The Intelligent Investor by Benjamin Graham was the first book I read when I started investing. It was so dry at times, that had I not been so eager to learn, I may have discarded it partway through. In the end, I was glad I finished reading The Intelligent Investor by Benjamin Graham, because it provides some timeless investing lessons.
Tversky, Kahneman and Thaler are considered the founding fathers of behavioural finance but I’d argue Graham had a strong grasp of the concept well ahead of his time. Graham argued that an “Intelligent Investor” was someone patient, disciplined, eager to learn and was able to control their emotions and think for themselves. He cautions investors against enthusiasm, claiming it almost always leads to disaster in investing. Successful investing requires discipline and consistency, being process focused as opposed to outcome focused, and paying little attention to what the market is doing.
Benjamin Graham On Risk
In the Intelligent Investor, Benjamin Graham emphasises that to make good decisions we need to ask ourselves “do I understand this investment as well as I think I do?” and “how will I react if my analysis is wrong?”.
My favourite quote in the Intelligent Investor captures how important investor behaviour is to investment returns. He wrote:
“If you want to know what risk really is, go to the nearest bathroom & step up to the mirror. That’s risk, gazing back at you from the glass.”
Who (or Rather What) Is Graham’s Metaphorical Mr Market?
Graham introduces us to the idea of Mr Market, being the personification of the market: namely the guy on the other side of any trade. This metaphorical personification is intended to remind us that we’re rarely ever forced to sell our shares and can disregard the wild prices Mr Market throws at us.
As owners, we don’t need to know the market value of our house every day nor do we need to know the price of our stock on a daily basis; assuming the business fundamentals are unchanged. According to Graham, we only need to pay attention to the price and act upon it if the price is sufficiently favourable to justify selling.
The Intelligent Investor reminds us to ignore the noise and to think long-term. We have the luxury to think for ourselves and to choose whether or not to take Mr Market’s offer. As long-term investors, we should not get too fixated on what the stock market is doing today, this month or this quarter.
As a retail investor, I feel it’s easy to forget that we own a piece of a business as opposed to a stock symbol. Graham reminds us that the managers and CEO work for us, its board of directors answer to us, its cash and assets belong to us and if we don’t like the way our company is being, run we have the right to demand management be changed, or assets sold. He argues that stocks succeed or fail because the businesses behind them succeeds or fail and preaches that valuation always matters. There is no such thing as a good or bad stock:
“Even the best company becomes a “sell” when its stock price goes too high, while the worst company is worth buying if its stock goes low enough.”
As part owners of a business, we should avoid management who are “hype-o-chondriacs”. Graham cautions that the majority of an executives time should be spent managing their company in private, not promoting it publicly.
Benjamin Graham Quote For A Bear Market
While full of additional wisdom, I’ll finish with an excerpt that grasps the overall ethos and learnings of the book quite well.
That man would be better off if his stocks had no market quotation, for he would then be spared the mental anguish.”
My Main Lesson From The Intelligent Investor
The biggest lesson I took from the Intelligent Investor is that I must respect the role my own behaviour plays, in shaping my investment returns. The book made me more aware of the perils of being unduly influenced by share price volatility and short-term noise. After all, investors own a piece of a business not just a stock symbol.
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