5 important lessons from the book ‘The Intelligent Investor

5 important lessons from the book The Intelligent Investor

Surely you’ve heard of Warren Buffet? If you’re a new investor or a seasoned player in the markets, at some point, you may have aspired to be like him. After all, he is one of the most successful investors the world has known. And when Warren Buffet recommends something, there must be some value in it, isn’t it?

No, we’re not talking about stock recommendations. We’re talking about a book — The Intelligent Investor — penned by Benjamin Graham. In Warren Buffet’s own words, it is “by far the best book on investing ever written.”

If you haven’t read it yet, it may be time to get yourself a copy. But even if you have, it’s never a bad idea to revisit some of the pearls of wisdom this little book contains, isn’t it? So, without further ado, here are 5 of the most important lessons from The Intelligent Investor.

1. Understand the value of the business you are investing in  

One quote from the book goes — “A stock is not just a ticker symbol or an electronic blip; it is an ownership interest in an actual business, with an underlying value that does not depend on its share price.”

What this essentially means is that the stock you wish to invest in is not merely an asset listed on the exchange. There is an actual business behind it, and if you are a long-term investor, you need to understand how much value that business has. Is it worth the market price it trades at today, or is it overvalued? Does the company’s business have any potential for growth in the future? 

The questions will help you understand how your investment could appreciate or depreciate over the long term. And if you make your investment based on this kind of evaluation rather than guesswork, you could be a more successful investor. 

2. Make investments objectively 

Be aware of why you are investing in a particular stock. Benjamin Graham drives home this point by drawing a fine line between investors and speculators. To quote his observation from the book — “People who invest make money for themselves; people who speculate make money for their brokers.”

Speculation carries a high degree of risk, and consequently, the possibility and the quantity of loss are higher. But if you want to invest intelligently over the long term, you need to put your money on an asset objectively, knowing why you are choosing it. Otherwise, your money will only go towards paying your brokerage. And your capital will only be eroded over time.

3. Prioritise research over impulses 

A great many investors tend to buy or sell on an impulse. If you’ve been guilty of this habit too, it may be time to turn things around. Focus on research and analysis. If you are investing for the short term, technical analysis is your best friend. But if you are a long term investor, you need to perform fundamental analysis of your preferred stocks. 

This will help you stop focusing on what your stock market game is all about. As Benjamin Graham quotes in his book, “Investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”

4. Steer clear of the herd 

The herd mentality is what drives an investor to buy a stock just because a lot of others are, or to sell their holding simply because the general market is doing that. However, this is not the right way to buy or sell your holdings. As the book clearly suggests, “The stock investor is neither right or wrong because others agreed or disagreed with him; he is right because his facts and analysis are right.”

So, stop relying on the herd and start focusing on facts and analysis. This will help you make informed investment decisions rather than merely selling or buying based on what the majority is doing. 

5. The past matters — but not too much 

If that sounds a bit self-contradictory to you, take a look at these two lines from the book:

  • Those who do not remember the past are condemned to repeat it.
  • The heart of Graham’s argument is that the intelligent investor must never forecast the future exclusively by extrapolating the past.

The first lesson here is that you need to keep your past mistakes in mind, so you don’t repeat them in your future investments and trades. Similarly, you also need to keep track of the practices that worked in your favour, so you can adopt these best practices in the future.

The other lesson here is that the historical data of the market does have some relevance, but you cannot simply extrapolate it and assume the future will play out just like the past did. In other words, relying too much on historical data could be a costly mistake. At the same time, ignoring past data entirely is also not a favourable practice. 

Conclusion 

This is simply a preview of the wonderful pearls of wisdom that The Intelligent Investor has within its pages. Go grab a copy of it online if you haven’t read it yet. But keep in mind that you need to take advice from all quarters, and apply what is relevant to your investment goals and needs. 

And once you’ve understood the basic dos and don’ts of investing, you’ll be better poised to becoming an intelligent investor yourself. The only thing that will be left to do is to open a demat account and start investing, putting to good use everything you’ve learned from this book. Motilal Oswal can help you here, thanks to the simple, quick and easy demat account opening process on its online platform. 

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