Monday, December 26, 2005

 

Don't just do something, stand there


The speculative public is incorrigible. It will buy anything, at any price, if there seems to be some "action" in progress. It will fall for any company identified with "franchising," computers, electronics, science, technology, or what have you when the particular fashion is raging. Our readers, sensible investors all, are of course above such foolishness.

—Benjamin Graham, The Intelligent Investor, 1973


I have this habit of reading 'The Intelligent Investor' every now and then just to remind myself of what investing is really about. The book is by Benjamin Graham, the father of value investing. Warren Buffett calls The Intelligent Investor "by far the best book on investing ever written". I'm just gonna go with 'the only investment book I think I'll ever need'. So far, I'm right in my assessment. I have the new paperback with the updated commentary by Jason Zweig. The examples, including Zweig's, are in an American setting but the principles set forth in the book can (and should) be applied to any market.

The Basic Ideas (as per my reckoning):

1. Don't lose.

Make the effort not to lose through thorough research before, during and after any investment.

2. Demand a margin of safety from any investment.
Make sure that, if you are wrong, you're not horribly wrong. You will be wrong sometimes.

3. You are your worst enemy.
Investing requires, above all, control over one's emotions. If not, you're just going to sell when the markets collapse and buy when the market's rising like everyone else. Easier said than done.

4. Stocks represent a stake in a company.
Stock prices SHOULD be a function of a company's performance. Nothing more and nothing less.

5. Markets are not all that efficient.
Stock prices sometimes dont reflect the company's worth due to the human emotion component in the markets. The efficiency of markets is a nice theory that WOULD work if we were all unfeeling robots.

6. You have no idea what the markets are going to do next.
If you think you do, you will pay the price. Minimize risk.

7. It's not enough to buy into a great company.
You need to buy in at the right price.

8. There's only one kind of investor: a value investor.
There's only one kind of value investor: a long-term investor. The rest are speculators. To wit, dont just do something, stand there.

9. For a value investor, risk does not increase with return.
By buying a stock at a price lower than its true value, you're essentially buying a dollar for 40 cents. 40-cent dollar is a popular expression among value investors. The lower the price you pay, the lower the risk and higher the potential return.

10. A valid approach to investment will not change.
The methodology by which one invests does not change with the market. There are investing principles that will remain valid under ALL conditions.

I do have to warn you that this book WILL change your investing outlook drastically. Television commentary on intra-day trading will come to resemble 'Saturday Night Live': worthless but funny. You will embarass yourself by giggling when some pundit uses phrases like 'technical analysis' or 'range-bound'. Don't take my word for it. Read the book.

One thing I find really scary about the book is its contemporary relevance. Little did I realize that stock markets behave the same way now as they did in Graham's day.A glimpse of that is given by Jason Zweig as he provides contemporary examples in addendums to each of Graham's chapters. The 'new economy' boom of 2000, WorldCom, Motley Fool's 'Foolish Four' are among the ones eviscerated. If you were a true 'value investor', you would have lost nothing during the 2000 crash AND profited in the ensuing bear market (in India or the US).

Here are some of value investing related blogs I found for further info:

Value Investing In Nigeria : Name says it all.
Dah Hui Lau (David) : A value investor from the UK
Mr Market - are you irrational today? : A contrarian investor, a related species.
Value-Stock-Plus : A fellow Indian value investor
Shai Dardashti on Grahamian Value : what would Graham do?WealthJunkie : value, value, value
Fat Pitch Financials: 40-cent dollars
Value Investing in the Indian Stock Market: detailed and practical analysis

Discover value investing. I am, all the time. For now, I'll leave you with another extract from the book:

Outright speculation is neither illegal, immoral, nor (for most people) fattening to the pocketbook. More than that, some speculation is necessary and unavoidable, for in many common-stock situations there are substantial possibilities of both profit and loss, and the risks therein must be assumed by someone. There is intelligent speculation as there is intelligent investing. But there are many ways in which speculation may be unintelligent ...




Comments:
Hi,

Good blog. Please contact me at jay_m888@hotmail.com

Thanks
Jay

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