The Intelligent Investor

The Bible of Investing That Will Make You Rich.

If you ask me to tell me one thing by which I can become very rich, then in response I will say that you become a better investor. Because everyone is an investor in this world. Some invest money and some invest time or energy by doing job or business. In this way, everyone in the world is an investor, so why don't we become a good investor.

 

If you want to become very rich, then you have to invest money somewhere, so it is important that we all become an intelligent investor. If there is one book we should all read about investing, its name is The Intelligent Investor. Warren Buffett has also said the same thing and he is the number one investor in the world. This book is written by Benjamin Graham, the mentor of Warren Buffett. All great investors have called The Intelligent Investor Book the Bible of Investing. Today I will talk about some important principles of this book.

1. Aggressive Vs Defensive

To understand about Aggressive Vs Defensive, let's understand it like this. There are two friends, who want to become rich, so both of them invest money. There is a lot of similarity between the two friends, as both are very intelligent and both have the same net worth. But, one thing separates the two is that one of them is an aggressive investor while the other is a defensive investor.

This means that one who is an aggressive investor thinks that the more risk we take, the more return we will earn. That's why he invests in such stocks which give high returns as soon as possible, whether that company is good or bad. While the other friend is a Defensive Investor, he thinks that he can get the return with the least risk, even if that return is average.

One day a friend doing aggressive investing comes to another friend and says that I have got 60% return from a stock this month, then another friend says that I have not got that much return even after all four investments. With just these things, we will feel that Aggressive Investing is better. But when we know its details then our concept will be clear.

Now its further story is that Defensive Investor made four investments in four months. He invested Rs 10,000 in all the four stocks. There was a profit of 5% in the first investment, a loss of 2% in the second investment, a profit of 12% in the third investment and a profit of 20% in the fourth investment. That is, if the average is taken out, then they get a total of 8. Profit of 75%.

Now let's see about Aggressive Investor. He bought a total of 8 different stocks in four months for Rs.40,000. There was a loss of 50% in the first investment, a profit of 60% in the second investment, a profit of 5% in the third investment, a loss of 10% in the fourth investment. Similarly, at the end of four months, the total amount with him was Rs 40800 i.e. profit of 2%.

This is the problem of Aggressive Investing, which can give high returns in a short period of time, but it can give a lot of loss in the long run. It is like a gamble where you win once but you will lose so many times that it can ruin your whole life.

“Benjamin Graham says that low reward is better than taking high risk.”

2. Mr. Market

Benjamin Graham has given a very interesting concept in The Intelligent Investor, that is the concept of Mr. Market. Let us understand it in this way – Suppose you are the owner of a business and you have a partner, his name is Mr. Market. Mr Market comes to your house every day and gives you offers every day, you can buy business or sell your business from him. Now the interesting thing is that the market is very emotional i.e. emotional people who are generally fine, but sometimes they will give you a price much higher than the real value and sometimes they will give a price much less than the real value.

For example let's say you have a business whose intrinsic value is Rs 10000 but this does not make any difference to Mr Market. When they are happy, they are ready to give 20000 rupees instead of 10000 rupees. But, when their mood is bad then you do not have to pay even Rs 5000 for a business of Rs 10000.

The best thing about Mr Market is that Mr Market will never force you to buy or sell your business at any price. They'll just give you a chance. The stock market i.e. Mr Market is not logical at times. It also changes with the emotions of the people.

That's why Benjamin Graham says that if you want to become an intelligent investor, buy a business from Mr Market only when it is selling for less than its intrinsic value and sell only when your business is getting more money than its value.

3. Defensive Investor

These are the investors, who are also called passive investors, that is, they do very little trading. Benjamin Graham generally advises people to become a Defensive Investor. The truth is that people do not have enough time to do research and analysis about each company.

Now I will tell you one such fundamental ruleWhich will help you to become a Defensive Investor.

To become a Defensive Investor, you divide your portfolio 50: 50. That is, if you have a total of ten thousand to invest, then put 5000 rupees in stocks / equities and keep the remaining 5000 rupees in bonds, debt, cash or other investment options and maintain the same 50 : 50 ratio. Meaning if you are getting 10% profit from the stocks, then take it out and put it in the other side and again balance 50: 50. Do this at a fixed interval like every one month or three months.

Now the investment you will invest in equity will invest in at least 10 companies and maximum 30 companies of different sectors. That too in those companies which have been performing consistently for many years and in the coming 25-30 years, these companies will remain in the market. That is, find such companies whose products you have been using since childhood and will continue to do so. For example, it can be a company of toothpaste, or it can be a company manufacturing oil, soap, flour, biscuits or it can be a paint manufacturing company or it can be a company supplying cooking gas, petrol or medicine/medicine. Or be it a bank or a bike maker or a chocolate maker. That is, you have to find a company whose product we liked even in childhood and will need it in old age too.

4. Enterprising Investor

In fact, there are three types of investors- 1. Defensive Investor 2 . Aggressive Investor 3 . Enterprising Investor

Enterprising Investor

The first two types of investors have been mentioned above. Now Enterprising investors are those investors who do not want average returns like a defensive investor and do not want to risk indiscriminately like an aggressive investor. They are such investors who invest a lot of time by doing research and analysis and they are generally active, due to which they are able to earn more returns from the market. It takes a lot of hard work to become such an investor. These are the investors who get more returns from the market and later become a great investor.

Apart from all this, an investor must have four things - Patience, Discipline, Eagerness to Learn and Lots of Time.

This is usually not available to everyone. That's why Benjamin Graham suggests that it is better to be a defensive investor. Still, if someone wants to become an Enterprising Investor, then he can become a better Enterprising Investor by doing the following four activities –

Go Against The Market – This means that when the market is very low and everyone is selling their goods, then you buy goods and while selling, the market is good and everyone is buying.

Buying Growth Stocks- To buy a growth stock, the investor has to buy a company which is big but not popular.

By Buying Bargain Stocks – This means that these are those stocks which are getting less than their intrinsic value due to any reason. But it is necessary for their business to be well established.

Buying Special Cases – Under this, the stocks of such a small company are covered, which a big company is going to buy.

5. Margin Of Safety

Let's say you have got an order to build a water ship that can easily carry the weight of 50 people. Then will you build a ship that can only carry the weight of 50 people? The answer would be- no. Rather, you will try to make a ship that can carry the weight of 70, 80, or 100 people so that the ship does not sink. The ability to lift this extra weight is called Margin of Safety. The same rule should be followed in the stock market as well.

That is, when taking a stock in the stock market, keeping in mind the Margin of Safety, do not give it more than two-thirds of the money. That is, if you understand that the price of a stock should be Rs 50 then you should not buy it for Rs 50 but you should buy it in the range of Rs 35-40 so that you can make profit while buying that stock.

 The Intelligent Investor, written by Benjamin Graham. This book should be read by every investor, businessman and MBA students so that they can understand any business.

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