Benjamin Graham was one of the most influential investors of all time. His book “The Intelligent Investor” is a must-read for anyone who wants to learn about finance.
Graham advises investors not to beat the market but instead focus on buying stocks at good prices and holding them until they reach their intrinsic value.
The intelligent investor has inspired numerous investors to get into the market. Here are some of the key insights from the book.
1. Market is irrational
According to Benjamin Graham, the market is irrational, and the investor has to be rational. This was not just a one-time comment: he made this remark over and over again through his writings on securities analysis.
For an investor to make money in markets, they have to take risks and grow their money steadily. The irony of investing is that as more people buy into something (like stocks), the price goes up. But then when those same people want out because they’re afraid of losing what they have invested, prices go down.
The market is irrational most of the time. This means that investors need to be very careful when determining a stock’s value and what it should sell for – just because Apple has been selling well recently doesn’t mean it will continue being popular tomorrow. To make money in the stock market, an investor must take risks and grow their money steadily.
The biggest challenge for investors is to make sure they don’t become too complacent or give in to irrational exuberance when markets are going up. If prices get high enough, it is time to sell off some of those stocks before a decline starts.
Investors cannot just sit back and relax when the market is going up, they should sell when prices are high to avoid loss. Investors cannot let themselves be pulled in by a stock’s price movement. Irrationality will prevail over value in the short term, but not in the long run.
2. Diversification for defensive investor
Diversification is one of the most important concepts in investing. This lesson by Benjamin Graham helps investors understand why diversifying their portfolio can be beneficial and how they should do it. Diversification means to own investments that are not the same type.
It helps to reduce risk. At the same time gives you exposure to several different opportunities so that your money will work for you instead of just sitting there. While investing in bonds and stocks, an investor should aim at buying them at a ratio of 1:1 because of eventualities. It is better to have continued smaller returns than gain fast but lose your investment at once.
They should be diversified in a way that all of them don’t have the same risks. If an investor has more stocks than bonds, it is advisable to sell some stocks and increase the position of the bond.
On the other hand, too much diversification can reduce portfolio returns by reducing the amount invested in your best ideas. Diversifying across uncorrelated asset classes in an attempt to reduce risk can be counterproductive because it reduces exposure to your best ideas.
Suppose you spread yourself across too many investments. In that case, the only way for investors in a ‘diversified portfolio’ to outperform is via stock-specific momentum. That means you’ll be buying what has gone up and selling what’s gone down.
3. Avoid growth stocks
Benjamin Graham believed that it is better to buy low-priced stocks than high-priced stocks because the potential return on investment will be greater.
Growth stocks have fast-paced expansion plans and high revenue expectations, which cause their stock prices to increase over time. Unfortunately, this means that you should avoid investing in these types of companies if you want your investment portfolio to grow faster than other investments.
The most successful investors, including Warren Buffett and Benjamin Graham, look for undervalued stocks. These companies have a strong financial position with high profitability levels compared to their competitors. They also offer the potential of market share gains, which will increase overall earnings per share over time.
By investing in value stocks, you can expect your portfolio to grow faster than other types of investment. This is because value stocks are usually undervalued by the market and offer a margin of safety to the investor, which means that you can expect them to appreciate in price over time.
4. Margin of Safety
The margin of safety concept, as developed by Graham, states that to help avoid significant losses when investing, it’s important to buy stocks at prices lower than their intrinsic values.
The margin of safety is also known as a security’s or asset’s “buffer zone.” The greater the gap between price and value, the wider this buffer. When you buy stocks at prices well below their intrinsic values, there is far less risk involved than when buying them closer to what they are worth because it allows for error if your estimate of the stock’s value was wrong.
This concept is still used in investing to this day, though it has changed somewhat over the years as markets have become more efficient and information becomes easier for everyone to access. Graham himself said, “In general, a sufficiently large margin of safety will guarantee survival against mistakes.” If you buy stocks below their intrinsic values, the possibility of loss is minimized.
The margin of safety lesson by Benjamin Graham can be applied to all levels of investment and investing in general. This idea has been adapted over time as markets have become more efficient but remains a valuable tool for those looking to minimize risk when buying or selling securities.
5. No correlation in risk and reward
Graham talks about the correlation between risk and rewards being non-existent in investing. Investing can be seen as a series of trades that have different levels of risk associated with them. Many people are under the misconception that there is a correlation between risk and reward. Benjamin Graham explains why this is not always true and goes into detail about investing for the long term.
The possibility of losing money defines risk. It has nothing to do with how much you have already made, nor does it consider whether or not you are making more than average returns on your investments. The potential for loss can be figured in numbers. However, this means little when it comes to investing, which should always come down to risk and reward.
Graham says, “The best way to measure risk is not by the number of times you may lose money in a given investment, but rather how many years it will take before you break even after your initial purchase price.” This means that investors should focus on an asset that is worth more than what they bought it for. The longer you hold on to your investment, the less risky it becomes as long as its value continues to rise at a steady rate.
We often try to define risk by breaking down what has happened in the past and using that information to predict future results, but this is not always true when investing. Investing is more about a person’s willingness to take on risks and their time frame for potential returns.
