Benjamin Graham was an influential investor whose research in securities laid the groundwork for in-depth fundamental valuation used in stock analysis today by all market participants. In 1949, Graham wrote the acclaimed book, The Intelligent Investor, and it has gained recognition as the foundational work in value investing.
The Intelligent Investor is widely considered the bible of value investing and features a character known as “Mr. Market”, Graham’s metaphor for the mechanics of market prices.
Mr. Market is an investor’s imaginary business partner who daily tries to either sell his shares to the investor or buy the shares from the investor. Mr. Market is often irrational and shows up at the investor’s door with different prices on different days depending on how optimistic or pessimistic his mood is. Of course, the investor is not obligated to accept any buy or sell offers.
Graham points out that instead of relying on daily market feelings and sentiments, which are run by investor’s emotions of greed and fear, the investor should run his own analysis of a stock’s worth based on a company’s reports of its operations and financial position. This analysis should strengthen the judgment of the investor when she’s made an offer by Mr. Market.
According to Graham, the intelligent investor is one who sells to optimists and buys from pessimists. The investor should look out for opportunities to buy low and sell high due to price-value discrepancies that arise from economic depressions, market crashes, one-time events, temporary negative publicity, and human errors.
His Guiding Principles:
• Don’t invest using borrowed money. (Don’t use margin accounts)
• Never pay too much for the prospect of future profits.
• Never count on greater fools to bail you out of reckless risks.
• Above all, your results depend much less on how markets behave than on how you behave.
IMPORTANT EXCERPT FROM THE INTELLIGENT INVESTOR:
Benjamin Graham, The Intelligent Investor (2003 edition), p. 203.
In recent years, investors have been led to believe that their greatest asset is the ability to trade at will, for free using such places as the Robinhood app. Benjamin Graham would suggest otherwise. He believed that your basic advantage as an investor is that you do not have to trade because everybody else is. When everybody is selling, that will likely be their problem, but it doesn’t have to be yours.
Remember that building a successful investing strategy is planning for these market downturns so that you are not required to trade during severe downturns. You can watch the turmoil with interest, but hopefully less worry. Pre-planning your immediate need for income is critical to ensure that you have cash available.
It is important to remember that you can ignore “Mr. Market”. When “Mr. Market” gives you a quote for securities that you do not like, you ignore him knowing he will be back in the future with a better quote.
Re-read the book excerpt above again to help understand the power of controlling your own emotions and behavior during times like these. Do not let others mistakes in judgement impact your own judgement.
Hope you have a great week!
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