The Intelligent Investor- Benjamin Graham
Born as Benjamin Grossbaum on 9th May 1894 in London. His father was dealer in China dishes and figurines. They have maid, cook and a French governess. His father died in 1903 and family went into poverty. Graham won a scholarship at Columbia. Graduated in 1914, second in class. He was 20 years old. Join Wall Street as a clerk, instead of academia.
Henry David Thoreau, Walden, “If you have built castles in the air, your work need not be lost; that is where they should be. Now put the foundations under them”.
“All of human unhappiness comes from one single thing: not knowing how to remain at rest in a room.” Blaise Pascal.
Graham’s definition of investment as “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return”.
3 elements of investing:
you must throughtly analyse a company, the soundness of its underlying businesses
you must protect yourself against serious losses
you must aspire to “adequate”, not extraordinary, performance.
An investor calculates what a stock is worth, based on the value of its business. A speculator gambles that a stock will go up in the price because somebody else will pay even more for it.
Henny Youngman talked about inflation, “Americans are getting stronger. Twenty years ago, it took two people to carry ten dollars worth of groceries. Today, a five year-old can do it.”
REITs are companies that own and collect rent from commercial and residential properties. Good inflation fighters.
An intelligent investor must never forecast the future exclusively by extrapolating the past.
The value of any investment is, and always must be, a function of the price you pay for it. He price the investor should be willing to pay for stocks must not be finite. The higher they go, the harder they fall. There must be a limit to optimism.
On 24th March 2000, US stock market peaked at USD14.75 trillion. By 9th October 2002, it is worth USD7.34 trillion, a loss of 50.2%.
General notion is that the rate of return depends on the degree of risk you are willing to take. However, intelligent investor rate of return depends rather on the amount of intelligent effort the investor is willing and able to bring to bear on his risk. The maximum return would be realized by the alert and enterprising investor who exercises maximum intelligent and skill.
No intelligent investor no matter how starved for yield would ever buy a stock for dividend income alone; the company and its business must be solid, and its stock price must be reasonable.
“Human felicity is produced not so much by great pieces of good fortune that seldom happen, as by little advantages that occur every day.” Benjamin Franklin.
Graham insistence that how defensive you should be depends less on your tolerance for risk that on your willingness to put time and energy into your portfolio.
Lynch’s rule – “You can outperform the experts of you use your edge by investing in companies or industries you already understand”
“It requires a great deal of boldness and a great deal of caution to make a great fortune; and when you have got it, it requires ten times as much wit to keep it.: Nathan Mayer Rothschild.
A great company is not a great investment if you pay too much for the stock. Growth stock are worth buying when the prices are reasonable, but when their price earning ratios go much above 25 or 30 the odds get ugly.
“The happiness of those who want to be popular depends on others; the happiness of those who seek pleasure fluctuates with moods outside their control; but the happiness of the wise grows out of their own free acts.” Marcus Aurelius.
Graham’s image of Mr Market……when stock is going up, he happily pays more than their objective value; and when they are going down, he is desperate to dump them for less than their true value.
Our brains are hardwired to get us into investing trouble; humans are pattern-seeking animals. Neuroscience shows that our brains are designed to perceive trends even where they might not exist. After an event occurs just two or three times in a row, regions of the human brain called the anterior cingulated and nucleus accumbens automatically anticipate that it will happen again. If it does repeat, a natural chemical called dopamine is released, flooding your brain with a soft euphoria.
But when stocks drop, the financial loss fires up your amygdale- the part of the brain that processes fear and anxiety and generates the famous “fight or flight” response that is common to all cornered animals. You can’t help feeling fearfull when stock prices are plunging.
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