I saved a page from a June 2013 Forbes article that featured Warren Buffett; it was titled “Wealth Wizards, advice from the masters”. In the brief article, author Matt Schifrin wanted to know from Mr. Buffett what was the best money advice he had ever received. He answer was no surprise; The Intelligent Investor, written by value investor Benjamin Graham. “Chapters 8 and 20 have been the bedrock of my investing activities for more than 60 years. I suggest that all investors read those chapters and reread them every time the market has been especially strong or weak.”
I have a 623 page paperback version of The Intelligent Investor, a revised edition with the Preface and Appendix by Warren Buffett and commentary by Jason Zweig. When I read the book years ago, I either underlined or highlighted nuggets of wisdom that I reference back to once or twice a year when I pull the book out for a refresher. Fittingly, the Forbes article I mentioned earlier is folded up and used as my bookmark.
Back to Mr. Buffett’s reference to chapters 8 and 20; wanted to share with you some of the “nuggets” that I underlined or highlighted in those specific chapters to assist in getting an understanding as to what Mr. Buffett may have found indispensable in his 60+ years of successful investing.
Chapter 8 - The Investor and Market Fluctuations
- The most realistic distinction between the investor and the speculator is found in their attitude toward stock market movements. The speculator's primary interest lies in anticipating and profiting from market fluctuations. The investor's primary interest lies in acquiring and holding suitable securities at suitable prices.
- You will be wiser to form your own ideas of the value of your holdings, based on full reports from the company about its operations and financial position.
- 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.
- At other times he will do better if he forgets about the stock market and pay attention to his dividend returns and to the operating results of his companies.
- As long as the earning power of his holdings remains satisfactory, he can give as little attention as he pleases to the vagaries of the stock market.
- Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in their holdings is perversely transforming their basic advantage into a basic disadvantage.
- The intelligent investor is likely to need considerable will power to keep from following the crowd. The right kind of investor will take added satisfaction from the thought that his operations are exactly opposite from those of the crowd.
- Never buy a stock immediately after a substantial rise or sell one immediately after a substantial drop.
- The stock market often goes far wrong, and sometimes an alert and courageous investor can take advantage of its patent errors.
- A common-stock portfolio is almost certain to fluctuate in value over any period of several years, the investor should know about these possibilities and be prepared both financially and psychologically.
- It is easy for us to tell you not to speculate; the hard thing will be for you to follow this advice.
- What advantage is there to him for not having his money invested until he receives some (presumably) trustworthy signal that the time has come to buy?
- A classic definition of a "shrewd investor" is one who bought in a bear market when everyone else was selling , and sold out in a bull market when everyone else was buying.
Chapter 20 - "Margin of Safety" as the Central Concept of Investment
- The margin of safety is always dependent on the price paid.
- Know what you are doing, know your business.
- The buyer of bargain issues places particular emphasis on the ability of the investment to withstand adverse developments.
- We suggest that the margin of safety concept may be used to advantage as the touchstone to distinguish an investment operation from a speculative one.
- The risk of paying too high a price for good quality stocks - while a real one - is not the chief hazard confronting the average buyer of securities. Observation over many years has taught us that the chief losses to investors come from the purchase of low quality securities at times of favorable business conditions.
- And a true margin of safety is one that can be demonstrated by figures, by persuasive reasoning, and by reference to a body of actual experience.
- Keep away from ventures in which you have little to gain and much to lose.
- It is a basic rule of prudent investing that all earnings estimates, when they differ from past performance, must err at least slightly on the side of understatement.
- Diversification is an established tenet of conservative investing.
- Have the courage of your knowledge and experience. If you have formed a conclusion from the facts and if you know your judgement is sound, act on it - even though others may may hesitate or differ.
To End
I strongly recommend that all investors purchase the book, it will make for some great reading as we transition to winter very soon. Meanwhile, I hope you have found some words of wisdom that you can apply to your own investment strategy and philosophy. Were there any that stood out or made you pause and think? For me, it was the following; "chief losses to investors come from the purchase of low quality securities at times of favorable business conditions." We've had a bull run for an extended period of time - a rising tide lifts all boats - so I need to review my portfolio to see if any companies fall into that category with the thought being that when the market takes a turn for the worse, the low quality companies will be hit the hardest.
