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4 Rules to Increase Financial Success by The Intelligent Investor

by | Nov 11, 2021 | Investment Lessons

The Intelligent Investor by Benjamin Graham is considered the best book on investing and financial success.

Are you interested in increasing your financial success? Pay close attention to the following 4 rules from Benjamin Graham.

These rules come right out of his book that we’ll discuss today.

The Intelligent Investor was written in 1949 and still considered one of the best books for financial success.

This book written by Graham, known as the father of value investing, is considered one of the most important books on the topic. This book will help you increase your financial success when it comes to investing. 

Benjamin was very good at making money in the stock market by evaluating companies very closely, while always minimizing any risk.

He, is not only seen as the father of value investing but was also the mentor to the oracle of Omaha, better known as Warren Buffett.

Today, we will be highlighting 4 of the biggest takeaways from The Intelligent Investor by Benjamin Graham

Who is Benjamin Graham

Benjamin Graham frequently pointed out the crazy thinking that was often rampant in the stock market. Graham encouraged rational thinking based on analysis versus the mentality of most investors acting on impulse and chasing the market like gamblers. His principles of investing safely and successfully continue to influence value investors to this day.

Before we jump straight to these 4 lessons to help you increase your financial success when investing, let’s review Benjamin Graham’s past.

Making money was never a driving force for him. In-fact, when Graham passed at the age of 82 in 1976 it is estimated he left behind only $3 million to his family. Over four decades he had an average annual return for investors of 15% and was extremely generous giving away a lot of his earnings. 

Graham graduated from Columbia University in 1914 and started working on Wall Street. During a career spanning a decade and a half, Graham built a sizable personal net worth.

Unfortunately, like many others, he lost most of his money in the stock market crash of 1929 and the subsequent Great Depression.

This dreadful experience left him with valuable lessons about minimizing downside risk by investing in companies whose shares traded far below their value. His top priority was to always protect your investment capital. He was set on creating an easy to follow investment philosophy that any small investor could also follow. 

So, what are some of the vital lessons we can learn from the book, The Intelligent Investor?

Let’s jump into 4 ways you can increase financial success when investing from The Intelligent Investor by Benjamin Graham. 

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Benjamin Graham’s Advice: Be Better than Mr. Market

Mr. Market is a fictional character but one who truly represents how most individuals invest. Most of us investors buy or sell on emotions!

Mr. Market’s investment decisions are typically irrational, they act on fears, or greed, panic and other emotions.

On one side of the market you have buyers thinking they’re getting a great deal and on the other side you have sellers who also think they’re better off selling. This irrational trading though can create an opportunity, according to Graham. 

When the pessimist is selling on fear and not the true valuation of the stock today, this creates a buying opportunity. Likewise, when investors are overly optimistic and buying a stock without merit, this can create an opportunity to sell for profits. 

Mr. Market doesn’t control their own behavior unfortunately and isn’t very rational. This form of investing in the long run does not lead to success. 

The key take away is don’t invest like Mr. Market. Overall the markets are relatively efficient and prices reflect current information. There are times though that Mr. Market and extreme emotions can alter the market. This is when you can take advantage with either buying or selling for profits. 

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Learn the Art of Value Investing

Graham believed that a true value of a stock could be determined through research. 

He worked with fellow professor David Dodd to develop value investing. 

The goal in value investing is to identify and buy securities priced well below their true value. 

Graham’s process provided a rational basis for investment decisions.

In short, it looked at the intrinsic value of a company before investing. 

This included earnings, revenues, current assets and the present value of future cash flow. 

Many calculators are available online that will calculate a stocks true value today.

What’s important to note here is if the intrinsic value is much higher than what a stock is trading at, this creates an opportunity to profit nicely in the future. In short, you’re buying a stock at a discount today to where it will be in the future. 

Once the stock is actually trading at its intrinsic value, you should go ahead and sell.

Here’s the big takeaway. When looking in a stock that’s trading at $50 compared to an intrinsic value of $100, this is a nice opportunity. 

Even nicer though, if you find another stock with an intrinsic value also of $100 but it’s trading at $30, this is a better opportunity.

There’s more upside and lower risk because it has a bigger margin of safety.

What’s a margin of safety? Let’s cover that next.

Always Invest with a Margin of Safety

Benjamin Graham was also a big advocate of investing with a margin of safety. 

What is a margin of safety? Simple, it gives room for human error or dramatic market swings.

Graham’s margin of safety is the difference between a stock’s price and its intrinsic value. 

In theory, the further a stock’s price is below its intrinsic value, the bigger the margin of safety is. This helps you, should the market have a sudden pullback after you’ve purchased the stock. Theoretically, the stock shouldn’t be impacted since it’s already trading below its value.

The margin of safety concept is about investing with the odds significantly in your favor. You invest with a bigger cushion in what the value of a stock should be and what you are actually buying it at. 

According to Graham, The margin of safety is always dependent on the price you pay. It will be large when buying a stock at a deep discount and nonexistent when buying it above it’s value.

The big takeaway, look to invest in companies trading below their valuation. Though this will filter out a lot of attractive tech stocks in today’s market, this will protect you in the long run as a value investor. 

Invest In Value Stocks That Pay a Dividend

Value investing is a long-term process and requires patience. 

At times, particularly today, your friends are most likely trading like Mr. Market and may in the short-term brag about their profits. Doubt can begin to creep in and you may feel disappointed. Maybe even FOMO (fear of missing out) can come into play. 

Remember, when buying a stock following a value investing philosophy, the market may take time to catch up and see the great deal you saw.

Thus, Benjamin Graham recommended looking for companies that have a long history of paying a decent dividend. This way, while you’re waiting for the market to catch up, you’re making a decent income from the dividend. 

Another benefit of this philosophy is that if a company has been consistent with paying a dividend uninterrupted for years, it’s a sign of financial strength.

Summary: 4 Ways to Increase Financial Success

The Intelligent Investor by Benjamin Graham is a book with wisdom for all investors.  

Investors who aim to create wealth over the long run will do so by investing in value stocks.

Though you may be tempted by today’s current market winners, investing with the value mindset will not only build your wealth overtime, but it’ll definitely help you sleep better at night.

Investing isn’t about beating others at their game. It’s about controlling yourself at your own game.

This book will not teach you how to beat the market today. It will teach you how to reduce risk, protect your capital from loss and reliably generate sustainable returns over the long run. 

Warren Buffett calls the Intelligent Investor “by far the best book on investing ever written.”

If you want to learn how Warren Buffett makes his money, then reading this book is highly recommended.

The Intelligent Investor by Benjamin Graham gives you everything you need to equip yourself with the value investor’s mindset.

To recap, personal financial success is primarily the result of following consistently these 4 rules:

  • Beware of Mr. Market
  • Learn the art of value investing 
  • Always invest with a margin of safety
  • Invest in value stocks that pay a dividend

On the other side of value investing is growth investing. Want to discuss an alternative investment that has outperformed the markets consistently? Click-here now and schedule a call with our team today.

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