Week in Review: Looking Back Through The Intelligent Investor

If you are to be, you must begin by assuming responsibility. You alone are responsible for every moment of your life, for every one of your acts. – Antoine de Saint-Exupery

Hearts are the strongest when they beat in response to noble ideas. – Ralph Bunche

How many millionaires do you know who have become wealthy by investing in savings accounts? – Robert G. Allen

The aim is to make money. Not to be right. – Ned Davis

Investing should be like watching paint dry or watching grass grow. If you want excitement… Go to Las Vegas. – Paul Samuelson

Week in Review

Warren Buffett has simple advice for improving your investing acumen.

You don’t have to read hundreds of books or take a bunch of classes either. All you need to do is buy two books and read three chapters.

Two chapters in one book. One in another.

Which two books and which chapters?

Intelligent Investor by Benjamin Graham, chapters 8 and 20. The General Theory of Employment, Interest and Money by John Maynard Keynes, chapter 12.

No worries. Over the next several weeks, I’m going to give you the short and sweet of it all.

Let’s jump right in… Starting with chapter 8 of Intelligent Investor.

(Editor’s note: These are direct quotes from the chapter. I’m cutting 26 pages of dense reading down to the core ideas in the chapter.)

If you want to speculate, do so with your eyes open, knowing that you will probably lose money in the end; be sure to limit the amount at risk and to separate it completely from your investment program.

Since common stocks, even of investment grade, are subject to recurrent and wide fluctuations in their prices, the intelligent investor should be interested in the possibilities of profiting from these pendulum swings. There are two possible ways by which he may try to do this; the way of timing and the way of pricing.

By timing we mean the endeavor to anticipate the action of the stock market – to buy or hold when the future course is deemed to be upward to sell or refrain from buying when the course is downward.

By pricing we mean the endeavor to buy stocks when they are quoted below their fair value and to sell them when they rise above such value.

We are convinced that the intelligent investor can derive satisfactory results from pricing of either type. We are equally sure that if he places his emphasis on timing, in the sense of forecasting, he will end up as a speculator and with a speculator’s financial results. The farther one gets from Wall Street, the more skepticism one will find, we believe as to the pretensions of stock-market forecasting or timing.

A great deal of brain power goes into this field, and undoubtedly some people can make money by being good stock market analysts. But it is absurd to think that the general public can ever make money out of market forecasts. For who will buy when the general public, at a given signal rushes to sell out at a profit?

Timing is of no real value to the investor unless it coincides with pricing – that is, unless it enables him to repurchase his shares at substantially under his previous selling price.

We are convinced that the average investor cannot deal successfully with price movements by endeavoring to forecast them.

A serious investor is not likely to believe that the day-to-day or even month-to-month fluctuations of the stock market make him richer or poorer.

Even the intelligent investor is likely to need considerable will power to keep from following the crowd.

A stock does not become a sound investment merely because it can be bought at close to its asset value. The investor should demand, in addition, a satisfactory ratio of earnings to price, a sufficiently strong financial position, and the prospect that its earnings will at least be maintained over the years.

We see in history how wide can be the vicissitudes of a major American enterprise in little more than a single generation, and also with what miscalculations and excesses of optimism and pessimism the public has valued its shares… There are two chief morals to this story.

The first is that the stock market often goes far wrong, and sometimes an alert and courageous investor can take advantage of its patent errors. The other is that most businesses change in character and quality over the years, sometimes for the better, perhaps more often for the worse. The investor need not watch his companies’ performance like a hawk; but he should give it a good, hard look from time to time.

Next week, we’ll finish up chapter 8 by diving into the famous “Mr. Market” parable.