for benjamin is the difference between the current market price of the stock and its intrinsic value. He says it's about buying a dollar in 50 cents. Investing in the stock market isn’t about beating others at their game; rather, it's about controlling yourself at your own game. 

One must decide to invest only in stocks they know they would be comfortable owning even if their daily share prices are not known to him. One must invest only if they would be comfortable owning a stock, even if had no way of knowing its daily share price.

Margin of safety concept is about understanding the risk dynamics associated with the investment, understanding the law of large numbers, i.e. probability, understanding the odds that can go against us, and trying to create a cushion for the same one of which could be diversification.

Behavioural Finance, the paver of the way: 

“Sir Isaac Newton owned shares in the South Sea Company, the hottest stock in England. 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 the people.” Newton dumped his South Sea shares, pocketing a 100% profit totaling £7,000. But just months later, swept up in the wild enthusiasm of the market, Newton jumped back in at a much higher price—and lost £20,000 (or more than $3 million in today’s money). For the rest of his life, he forbade anyone to speak the words “South Sea” in his presence.”

The given extract is from the book itself, where Benjamin tries to convey that investments should not be commanded over by emotions of fear and greed. In the short run, the prices of stock may rally in the headwind, whereas as per the fundamentals, they must be rallying towards the tailwind, but sooner or later, the market (share prices) will come to a consensus with the fundamentals.

Here we can say that Sir Issac Newton was the prey to Experiential Bias i.e. he was biased by his recent event (gain in South Sea shares) and thus decided to mimic the event without considering the shares' current valuation. And the fact that at that price, they were overpriced in proportion to their fundamentals. Thus he had his lessons the hard way. 

Benjamin says that at times investors are greatly influenced by human emotions, biases and cognitive limitations of our mind as an organ in processing and responding to information. This is something that an intelligent investor should work upon, their investments must not be completely gut-based/ trend-based rather backed by fundamental and data analysis.

The Bottom Line

‘The Intelligent Investor’ for the people indulged in and around the financial world is just the same as what The bible, The Gita, and The Quran are for the scholars following the paths of various religions. The book puts in context all the risks and rewards of investing in the way an Intelligent Investor does, as defined by Benjamin. 

To give a parting thought, I would again like to quote the person himself from the book where he says that “There is no such thing as a good stock or a bad stock, there are only cheap stocks and expensive stocks”- every best company someday gets a sell call when the price becomes to too high, and that's how it should logically be. Otherwise, markets would have rallied in just one direction towards the north, and if that happens, the market will seem irrational and meaningless.

Comment below what is your outlook on the good stock - the bad stock quote. We at Finology always love to hear from our readers. 

Happy Investing!