Have you ever thought about investing in the stock market? Well, today we are going over the book "The Intelligent Investor" by Benjamin Graham. Warren Buffett said that this is the best book ever written about investing. Buffett read this book when he was 19, went to Columbia University and Benjamin became his teacher. So if the richest man on the planet says that a book is a great read, I think it's worth investing your time in the book.
First, you need to understand what investing actually is. All you need to know to get started is that there are three big types of investments called asset classes. And they are Stocks, Bonds and Cash. Stock is just ownership in a company, and there are 2 ways to make or lose money in the stock market. You see when you own a stock, you actually own a piece of a company. And as the value of that company increases, the stock price goes up. But if the value of the company decreases, the stock price goes down as well. These ups and downs determine the amount of profit or loss. The second way to make money is when the company shares its yearly profit with you in the form of dividends. Stock prices can go up and down dramatically for all kinds of reasons as a result stocks are the riskiest types of investments in your plan.
However, there is a way to invest in the market that doesn’t leave you at risk of losing everything: Intelligent Investing. There is a lot of money to be made through investing. But also a lot to lose. Finance history is full of stories of investors like Warren Buffett, who by investing in the right companies, earned vast amounts of money in return. And there are just as many if not more stories of misfortune, in which people place the wrong bets and end up losing it all. There are three principles that apply to all intelligent investors: First, intelligent investors analyze the long-term development and business principles of the companies in which they’re considering investing before buying any stock.
A stock’s long-term value is not arbitrary. Rather, it depends directly on how well the company behind it performs. So, be sure to examine the company’s financial structure, the quality of its management, and whether it pays steady dividends. Intelligent investors use thorough analyses in order to secure safe and steady returns. This is very different from speculating, in which investors focus on short-term gains made possible by market fluctuations. Speculations are thus very risky, simply because nobody can predict the future. For example, a speculator might hear a rumor that Apple will soon release a new hit product, and would then be motivated to buy lots of Apple stocks. If he’s lucky, then this knowledge will pay off and he’ll make money. If he’s unlucky and the rumor proves wrong, then he stands to lose a lot. In contrast, intelligent investors focus on pricing. These investors buy stock only when its price is below its intrinsic value. Don’t fall into the trap of only looking at short-term earnings.
Look instead at the big picture by examining the company’s financial history. These steps will give you a better idea of how well a company performs independently of its value on the market. For instance, a company that isn’t currently popular (and therefore has low share price) but shows promising records, i.e., has earned consistent profits, is likely undervalued, and would thus make a prudent investment. Second, intelligent investors protect themselves against serious losses by diversifying their investments. Never put all your money on one stock, no matter how promising it appears! Just imagine the horror you would feel if the promising company that you poured all your investments into shows up in the news for a tax fraud scandal. Your investment will lose its value immediately, and all that time and money will be lost forever.
By diversifying, you ensure that you won’t lose everything at once. And to further remove you from the emotional stress of investing with the market, you should always stick to a strict formula when investing. Graham calls it formula investing, but it’s more widely known as dollar-cost averaging. What it means is that you simply set a fixed budget you’re going to invest every month or quarter, and then invest that into the stocks you’ve previously picked no matter the price. Third, intelligent investors understand that they won’t pull in extraordinary profits, but safe and steady revenues. The target for the intelligent investor is to meet his personal needs, not to outperform the professional stockbrokers on Wall Street. We can’t do better than those who trade for a living, and we shouldn’t be aiming for fast money anyway; chasing dollar signs only makes us greedy and careless. Whether you are just starting out, or you've been investing for quite some time you always want to walk the path of the Intelligent Investor. Maybe you won't become a billionaire in a week but I guarantee you too can turn your investments into modest but steady profits.