5 important takeaways from The Intelligent Investor book | Motilal Oswal

5 important takeaways from The Intelligent Investor book

While beginning your investment journey, you may come across many sources of information. Nowadays, there are thousands of youtube channels, books and podcasts that teach stock market investing. However, why not start learning from what Warren Buffet calls “the best book on investing ever written”.

Benjamin Graham was an American investor, professor and economist. He is known as the "father of value investing". His book “The intelligent investor” has been read by millions of investors all across the world. Benjamin Graham, together with David Dodd, began teaching value investing at Columbia Business School in 1928. In 1949, they together published “The Intelligent Investor”. Here are 5 lessons from the book:

1. Mr. Market

Mr. Market is an allegory created by Benjamin Graham to explain the irrational and volatile nature of the stock market. Through this allegory, Graham explained how Mr. Market is a bipolar force that keeps on reacting to the everyday volatile nature of the market. "Mr. Market," turns up every day offering to buy or sell his shares at a different price. 

Graham explained that individual investors have to tackle Mr. Market with patience and confidence. It is advisable for the investor to concentrate on the actual performance of the companies and the dividends they receive, rather than paying attention to the changing sentiments of Mr. Market.

2. Value Investing

Value investing focuses on buying stocks of underappreciated companies that trade less than their intrinsic value. The goal is to hold these stocks for the long term for profits over a wider time frame. 

Analysis of a company's earnings, assets, and dividend payouts helps identify the intrinsic value of a stock, which is then compared to its market price. If the intrinsic value is more than the market value then the stock is undervalued in the market. Value investors should buy and hold such stocks for the long term.

3. Margin of Safety

The sentimental nature of investors, the inability to predict the future, and the volatile nature of the stock market provide a margin of safety for investors. Graham advocated for an investing approach that provides a margin of safety for the investor. Buying undervalued stocks is the most important way to include a margin of safety.
Alongside, diversifying portfolios and purchasing stocks in companies with high dividend yields and low debt-to-equity ratios are also ways to achieve a margin of safety.
This margin of safety is intended to alleviate the investor's loss in case the company goes bankrupt.

4. The Benjamin Graham Formula

A defensive investor is one who invests in the stock market using less time, effort, and management. Graham's number is a helpful tool for defensive investors. 

 

Graham’s number is used to calculate the fair valuation of a stock. Defensive investors can greatly benefit by using the Graham number to find undervalued stocks with a margin of safety.

5. Dividend Stocks

Graham's investment principles, although old, remain relevant till today. He criticized companies that made it difficult for investors to get an accurate picture of the health of a company with their obscure and irregular methods of financial reporting. 

Graham advocated for companies paying dividends to their shareholders, rather than keeping all of their profits as retained earnings. The consistent payment of dividends is an indicator of the good health of the company. Graham said that one should only invest in companies that have been giving constant dividends for the past 20 years.

Conclusion 

Benjamin Graham’s teachings in ‘The Intelligent Investor’ are relevant even in today’s times. He reportedly averaged an approximate 20% CAGR over many years managing money. 

His method of buying low-risk stocks with high return potential discussed in the book has made him a true pioneer in the financial analysis space.

Well, there you have it. These are a few of the most important lessons from the book which is the most popular book on value investing.

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