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Investment insights from the intelligent investor - part two

Benjamin Graham's definition of investing is, "An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return."

The pitfalls faced by new investors in the stock market are so many that it's not prudent to walk into it without any basic principles.

These basic principles are offered in the book to protect you from speculators and gimmicks in the market as well as saving you a ton of money and keeping away emotional rollercoasters along the way.

The Intelligent investor by Benjamin Graham. Recommendation by Warren Buffett.
Image for representational purpose only. Source - Google Images

In this second part of the series of blogs on the insights from the intelligent investor (Revised edition, with commentary by Jason Zweig), we look at more key takeaways from the book, that remains relevant to our times. Click here for part one.

  1. Thoroughly analyse a company, and the soundness of its underlying businesses, before you buy its stock.
  2. Deliberately protect yourself against serious losses.
  3. Aspire to "adequate", not extraordinary, performance.
  4. Rising prices allow a country to pay off debts with currency cheapened by inflation. Completely eradicating inflation is against the economic self-interest of any government that regularly borrows money. Which is why it's more advantageous to be a lender during deflation (steadily falling prices) - so keep atleast a small portion of assets in bonds as insurance against deflation.
  5. Mild inflation allows companies to pass increased costs on raw materials to consumers, high inflation wreaks havoc and makes consumers cut spending and depressing economic activity.
  6. High deflation also has a negative impact on stocks, real estate and economy in general. Example, Japan since 1989.
  7. Invest just 2% of overall portfolio in gold (5% if you are over 65) but not directly, but in a well diversified mutual fund specialising in stocks of precious metal companies and less than 1% annual expenses.
  8. In general, a P/E ratio below 10 is considered low, between 10 and 20 is considered moderate and greater than 20 is considered expensive.
  9. It is inaccurate to assume that you can eliminate all the risks of stocks and always beat returns of bonds simply by holding them long term.
  10. Past returns do not guarantee similar or same performance in the future. The intelligent investor must never forecast the future by exclusively extrapolating the past.

Stay tuned for more investment insights in the next blog in the series on the intelligent investor.

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