The Intelligent Investor in Under 3 Minutes
Updated: Jun 23, 2021
Onto the best of the best.
As promised in our last article on investing books, a summary of The Intelligent Investor is a must-do on our part and a must-read on yours. The book has incredible insights that provide those foundational mindsets we all need when starting to invest.
But we quickly run into two problems:
A) The book is incredibly long (600+ pages) and
B) It uses language that's far too tiring to get through: especially if you're not used to reading older books!
That's why we're going to summarize the three main ideas from the best-seller below, along with short explanations and visuals to help throughout.
Let's get straight into the first lesson we took away 👇
Margin of Safety.
This is a technique that Benjamin Graham (author of The Intelligent Investor and mentor to Warren Buffet) used to find profitable investments: i.e. investments that would pay off not only in the next month or so, but in the years and even decades to come.
A margin of safety (MOS) basically means your "buffer" or "cushion" in a particular investment. In other words, if your analysis tells you that the "fair" or "correct" value of a stock is $50 per share and you bought it at the current price of $30, your margin of safety is $20. You're buying the stock at a price so low such that there's a $20 "cushion" for you to rely on if things get bad.
Have a look at examples of margin of safeties below:
Low MOS (not good):
High MOS (good):
Obviously, this can't be the only metric we look at. But it's definitely a starting point to show us:
A) Where we've got really good potential for returns, and
B) Which companies are, therefore, relatively less risky for us to invest in.
Use tools like Simply Wall St. (shown above) to easily find a stock's margin of safety and bring you one step closer to picking good investments.
Interested to learn more about Simply Wall St. specifically? We did a 3-minute review about them here.
The second key principle we took away from The Intelligent Investor is this idea of the market and stocks being an actual person.
Why a person? Because we've all experienced how stocks skyrocket one day and then plummet the next: clearly indicating that the market has mood swings that are very much similar to human beings.
Unpredictable, moody, and not very clever —
These are the characteristics that Graham gave our new friend, Mr. Market, and that's exactly what we should keep in mind when investing.
I.e. Don't start getting massively excited when you see that Mr. Market is happy and stocks are flying upwards. Remember that he's got a mood, which is why those sky-high prices will come right back down soon enough!
Think: All those investors who lost money piling into GameStop when it reached $200 per share were a victim to Mr. Market's mood swings. Sure, a small amount of money can go into these situations to satisfy the innate gambler inside all of us —
But with the bulk of our money? We need to be a lot more careful and remember what a moody old lad we're actually dealing with.
Graham also defines two types of investors in his book: the defensive and the enterprise.
Defensive investor portfolios should be "well-balanced, safe, and very easy to manage". In modern times, this most likely means investing in low-cost, diversified index funds: pervasively available with almost every online broker today.
Enterprising investors are slightly more aggressive. They're diversified and may opt-in for the low-cost index funds mentioned above too, but a lot of their money will also be in more rewarding investments. This means individual stocks, less-established companies, and growth stocks —
In other words, investments that can drop by 20% one year but then skyrocket over 100% in another (think tech stocks such as Amazon, Etsy, PayPal, and Square last year).
These are the type of names that the enterprising investor of today may target.
Why am I describing these two? Because they're the most important rules of the game.
Graham strongly suggests that you need to know which type of investor you are before you start putting your money to work, otherwise you're very likely to just sway with wherever the market's going at a particular time.
Think of it like climbing a ladder that's placed against the wrong wall. Yes, you've started investing which is great, but if you don't have a proper objective in mind, you're a lot more susceptible to falling for Mr. Market's mood swings —
And we really want to avoid dealing with that miserable bastard's moods, don't we?
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