“Tihar” festival has come to an end. The beautiful part about the festival is that it teaches us to acknowledge the power of wealth. Goddess Laxmi is worshiped in the festival with the faith of preserving and accumulating wealth. However, money does not come easy. A lot of hard work and dedication is required to maximize wealth. In this article, we discuss a small portion of a book that has encouraged maximize wealth through investing.
One of the world’s wealthiest person, Warren Buffet accredited “The Intelligent investor” as the book that mentored his ways of investing. Written by Benjamin Graham, The Intelligent Investor is a well written investment plan for ordinary investors. Ordinary investors lose their way out when they begin their investment or are in the process. So, Graham wrote The Intelligent Investor to guide the ordinary investors into their investing journey.
While he wrote this book, Graham looked back to the 49 years of history of stock market and concluded that sound investment principles produce sound investment outcomes in the stock market. Benjamin Graham covered three important topics in the book. Those topics are:
Investing vs. speculating: Graham clearly distinguishes the principles of investing and speculating through his definition of investing. “An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.” Furthermore, Graham explains that intelligent investing involves fundamental analysis, calculated risk management and the pursuit of reasonable return. Graham encourages reader to allocate separate funds for the two activities: investing and speculating, ensuring the later does not cross the fund allocation limit of 10%.
The margin of safety: This is one of the finest risk management principle taught by Graham to the investors. He defined margin of safety as the deviation between the real value of stock and the price the investor pays. As per Graham, a number of times, investors usually predict fair price of stock far higher than the actual price. They further purchase the stock at a premium. However, Graham believes every stock should have a margin of safety that can minimize losses even if the conditions for the company or investment changes.
Theory about Mr. Market: In a storytelling way, Graham introduces the character of Mr. Market in his book. The role presents an important message to investors that they can buy the stocks at lower prices and sell at higher prices. Moreover, Graham also suggests investors that if the price of the stock is not as per their prediction, they can simply ignore Mr. Market (i.e. avoid buying shares).
Graham puts an effort to distinguish between Defensive Investor and Enterprising Investor. He defines defensive investors as passive investors who are satisfied with average market return and enterprising investors as those who put an effort to beat the market. In his book, Graham provides advices that suit both of the categories of investors.
For ordinary investors, the book can be a great guide to initiating stock market. The book is an excellent example that motivates investors to invest even in the bear market provided that the book suggests to buy shares below the fair price and to buy shares every month in order to average the cost of shares purchase.
The beginners can take this book as a tool that prepares through the upcoming risks from the market. The examples provided in the book can help beginners prevent themselves from several pitfalls of wrong investment.
Graham’s comprehensive book’s important points related to investing might not be summed up within few words. The first edition of the book dated back to 1949 yet its lessons convey a timeless wisdom into investing. The examples, analogues and definitions required in any stock market are well put in a conceptual framework in the book. Dear readers, let us know about your favourite chapter in the book.