Main lesson of the book: There is a difference between an investor and a speculator
This was the first if not one of the first books ever of its kind. It was one of the originators of the current market system of the finance world. It helped structure a lot of financial business models and inspired more than a few investors on how to improve their wealth. This praise is of course based on the feedback gained from Warren Buffett. This book is without a doubt one of the core books on investing you should have in your personal library.
The intelligent investor covers a wide range of concepts related to investing and how the intelligent investor should maneuver through these dangers’ woods. The biggest point this book supposes is the difference between a Speculator and an Investor. In simple terms an Investor buys stocks, or securities for the long run. Whereas a Speculator buys securities to sell them within a short period of time. A speculator thus invests in stocks with the priority to make a quick buck and grow his assets in the short terms. To do this efficiently the speculator would have to make sure he buys a stock he knows will go up in value. He can either do this by “timing the market” or buy buying stocks when they first start out in the hopes the company will become popular and thus increase in value. Both of these options are based on the premise that the specular can read far enough into the future to ensure his financial gain. And right there starts the issue with speculating. Its based on a concept that the speculator knows whats going to happen in the near future.
Where an investor buys stocks in companies he knows will be around for a long time and have a solid foundation as its management or business model. And that brings us to the point the book is extremely focused on, if you are to be an investor, you should be an intelligent investor. And as an intelligent investor you should make your stock choices while keeping these points in mind:
- When you buy a stock in a company, you’re not buying a piece of paper or a digital piece of information. You are buying ownership of a company and the true worth of that company isn’t always reflected in its market price.
- If the market were a person it would be without a doubt a certifiable lunatic. Whose mood swings would vary between extremely positive and extremely negative. The intelligent investor has to make sure he knows the difference between these moods and buys and sells his stock according to the mood of the market. Never buy when the market is too positive which means it will overvalue its stocks. Instead buy them when the market is negative and is almost giving its stocks away as it is undervaluing its stocks.
- You don’t make money when you sell, you make money when you buy. So, buying a stock at a really high price means you’re not making any money.
- No matter how much you prepare or research, you will make a mistake with your investments. It’s a 100% mathematical certainty that you will fail with some of your investments. So the rule behind all your investments should then be that you always have a “margin of safety” included in your purchases.
- Investing in stocks in itself isn’t risky. The risk exists within yourself. An intelligent investor needs to control himself. The market is a psychopath who will always try to take you with him on his wild chases for big money. The moment you let the momentum of the market take you with it on a wild goose chase, you are certain to lose most if not all of your money. And that is the key difference between an investor and a speculator. Control of one self.
The beauty of this book is that it actually gives you a set of rules to follow to make sure you buy stocks that offer a safety margin. These rules were made decades ago, but they still ring true to this day.
- Adequate size. Only buy stocks from companies that have a market value of no less than 2 billion. Which will immediately cancel out a LOT of companies.
- Strong financial condition. This means that the company has at least twice as many assets as its debt. This will make sure the company has a strong staying power.
- Earnings stability. You would make the assumption that a stock that passed the restrictions so far would of course be stable, but you still need to check. A lot of companies have fancy accountants that can make things look better than they are.
- Earnings growth. A company should at least be able to grow its business by 3% every year. Check its past records to verify this.
There are of course more points but these are the core ones in my eyes. The Intelligent Investor isn’t a book for the casual investor who just wants to be a part of the stock market. This book was meant for people who seriously want to play this game and make money at it. The fact that you are buying a part of a company comes with responsibilities. You will need to do due diligence on the company you’re buying into. That means that you will have to read their financial statements and their proxy statements. By reading these, you will see the actual worth and value of the business. By reading and understanding these statements, you can find a lot of red flags that will immediately show you if the company is a good or bad investment. Companies will often hide their dirty laundry in these statements because they know that most people won’t read them. The intelligent investor is that because he does the homework and does the research. Only after being sufficiently informed will the intelligent investor purchase a stock. And the investors portfolio should be properly diversified. The portfolio should consist of a minimum of 25% stocks with a maximum of 75% stocks and the remaining ratio should consist of bonds.
This book has a lot of great examples of the past and how companies failed their shareholders and the public in several ways. It has some amazing advice on how I should conduct myself in the stock market. The psychological part of the market is something that should be feared and not tried to be understood. A must read for anyone who wishes to seriously engage in the stock market. I had but one problem with this book and that is that I have read several books which seemed to base their entire premise on the information in this book. Which made it feel like I was reading stuff I already heard. But still a great book.