Have you ever considered investing in the stock market? How about dreaming of being able to invest like Warren Buffett? The chances are this has crossed your mind, but as like many of us, are hesitant to do so due to financial crisis, fears of dot com bubbles and market crashes. But there is a way to invest that doesn’t leave you at risk of losing everything. It is the method outlined by Benjamin Graham in 1949 and published in his book The Intelligent Investor. His most famous student Warren Buffett has gone on to be the most successful investor of all time. So, what can we learn from the book?
Intelligent investors take their time
You can earn a lot of money from investing, but you can also lose a lot. Intelligent investors don’t just jump into the latest hot stock or commodity, they take their time and use thorough analysis to secure safe and steady returns. Its not fancy, but it reaps significant dividends over time. This is a vastly different approach to what many consider when investing, which is essentially speculating, or to put it more bluntly, gambling. Even if an intelligent investor thinks that a company is a great investment, if the price is the wrong one, they will not invest in it. They only buy when its intrinsic value is below its share price.
Intelligent investing has three principles
The book proposes that there are three core principles to follow. The first of these is that you should analyse the long-term development and business principles of the company you are considering investing in prior to buying any shares in the company. While share prices can seem to fluctuate on a whim day to day, over the longer term, their long-term value will be dependent on how the company performs. They don’t fall into the trap of only looking at short term earnings or some fancy news headlines. Second, they diversify their investments, so that they mitigate their risk. They do not put all of their eggs in one basket. Third, they understand that the goal is not to bring in extraordinary profits, but instead safe and consistent returns.
Don’t follow the crowd
The stock market is often more emotional than rational. The psyche of most investors and the market in general swings wildly depending on the mood, regardless of the actual facts. When things are going great, prices can skyrocket across the board and not just for those companies that are actually doing well. Likewise, when things are going badly, prices will fall, even for those companies who are doing well. An intelligent investor stays rational and realistic and doesn’t follow the crowd or panic in the face of market fluctuations. Instead stay focused on market fundamentals regardless of the emotions of the market and those investing in it.
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Lee Nallalingham 