Do you want to be the next Warren Buffet? Do you want to invest in a mutual fund, stocks, or perhaps create your portfolio? You may be reluctant to do so because you do not have a fancy business school degree. But in today's world, you don't necessarily require a fancy degree to be an investor.
Start small, start with the basics, because no one comes up with a million-dollar mutual fund without going through the basics. And if you are thinking about how to access financial knowledge, pick up The Intelligent Investor by Benjamin Graham. Also known as the father of value investing, Graham is perhaps Buffet's mentor.
Why Read This Book?
You are not required to fulfill any prerequisites. Similarly, the author does not expect you to be fully aware of the financial jargon of terms used in the book.
Now here is the thing, when Graham wrote this book in the early 1960s, he resorted to a more formal tone, dense financial jargon, numbers, and specific recommendations. Because that was normal, there were not many books written to converse or engage the reader.
We are interested in Zweig's commentary of the said book written in 2003. It has a much more approachable tone. Zweig uses financial jargon, as well. After all, you cannot guide the reader about value investing without using the term, stocks, optimum portfolio, equity investments, etc. However, Zweig's commentary provides a deeper context, definition of terms which Graham missed in the earlier additions of The Intelligent Investor.
How Can This Book Help Me In 2020?
If you are questioning the changing trends in market then you are right. When Graham first wrote The Intelligent Investor, financial markets operated in a completely different manner than they do in the status quo. However, while the market changes, the underlying principles remain the same. So, the book is just as effective as it was at the time it was written.
Here are some Key Takeaways from The Intelligent Investor on value investing that can teach you valuable things on finances and investment:
1. Value Investing Is A 'Defensive Investment Strategy'
If you are a value investor, remember you are playing in the long term. You shall not seek untested new market opportunities. Stay firm, stay safe, and ensure substantial returns. You may be wondering how to do that without seeking new investment opportunities.
Remember, you are in the market to make money. Manage your portfolio a few times a year and detach yourself from daily stock quotes and trends because you don't want to end up in a market bubble.
2. Set Limits to Minimize Loss
Deploy strategies to reduce your damage, start with a dollar-cost averaging, price- to-earnings ratios, and margins of safety.
These strategies are mechanical but mechanical enough to be programmed into a computer, you can make mistakes, but the computer cannot. Graham terms human beings as notorious investors and rightly so. You may bend the rule for one attractive investment opportunity, but the computer won't.
Remember, you don't have to buy an overvalued stock just because you won't get a chance to buy it in the future.
3. Speculation over Value Investing or Vice Versa
For starters, remember you are a value investor, not a speculator or a day trader. Speculators like the adrenaline, the rush to bet on a company's success with high-risk investments but often at times end up with the most significant financial loss.
The stock market is perhaps the same as a gambling den. It is impulsive, attractive, and wants you to place bets without thinking about the consequences. Graham wants you to remove the impulse from the transaction to minimize the likelihood of loss.
4. Focus On Your Portfolio Or Hire A Manager To Do So
To be a value investor, you need to dedicate time to your collection. Even if you are not investing, you have to research and research all year long. Graham puts it this way, 'a value investor either makes an informed decision or no decision at all.'
It is as simple as that if you want to bet high, make sure that you have enough research to do so. Similarly, if you cannot dedicate enough time towards your investment, divert towards mutual fund or index funds for better understanding.
If you hire a fund manager, you can be assured that you will have a professional guiding you along your investments.
5. Exercise Caution
It is perhaps true, high risk entails high investment, but there is a limit to risky ventures, and that invites caution. It was the same phenomenon, back in 2008, when junk bonds lured investors into unstable investment.
The majority of the 2008 investors did not realize that the scale of risk was so enormous, and probable returns did not outweigh the risk.
6. Past Performance Does Not Guarantee Growth
If you have ever been through investment webinars or guidance videos, the presenter always pushes bar graphs, numbers, or charts at you not to guide you but to confuse you.
Projections, trend analysis based on past performance may be right, but they are not always right. There some classic examples in the book, the dot com stocks, and internet investing picked up in the early 2000s, but then what became stagnant. Therefore it is important to consider past projections but not to base an entire decision on a single forecast.
7. The Seven Criteria
If you are a defensive investor and you have thousands of NYSE stocks in front of you. How do you make the right choice to generate returns and mitigate risks?
Graham gives you the seven specific criteria to do so. Applying the requirements is an evolutionary process; it helps you to eliminate the worst possible stocks and make the best possible selection.
8. Go Beyond Numbers
If you are an average investor, you may not involve yourself with dry accounting methods and practices. You have accountants to do that for you, which end up in manipulating numbers.
They may show you promising numbers, but it is possible that your investment is not doing well. You shall have the ability to identify questionable accounting practices.
9. You Are the Owner
As a stockholder, remember that you are the owner and you may assert your right to make decisions or look after the company.
Be an active participant in the company's day to day activities. You don't have to be a majority shareholder to do that. Even with a single stock, you're eligible to exercise your right as a majority stockholder.
Whether you study Graham, Lynch, or Buffet's path towards value investing, remember, you are the value investor at the end of the day, and you can always be innovative about your strategy.
Start Your Financial Journey Today!
All of these takeaways will help you start your journey but you must remember that they can only help you if you seek a professional course. You need to study the current market and its trend before applying these principles to invest in any area of interest. Financial journey is a long one that is filled with many ups and downs. But as long as you stick to the takeaways and principles of investment, your financial journey will be good to go!