A successful investment does not require stratospheric IQ, internal information or luck. Instead it is necessary with the intellectual framework needed to make decisions and with the ability to prevent the destruction of emotions. In "The Intelligent Investor", Benjamin Graham presents a rationally put together framework that will help you control your emotions. Certainly, that investment strategy has been the most successful in the last hundred years. It is impossible to ignore the impressive record not only of Graham himself but of many of his disciples. Warren Buffett describes the book as "the best investment book ever written."
Takeaway No. 1
Meet Mr. Market. Imagine that you own a part of a business that pays you $1000. Every day, a certain bipolar man named Mr. Market comes to your house thinking about how much you are involved in your business. In addition, he buys your share or offers you additional sales based on that. History has shown that Mr. Market's opinion of how valuable a part of your business is can be pure gibbere. For example, in March 2000, he estimated the value of your stock to be $ 2600. Only a year later, in March 2001, he realized his worth is $500. However, the company's revenue increased by 0% and profits increased by 20% during the same period. Let this kid decide how much you love the Decide 1000 in that business. Certainly not! One of Graham's main principles is that a stock is not just a ticker symbol but a price tag, it is a proprietary right in the business. And min. The market is not always rational, so the original value of the business may differ from the price it is willing to pay. Mr. The market is easily optimistic, or rather very pessimistic, so in fact it is often more or less expensive. Mr. Market advised clients to invest only if they feel comfortable stocking in the future, regardless of the volatile prices they offer. But for an investor who can keep his head cool, Mr. Market shows a great possibility of making money because he doesn’t force you to deal with him, he gives you the opportunity to do so. You should be happy to sell it when it offers ridiculously high prices, and likewise, you should be happy to buy from it whenever they offer you deals. We have to keep in mind that at the time Graham wrote this book, we had more news, speculation, stock quotes, etc., than people today. In the 1970's, Mr. Market probably came once a day with a morning newspaper. Today we want to do business with us every time we open our phone. Which, if you are anything like me, more than 100 times a day, only Mr. Just because the market visits you frequently doesn't mean you have to trade with it more often than people in the 1970s did. If he doesn't make you an offer that meets your criteria, ignore it and move on with your day!
Takeaway number 2
How to invest as a hedge fund. According to Graham, there are two types of investors - defensive (or passive) one and entrepreneurial (or active). Most people are more suited to a defensive strategy, as the time to be willing to dedicate it to an investment is limited. The protective investor should create a portfolio consisting of a mixture of bonds and equities, said 50% stocks and 50% bonds. Note that how much you should dedicate to each asset category depends on your life situation and the current difference in the average yield of the stock compared to the bonds. Restore this allotment once or twice per year, so that stocks will suddenly form 60% of the portfolio compared to only 40% of the bonds, buying bonds by selling stocks until 50-50 is restored. Invest a fixed amount of income at regular intervals. For example, straight after you get paid. This is called the dollar-price average, and will allow the average price of shares and bonds. Most importantly, it will ensure that you do not focus on your purchases at the wrong time. For the stock component of the portfolio, the defensive investor should target the following 8 points: 1: Their diversification should be sufficient in companies that have invested in 10 to 30 companies. Also, make sure you don’t overlook an industry. 2: Companies must be large, which Graham defined as generating more than $100 million in annual sales. After inflation, it is worth about $700 million today. 3: Find Conservative Financing Companies Such a company has a so-called "current ratio" of at least 200%. That is, his current assets are at least double his current liabilities. 4: Dividends must be paid to shareholders for at least the last 20 years. 5: No shortage of earnings in the last ten years. 6: Income increased by at least 33% in last ten years. This translates to a conservative growth of 2.9% per year. 7. Don’t pay too much for the property. The stock price should not be 1.5 times higher than the net asset value. Net asset value can be calculated by deducting the company's liabilities from its assets. 8: Don't take too much money (either) for earning. Do not let the P / E ratio exceed 15 when using last 12 months earnings. Today's option is to invest in an index fund, which, by definition, will return the same as the market average. If you are satisfied with the average reward by your investment, you only need these first two supports. However, if you are more thirsty then you also need to think ....
Takeaway number 3
How to invest as an entrepreneur. It is a simple matter to lose the market as it is so easy for a defensive investor to get an average return on the market. You spend a little more time investing than these average investors, right? To become an entrepreneurial investor and defeat the market, it is necessary to demand more according to such logic. It requires patience, discipline, eagerness to learn and a lot of time. Many commercial and private investors are not suitable for this. It’s easy to fall prey to Mr. Market’s price quotations that one can’t even imagine. Listen to these two statements at the top of the dot-com bubble by the chief investment strategist on two large mutual funds in the early 2000s: "This is a new world order ..." "We see people throwing away everything. The right companies, with all the right people. , With the right visions, because their stock price is too high. "" This is the worst mistake an investor can make. " "The stock market two years ago is more risky today because prices are higher? The answer is no!" But the answer is yes, yes, yes! Of course, both of these statements proved to be costly for investors investing in the fund. Since the profits that companies can make are limited, the price that an intelligent investor is willing to pay to these companies should also be limited. Price is a really important factor for an enterprising investor. Just as companies tend to overestimate when they are growing fast or are attractive for any other reason, so companies with unsatisfactory growth tend to underestimate. That is why the wise investor should try to avoid so-called "growth stocks" as much as possible. Why? Just because an investment decision is relatively more based on future income and future earnings is less reliable than current valuations. On the other hand, if you find a company that is worth less than the net working capital, the net working capital can be calculated by subtracting if you pay nothing for all the fixed assets like buildings, machinery, etc. Total liability on current assets. Such companies proved to be truly profitable during Graham's investment career. Unfortunately, without a tough bear market, they are rare today. Fortunately, Graham suggests an additional method of finding investment for entrepreneurial investors. These criteria are the same as those that should be used by defensive investors, but the limits are lower, allowing entrepreneurs to consider investors as more companies. Note that there is no problem with the size of the company. Also, some diversification should be implemented, but existing companies are not carved out of stone for the active investor. When analyzing a company, the entrepreneurial investor should study his annual financial report. Graham has written an entire book on the subject entitled "Interpreting Financial Statements". So we should talk more about this on another occasion.
