Many successful investors consider The Intelligent Investor to be the bible for value investing. Benjamin Graham wrote the book, which lays out all of the value investing principles in one place.
Warren Buffet was a student of the Author in his early on college days. In the preface to the fourth edition of the book “The Intelligent Investor”, Buffett shares some exciting insights from his life, his overall review of the book and recommends the reader to focus more on chapter 8 and 20.
Here’s why Warren Buffett recommends investors to read chapter 8 and 20 of the intelligent investor
Chapter 8 “Investor and market fluctuations”
This chapter highlights the beauty of stock market price movements. As you know the prices of the stock are dependent on the demand and supply of the shares. This is directly proportional to the psychological bias of the investors.
A stock once brought will continue to be over-brought and once sold will continue to be over-sold till you lose all your money.
The prices of these stocks are not in line with the fundamentals of the company in the course of price movements. This gives the investor a wonderful opportunity to invest in stocks when they are available on a discount.
There is an interesting story about Mr. Market which sums up the entire stock market game for all investors. The mood swings of Mr. Market directly implicate with the stock market movements. When the markets are bullish, the stock will continue to be bought even at high valuations. On the other hand, if the markets are bearish, the stock will continue to sell off. This being, irrespective of the fundamentals of the company.
According to Buffett, these bearish and bullish trends are the most ideal scenarios for investors to buy and sell stock for long term investment.
Be greedy when others are fearful; be fearful when others are greedyWarren Buffett
The book differentiates the investor from a speculator
Quoting Page 205 of The Intelligent Investor “The most realistic distinction between the investor and the speculator is found in their attitude towards the stock market movements. A speculator’s primary interest lies in anticipating and profiting from market fluctuations. The investor’s primary interest lies in acquiring and holding suitable securities at suitable prices“.
Key takeaways from chapter 8
- Prices of the stock move in a zig-zag patters. These movements are called fluctuations.
- The value of the stock may not truly depict the value of the business behind that stock.
- The beauty of market fluctuations is that you can own businesses at a price lower than it’s actual value.
- Profits are made while buying cheap and selling it when the prices are overvalued.
Chapter 20 “Margin of safety”
Warren Buffet thinks this chapter is important because, not all the stocks we choose will yield us with good returns. There is a possibility that even a stock with great fundamentals and a good business model can turn bankrupt over a period of time.
Thus, the best way to safeguard oneself from such losses is by practicing the concept of “margin of safety”.
Margin of safety is the difference between the stock price and the intrinsic value of the company. The stock price is the market price of the stock on which it is currently trading and the intrinsic value is the true worth of the company.
The importance of having a margin of safety is that it allows investors to invest in stock at a discount. The investors who purchased the stock at a bargain has already profited from their investment, and the rewards are simply a matter of time.
Key takeaways from chapter 20
- Pay the right price for the value of you investment.
- Invest in companies based on the fundamentals of the company .
- Wait for the right time to price your investment at fair valuations.
- Diversify your portfolio to safeguard your assets from risks.
The mix of these chapters on the investors mindset
Market fluctuations and margin of safety are somewhat connected to each other. The relationship between the two, can entirely sum up the investment decisions made by Warren Buffett in his entire investing career.
Market fluctuations give the investors an opportunity to buy stocks at their price lower than the intrinsic value. An intelligent investor needs be smart to find the right stocks to invest in and have patience to wait for the stock to reach the right price. Following this method and some asset diversification can aid you to be a great investor.
These are indeed the most insightful chapters from the book “The Intelligent Investor”. I highly recommend you to buy a copy of this book as it will give you a better perspective on value investing.