Top 10 investing lessons from the book Intelligent Investor by Benjamin Graham
In the book Intelligent Investor, Benjamin Graham lays out the principles of value investing. This post will look at 10 tips from that book that can help improve your approach to investing. I've also included some links to other posts to continue your learning about value investing.
1. Define and focus on your target asset class.
Understanding what you're trying to achieve is everything when it comes to investing. Before you start, define your target asset class and set a goal for yourself.
Be ambitious: don't worry about what other people's goals are, but be realistic in terms of the amount of money that will be required in order for you to reach your goal. Don't forget that the market has ups and downs, so it is important not to put too much money into riskier investments if you are trying for something big (like early retirement or financial freedom).
Once you've done this, narrow your focus on what kind of investments will help you achieve your goal. For example, if you want to save up for retirement in 10 years and have $10,000 sitting around doing nothing right now then investing some or all of that money into an S&P 500 index fund would be a great idea since it is a relatively safe investment with potential returns above 10% annually over time.
2. Evaluate financial statements.
Benjamin Graham's first tip for evaluating a stock is to look at the financial statements for the company. Financial statements are a snapshot of a company's performance, and they can tell you a lot about how much profit or loss a company is making and how it's being financed.
The first step in examining financial statements is to look at assets versus liabilities: if total assets exceed total liabilities by more than 20%, then this indicates that there might be hidden value in the company. It also tells you that liquidation would be profitable for shareholders because there would be more money coming back to them than what they put into the investment.
The next step is to look at earnings per share (EPS). If the EPS has been falling consistently over several years, then it's likely that management does not know how to effectively run the company or generate returns for shareholders. If EPS is increasing steadily, then this shows strong performance and a better chance of future growth.
3. Understand investment risks.
The first step in making intelligent investment decisions is to understand the different types of risk and how they work. Risk can be defined as the possibility that you will lose money on an investment. There are two kinds of risk: good and bad. Good risks are those for which your share price fluctuates, but it usually increases over time—this is what we call positive volatility (or “growth”). Bad risks have constant share prices; this is known as flat volatility or no growth.
When analyzing an investment, it's important to know if its volatility (or lack thereof) will be good or bad for your portfolio overall. If an asset has low volatility, but provides no income from dividends or interest payments, then it might not add much value over time despite its stable performance; similarly, if an asset has high growth potential but also comes with high risk factors that could threaten your portfolio balance at any moment (such as fluctuations in commodity prices), then you may want to look elsewhere for a suitable investment opportunity instead.
Risk is a function of the amount of capital you invest. This means that as your investment grows in value, so does the risk associated with it. For example, if you're looking to invest $100,000 and want to know how much volatility (or risk) there will be in your portfolio, then it all depends on what kind of asset you choose. If it's a low-risk asset like government bonds or high-quality corporate debt securities (such as those offered by Coca
4. Understand how the stock market works.
The stock market is a place where people can buy and sell stocks, which are shares of ownership in a company. The price of the stock fluctuates depending on how much people are willing to pay for it at any given time.
If you're not familiar with how stocks work, don't worry! We'll walk through an example so you can see exactly how this works. Imagine we're back in 1803 and there's only one company that everyone owns—the East India Company (which was originally set up as a trade company). Let's say that today is your birthday, so you decide to sell your shares in the East India Company because they've been doing really well lately and you want to spend some money on yourself instead. There might be other people who want to buy shares too: maybe one person likes investing in businesses that do well; another might think he knows something about spices; someone else may just want an investment he feels safe with because he doesn't know anything about business but heard good things about the East India Company from his neighbor who also happens to have some stock . . .
If you want to buy a share, but don't have enough money for it yet, that's okay—you can borrow some from the East India Company (or a bank) and then repay them as soon as your own shares go up in value so that you don't end up with too much debt. If things go according to plan then everyone will make money! But what if everyone decides to sell at once because they're worried about what would happen if one of those other companies goes bankrupt
5. Understand how your broker makes money.
Brokers make money by charging commission fees, and they make money in other ways. Some of these are legitimate, but some are not.
Brokers can charge commissions on the products they recommend to you. This isn’t necessarily a bad thing—they have to make a living too! But it’s good to know what you are paying for and what value you are receiving for those fees.