Takeaway number 4
Insist on a margin of safety. There's one risk that no careful consideration can truly eliminate: the risk of being wrong. You can, however, minimize this risk. To do this, you must insist that every investment you make has a "margin of safety". As mentioned before, the price and value of a company is not always the same. When the price is at most two thirds of its calculated value, the investor has found a company with enough margin of safety. You wouldn't construct a ship that sinks if 31 Viking boarded it, if you know that it regularly will be used to transport 30 of them. Neither should you invest in stock that you think is worth, say, $31 if it currently is priced at $30. It might be that your calculation is wrong. In the first case, a group of angry (and wet) Vikings might hunt you down. In the second, you might postpone your financial freedom by a couple of years. I don't know which situation that I'd consider to be worse: Use margins of safety! A formula used in the book can give you some heads up regarding what the value of a company is, and therefore also if it can be bought with a margin of safety. Value = current (normal) earnings * 8.5 + 2 * expected annual growth rate The growth rate should be equal to the expected yearly growth rate of earnings for the next 7 to 10 years. Here's how much the three largest companies of the S&P 500 are worth according to the formula in September 2018: Note that we can use the formula backwards too, to trace how much these companies must grow in the coming 7 to 10 years for today's stock prices to be rational. There's a huge discrepancy here! Amazon is expected to grow at 74% per year according to its stock price, while Apple is expected to grow at a mere 5.8%. Do you think that this is reasonable?
Takeaway number 5
Risk and reward are not always correlated. According to academic theory, the rate of return which an investor can expect must be proportional to the degree of risk that he's willing to accept. Risk is then measured as the volatility of the returns on the investment, meaning, how much it has differed historically from its expected value. Graham doesn't agree with this statement. Instead, he argues that the price and value of assets often are disconnected. Therefore, the return that an investor can expect is a function of how much time and effort he brings in his pursuit of finding bargain assets. The minimum return goes to the defensive (or passive) investor, while the maximum goes to the enterprising investor who exercises maximum intelligence and skill. Consider this: It's 4:00 a.m in the morning, and you've been out drinking in the streets of Moscow together with your friends. You decide that it's too early to call it a night, and therefore you end up in the more obscure parts of town. At a particularly ambiguous bar you're approached by a man who asks: "Do you want to play a game?" "Well, of course, games are fun!" your bravest least sober friend replies. The man puts a revolving in front of you, which is loaded with a single bullet. "I'll give you $10,000 if you dare to take a shot, Russian Roulette." Your drunk friend reaches out for the gun, but you stop him. "I think we'll pass on this one " you politely inform the man. "I thought so" he replies ... "What about $ 100,000 for taking two shots?" Now, this story represents an educational way of demanding high-risk rewards. In the first offer, you were to receive $10,000 at a 16.7% risk of blowing your brains out. In the second offer, the reward is $100,000 because the risk of putting a hole through your head has increased to 33.3%. Seems logical, right? But stock market investing doesn't have to be like that! Remember that price and value are not the same. When you buy a company at 60 cents on the dollar, you have a great potential reward, and a low risk. Furthermore, if you can find another company that you can buy at 40 cents on the dollar, you have found a better potential reward, combined with an even lower risk! How could anyone in their right mind argue that it's riskier to buy a dollar at the price of 40 cents than to buy a dollar at 60 cents, just because the potential reward is higher?
Conclusion
Firstly the market tends to be over-optimistic and too pessimistic from time to time. Don't let this influence what you think the true value of your assets are. Instead, see it as a business opportunity, where you get to deal with a person who has no idea of what he's doing! Secondly, the defensive investor should go for a diversified portfolio of stocks and bonds, where the stock category consists of primarily low-priced issues. Thirdly, the enterprising investor should also aim for stocks that show lower price tendencies. The fourth takeaway Is that the intelligent investor should insist on a margin of safety when acquiring an asset. And finally, takeaway number 5 is that risk and reward aren't necessarily correlated. What do you think of Graham's advice? Are they still as applicable today, as they were back in the 1970s? Share your thoughts with other viewers in the comments below. As always, if you want me to summarize a book on investing, personal finance or money management, please comment on that as well. And if you find that any of the takeaways of this book is especially interesting and want me to elaborate on it, don't be shy, you may comment on that too!
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