The Intelligent Investor by Benjamin Graham
In this piece, we’ll examine the lessons of chapters 10, 11 & 12 of Benjamin Graham’s seminal work “The Intelligent Investor” and see how they can be adapted to current times.
Chapter 10: “The Investor and Market Fluctuations” In this chapter, Graham stresses the importance of having a long-term investment horizon and avoiding short-term market fluctuations. He also highlights the importance of having a well-diversified portfolio, avoiding market timing and hot stocks, and focusing on the underlying fundamentals of the companies in which you invest.
For example, let’s take the case of a tech-savvy investor, Sarah, who has been following the latest trends in the tech industry. She has been hearing a lot about the growing popularity of electric vehicles and wants to invest in this sector. She decides to put all her money into Tesla, which is at the forefront of the electric vehicle industry. A few months later, she realizes that the stock has been affected by market fluctuations, and her portfolio value has taken a significant hit.
In this scenario, Sarah could have benefited from the lessons of Chapter 10 by having a long-term investment horizon and not being swayed by short-term market fluctuations. Instead of putting all her money into one stock, she could have diversified her portfolio by investing in multiple companies operating in the electric vehicle industry. She could have also focused on the underlying fundamentals of the companies rather than the hype surrounding the industry.
Chapter 11: “Security Analysis for the Lay Investor” In this chapter, Graham provides guidance on how to conduct security analysis, which is the process of evaluating the potential value of a company’s securities. He emphasizes the importance of focusing on the underlying fundamentals of the company, such as financial statements, management quality, and industry trends, and avoiding the use of technical analysis as a sole method for security analysis.
For example, let’s take the case of a lay investor, Michael, who wants to invest in the retail sector. He hears that Amazon is performing well, and the stock is a good buy. However, before investing, he decides to conduct a security analysis of the company. He starts by looking at the financial statements and management quality, and he also studies the retail industry trends. He realizes that although Amazon is performing well, the company’s high levels of debt and increasing competition in the retail sector may pose a risk to his investment.
In this scenario, Michael could benefit from the lessons of Chapter 11 by conducting a thorough security analysis of the company before investing. By focusing on the underlying fundamentals of the company and avoiding the use of technical analysis as a sole method, he was able to make an informed investment decision and minimize his risk.
Chapter 12: “The Investor and His Advisers” In this chapter, Graham sheds light on the relationship between investors and their financial advisors. He emphasizes the significance of being mindful of the various types of financial advisors, the potential for conflicts of interest, and the legal and regulatory norms for financial advisors.
Consider the scenario of David, a retiree who is looking to invest his retirement savings. He wants to take the help of a financial advisor, but he is not quite sure of the steps he should take. David begins his journey by researching various types of financial advisors and their services, as well as their qualifications. He also performs due diligence on his financial advisor, examining their experience and track record.
David is taking the necessary precautions to avoid potential conflicts of interest, such as those that may arise when advisors receive commissions for selling specific products, which could then impact their advice and recommendations.
Another option for David could be Robo-Advisors. Many investors are now turning to digital investment management platforms such as Wealthfront or Betterment to manage their portfolios. These platforms offer low-cost investment management services, utilizing algorithms and artificial intelligence to create and manage portfolios based on an investor’s goals and risk tolerance.
While these platforms could be an ideal choice for some investors, it is still vital to comprehend the fees and investment strategies being employed, and to conduct the necessary research to guarantee that the platform aligns with your investment goals.