When you start your investment journey in Stock Market, the very first book everybody recommend you would be “The Intelligent Investor”.
Yes, whether you are a small investor or a very famous investor you must have heard about this book. The Intelligent Investor is the best book ever written.
“By far the best book on investing ever written”………..Warren Buffett
Benjamin Graham, author of this book also known as “Father of Value Investing”, was very famous American Investor of his time.
In first reading you may find it difficult to understand. So, we highly recommend you to read this summary before you buy this book. So, later you would find it easy to understand.
First of all, you should understand that this book is based on US Stock Market, but all the principles of value investing applies to Indian Stock Market too.
A great company is not a great Investment if you pay too much for the Stock
It is always said that if you will invest in some top companies like HDFC, Bajaj Finance, Reliance, HUL, Maruti etc. you will make money in Stock Market. But, it is half Statement.
As per Mr. Graham if you pay too much for a great company due to its brand value you might be right in selection of company but your entry price will make this decision worthless.
So, buy good companies only when they are available at good price.
Most interesting Chapters of this book are:
Chapter 1: Investing Vs Speculations
Chapter 8: Investor and Market Fluctuations
Chapter 20: Margin of Safety
Most valuable topics covered in this book are
Investor Vs Speculator
Do you believe in Investing or Speculation? 90% would answer “Investing”.
But some time we could not differentiate between Investing and Speculation. Mr. Graham has given a good definition of this
“An Investment operation in which upon thoroughly analysis promises safety of principal and an adequate return. Operation not meeting these requirements are speculation”
When we put our efforts and do some research before buying shares of a company, which seems good during our research and can also generate good returns in terms of capital appreciation or dividend then we are investing, rest time we just speculate.
Most of us in stock market invest in any stock because it is being suggested by our friend, neighbour, relative or any expert on TV.
We just invest blindly in hope that it will fly high and we will immediately make profit. This is pure Speculation and in maximum cases we lose our hard earned money.
Buying a stock without intention to hold it for long term is also a speculation.
Direct investment in stocks wants your effort and time otherwise you should choose mutual funds.
In long run you can get good returns if you are Investing. Always be clear in your mind whether you are investing or speculating.
“People who invest make money for themselves, People who speculate make money for their Broker”
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Investor and Market Fluctuation
Investors get fearful with any sharp correction in market. But corrections are the best friend of Long Term Investors. Correction in favorite stocks give them opportunity to more more. Bear Market is best time to create a perfect portfolio, where as in bull market sell stocks those have gone overvalued because somebody is very optimistic about that stocks.
“The Intelligent investor is a realist who sell to optimistic and buys from pessimists”
Mr Market is a very interesting artificial character discussed in this book. Mr. Market indicates mood of Stock Market.
For example, when market is in bull run Mr. Market feels very happy and he is ready to pay higher prices for your stocks whether they worth it or not.
But when market is negative or in bear phase, Mr. Market wants to buy your stocks at cheaper price. Even he is offering you to buy his stocks at lower prices.
You should do business with Mr. Market. Reject his offer if it not favoring you. But if you find it attractive go for it. Rest of the time you should Ignore Mr. Market.
Likewise, you should not keep checking prices of your stocks in Stock Market. Don’t be fearful when they fall or be happy when they rise.
Only act if it is in your favor and make a habit to ignore market noise rest of the time.
“Always remember that Market quotations are there for convenience, either to be taken Advantage or to be ignored”
Margin of Safety
Margin of Safety is very important aspect of Investing, but there is no proper definition of Margin of Safety. Some investor finds margin of safety in form of free cash flow of company, some take earning growth as margin of safety.
Ultimately it’s the price which gives you best margin of safety. For example, market price of ABC Ltd is Rs.120 and you have done a detailed research on ABC Ltd. In your research you come to a conclusion is ABC Ltd is worth buying at Rs.100.
Now, due to sharp correction in Stock Market, ABC Ltd share is available at Rs.90. So, you are getting an opportunity to buy shares of ABC Ltd at Rs.90 which is worth Rs.100.
“The Margin of Safety is always dependent on the price paid. It will be large at one price, small at some higher price and non-existence at some still higher price”
Some other Important quotes from “The Intelligent Investor”
Investing isn’t about beating others at their game. Its about controlling yourself at your own game
“Never Buy a Stock because it has gone up, Never Sell a Stock because it has gone down”
“Successful Investing is about managing risk, not avoiding it”
Everybody knows Stock Market is a risky place, but as an investor you should be able to manage that risk either by diversifying your portfolio, or buying with a long term view. Because you can manage it but can not eliminate it.
Hope you find this article helpful. If you have any query related to Stock Market please comment below.