One of the landmark books in the field of investments is “The Intelligent Investor” written by Benjamin Graham. He was not only the father of value investing but he was also the mentor of Warren Buffett. Ben Graham had advocated a classically fundamental approach to investing by delving deep into the nuances of the income statement and the balance sheet and keeping tabs on filings. According to Graham, if investors could make the best use of all the publicly available information, there is the scope to become a truly intelligent investor and reap the benefits in the stock markets.
So, what are the qualities of a good investor in the stock markets? Are there distinct signs of a good investor and what sets them apart from the run-of-the-mill investor? Above all, is there is a veritable model of how to be a good investor and what are the factors that go into making a successful investor. Here are 8 such signs that you are actually an intelligent investor.
1. You draw on the wisdom of historical patterns
No investor is intelligent enough to look into the company’s future without looking at the company’s past performance. Whether you are looking at fundamentals of the company performance or you are looking at the price patterns emerging from the charts, the rule is the same. An intelligent investor is one who can identify the past patterns, distil the wisdom from these patterns and extrapolate these trends into the future. After all, the proof of the pudding lies in the eating and your understanding of past trends is only useful as long as it allows you to extrapolate into the future.
2. You are not carried away by hot stock tips and media recommendations
An intelligent investor will be not only judged by what he does but also by he does not do. For example; listening to tips, spending too much time on stock chat forums and giving too much credence to media analysis are not signs of an intelligent investor. Typically, an intelligent investor spends more time reading, accessing reliable data sources and crystallizing his view on the stock. It is too ambitious on your part to believe that you can actually end up as an intelligent investor on the strength of tips and recommendations.
3. You are a defensive investor unless you are dead sure
This may sound quite ironic but it is actually true. Any investment decision is a commitment of time, money and intellectual resources. An intelligent investor will use all these three resources very prudently. When you invest in a stock without adequate research and adequate conviction, you are not only wasting money but also your time and your intellectual bandwidth. Unless you are absolutely convinced about an active investment idea, it always pays to adopt a defensive approach to stock markets. That is what intelligent investors typically do.
4. You allow time to work in your favour
This is the classic pattern that intelligent investors follow. Good companies take time to become great stocks. They need to achieve economies of scale, perfect the business model and be able to repeat their performance consistently and in a profitable manner. That is when company value actually gets translated into shareholder value. But for that you need patience and an awful lot of patience. Unless you are willing to wait on stocks for periods ranging from 6-8 years you cannot really consider yourself an intelligent investor. Only that will ensure the full play on the value of a stock.
5. You take a long time to form an opinion and longer to change
One of the hallmarks of an intelligent investor is that they take a long time to crystallize a view on a stock or a sector. They will meticulously evaluate the fundamentals, the charts, the business prospects, the moat etc. For these intelligent investors the investment view requires an investment of time and money. A truly intelligent investor actually takes a long time to form an opinion on a stock. Above all, they take much longer to change their opinion. It is this thoroughness and meticulousness that distinguishes a normal investor from an intelligent investor.
6. You believe in the merits of diversification
Irrespective of what fundamental investors may say about the merits of concentration, there is a lot of business sense in diversification. It reduces your risk and the fundamental step in any trading or investment activity is about reducing your risk. Above all, it makes your equity portfolio less vulnerable to micro and macro stimuli. In the process you give up some portion of returns but that is the trade-off and it actually works better in the long run.
7. You focus on management quality above all else
Intelligent investors focus on the quality of management. Is the management proactive enough to change with the changing times? Has the management created a reliable second line of defence? Does the management believe in high standards of corporate governance, disclosure and ethics? All these factors have a positive impact on valuations and also tend to be value accretive from a market cap point of view. As Peter Lynch put it, “A good management can handle a bad business but a bad management cannot even handle a good business” That is what intelligent investors focus on.
8. You look for a moat in the business
This is something we all have learnt from Warren Buffett. You create great stock market value when your company has a moat. What do we understand by a moat? It is that unique competitive advantage or special entry barrier that puts the company way above competition. At the end of the day, it is this moat that creates sustainable value and ensures that despite market vagaries and performance cycles, this moat sees them through.
Being an intelligent investor is about getting the small things pertaining to investing right. The bigger things will automatically take care of themselves!
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