Brokers also earn commissions from trading in their own accounts (or those of their family members). There is nothing wrong with this either; they need money to pay their bills just like everyone else does. Just be aware that if your broker is generating extra profits through such transactions, then he/she may be more likely than others to push them onto clients in order to earn additional income without giving them any added value beyond basic investment advice
Brokers make money by charging commission fees, and they make money in other ways. Some of these are legitimate, but some are not. Brokers can charge commissions on the products they recommend to you. This isn’t necessarily a bad thing—they have to make a living too! But it’s good to know what you are paying for and what value you are receiving for those fees. Brokers also earn commissions from trading in their own accounts (or those of their family
6. Set and follow a personal financial plan.
A sound financial plan is critical to successful investing. It’s also one of the most important things you can do as an individual investor, as it will give you a framework for managing your money and help ensure that your investments are aligned with your goals and values.
To create a financial plan, it helps to start by taking stock of your current situation. You might want to do some research on how much income you need each year, what expenses are draining away at those funds (such as housing or college tuition), and how much insurance coverage you currently have in place (homeowner's insurance? Life insurance?). Once these figures are calculated, then ask yourself: am I saving enough money each month so that I'll be able to meet these expenses later on? If not, what steps can I take now—either cutting back spending or earning extra income—to get myself into better shape?
Once this assessment is complete, use it as the basis for creating a detailed financial plan with goals that align with yours.* For example: "I want $200k in savings by 2022." Or: "I want $50k left over after all living expenses each year so that we can travel." These goals will determine where exactly to invest; if one doesn't fit well within the other parts of their overall strategy then maybe this isn't where they should be putting their money after all!
*The key here is being realistic. Don't set an unrealistic goal ("I want $2 million in savings by 2022"), but instead focus on what will work best for you, based on your own situation and goals.
7. Actively manage your investments.
You cannot passively let the market do all of the work for you. You need to actively manage your investments by doing something that changes the outcome of a position or portfolio. This may include buying or selling securities, changing weightings within an existing portfolio, or taking profits at some point along the way (or not).
Don't make knee-jerk reactions in response to short-term fluctuations.
While it's ideal to keep a long-term outlook on investing and not jump into trades based on short-term fluctuations in prices, many investors are tempted by their emotions when markets turn volatile early in an economic cycle.* When this happens, they often adjust their portfolios too quickly and end up locking in losses because they sell stocks at lower prices than they could have if they had waited longer.
The best way to avoid making this mistake is by recognizing that you don't need to react to every single situation in order for your portfolio to grow. If you have any doubt about what kind of changes are necessary, we recommend reading up on how other investors approach portfolio management—or talking with an investment adviser.
A good approach for active management would be to keep your portfolio's balance between investments and cash steady. This will prevent you from being forced into a bad decision when markets turn volatile again.
8. Consider paying someone else to manage them for you.
If you want to make money from investing, don't waste your time trying to do it yourself. As the book says: "The investor who is buying a stock must be sure that he has the necessary knowledge of its business and management, for only if he has such knowledge can he determine whether or not his expectations are reasonable."
If you don't have the time or expertise required to manage your investments yourself, consider paying someone else to take care of them for you. This can be done through a financial advisor or even an automated investment tool such as Wealthsimple or Betterment (though there may still be fees involved).
Paying someone else to manage your investments is a good idea if you don't have the time or expertise to do it yourself. This can be done through a financial advisor or even an automated investment tool such as Wealthsimple or Betterment (though there may still be fees involved).
This way, you'll know how your money will perform over time—and whether or not those expectations are reasonable.
The Intelligent Investor by Benjamin Graham is one of the most important books on investing ever written. In this article, we'll explore 10 fascinating tips from its pages that will help you become a better investor.
9. Investing is like playing an instrument.
You practice with an instrument until you're able to play it, then you move on to something else.
The same goes for investing: You invest in stocks, bonds and other securities until your portfolio reaches a level that meets your needs, then move on to another asset class or type of investment. For example, Graham suggests investors start off by investing in common stocks but gradually sell the ones that have performed well and replace them with others that have performed poorly over time while continuing to hold cash reserves on hand in case needed during market declines or times of economic uncertainty (which unfortunately occur regularly).
10. The goal of investing is not to get rich quick but rather make sure you're financially secure for life.
You need to invest wisely so that the money will last even when times are bad.
The same goes for any other instrument you play. You practice with a guitar until you're able to play it, then move on to another instrument. The same holds true for learning how to cook, paint or do anything else. Once you know how one thing works, then you'll start mastering those skills over again from scratch.
For example, if you're a beginning investor and want to get started with investing, then it's important to learn the basics first. You wouldn't go out and buy a violin before learning how to play one. Similarly, don't dive head first into investing without first learning about money management techniques or financial planning concepts such as diversification or dollar-cost averaging.