6. Contrarian thinking
Contrarian thinking is the act of going against the grain or following a different path than what others are doing. This can be difficult for most people to do because it requires them to think differently than the norm. Benjamin Graham was an investor who gained much success through his contrarian thinking strategies.
While investing in stock, contrarian thinking should be applied to help you make the right decision. Contrarian thinking is when you go against the crowd instead of following it. This technique can help investors make better investment decisions because others do not influence them in their judgment or analysis of a stock’s potential to increase value over time.
The contrarian theory suggests that if everyone believes something will happen, then the opposite is likely to happen. According to Benjamin Graham, a well-known economic analyst, and writer who created the concept of value investing in financial markets, this theory applies when an investor has many people selling stocks with nothing but pessimism surrounding them.
For contrarian thinking to work effectively, you need to estimate if the current price of a stock is lower than its actual value. This can be done by estimating how much cash flow the business earns per dollar invested in it, which is known as the “cash on cash return” or simply “the cash-flow yield.” The higher this number, the better off you are because if your cash-flow yield is greater than the interest rate that you receive on your money, then investing in this stock will increase your wealth. The cash flow return can be estimated by figuring out how much a company makes per dollar invested and multiplying it by one minus tax rates or capital gains taxes.
7. Look beyond yield
There are many reasons you might want to look for low-risk investments, but if you do not have a long-term investment plan, this is not what you should be focusing on. One of the biggest mistakes many investors make is assuming that they can predict the future value of an asset and buy or sell accordingly.
This strategy does not work because it relies on predicting what other people will do with their money. Benjamin Graham tells readers to look beyond the yield on a stock when deciding whether or not to invest in it. This can be applied to any investment you might make, from stocks and bonds to real estate.
The key is that if you are only looking at one factor, such as the yield on a bond, then you may miss out on other factors, which could lead your decision-making process astray. Investing in stocks can be a great way to build your wealth and diversify your portfolio. However, it can be hard to find the right ones for you with so many different stocks out there.
One of the most important things you should look at when investing in any stock is its yield — How much income does it generate per share? Other factors are just more important than yields, such as price-earnings ratio, company size, and dividend rate.
8. Investment is a process
You cannot get rich by simply investing in a stock. Sure, you might make some money, and it will probably grow over time because of the power of compounding interest. But if you want to be wealthy, you need to invest your time and effort into the investment process.
Intelligent investors should base their decisions on a valuable framework that guides them in the process of investing.
Investing is a process that requires patience, hard work, and discipline. This means that you should not invest in something simply because it seems like a good idea or everyone else is doing it. Instead, make sure to do your research on the company’s management team, its financiers, competitors, before investing in an asset class such as stocks or bonds.
Investment is not a sprint but a marathon. You need to have the discipline and patience to wait for your opportunities to arrive so that you can take advantage of them. Investing is not gambling and does not just happen overnight. It takes time to research companies and learn how the economy works before making your investments. If you want to be wealthy, then invest in this process because it’s not easy or quick, but if you do things right over time, you will reap the rewards.
9. Dollar-cost averaging (DCA) strategy
DCA means investing your money into an investment vehicle regularly, regardless of the security’s share price at the time. This is where investors lose money because they do emotional things like selling all their stocks at a bad time or buy them when prices are too high. It will help you take advantage of the market dips. This also keeps you from letting your emotions lead your investment decisions.
DCA can even be used with mutual funds to maximize profits while minimizing risk, and it can be used for either long-term or short-term investing. With this strategy, you will earn more money than if you just bought shares at one time and then held them until the share price went up again. It is a great way to get rich slowly over time without taking too much risk.
A dollar-cost averaging strategy is one of the best ways to invest your money when you are not sure what choice to make. It reduces risk by spreading the purchase amount over time, thus allowing investors to limit their downside in the event of market downturns while also preserving the opportunity for higher rates of return if markets are on an upward trend.
10. Value investing
Value investing is one of the most important concepts in finance. There are many ways to invest, but value investing takes a lot of risk out of the equation and can help you maintain your financial stability even during tough economic times. The goal of value investing is to buy stocks that are undervalued and sell them when they reach their true worth or higher. It’s not an easy strategy, but it has proven itself time and again as the best one for investors who want to make money in the long term.
Graham explains the importance of having a margin of safety in your investments to make sure that you are buying stocks that are priced below their true worth. The goal is not to buy stocks at any price but rather to buy stocks at prices significantly below what they should be worth. This makes sense because it doesn’t matter how good an investor you are if you’re paying too much for your investment and don’t have sufficient room for error or loss.
Graham advises investors to think long-term and buy assets that will generate value in the future. He suggests that you not try to time the market but rather buy your stocks and hold on to them until they are truly overvalued.
This is a great lesson for investors because it’s important to understand how to build wealth through investing without taking too much risk or trying to beat the market.
Final words
The book Intelligent Investor by Benjamin Graham is a valuable resource for anyone who wants to learn about the process of investing. Anyone, whether they are a seasoned investor or a newbie can learn many things from this book. It is critical to note that investment is not something you can do without hard work and dedication.
For a person starting to invest, the lessons will help you get started by providing insights into how the human brain works, what motivates people in terms of investment decisions, and how cognitive biases can affect your investments.
Related: Top 10 Key Takeaways from the Book: Think and grow rich
