Last week I finished reading Benjamin Graham’s Intelligent Investor. Though the first edition was published in 1949, the investor of average intelligence is still capable of understanding the language and general concepts contained in the book. I am still excited and a little giddy at having read the whole thing, especially with the pleasure and benefit of having an outstanding mentor to help me along the way.
Thinking back at how I first started investing my spare money, I can only shake my head. I wasn’t entirely wrong, but I also could have done much better in choosing how and when to invest. The one smart thing I did was to put most of my money into an index fund. The one dumb thing I did was to put my money into some of the growth stocks about which Graham provided much warning and evidence against such a proposition. I invested in these two or three individual stocks without any consideration of whether I was purchasing a stock at a bargain price, at fair value, or if I was paying a premium for the growth (which I was).
Of course, one stock did very well up until it started to miss analysts’ unrealistic expectations. The other stock just didn’t do well to begin with - I got in at the top! I lacked an understanding of two very important things. One is that the investor should use the fluctuations to take advantage grossly mispriced stocks. Never allow the daily market fluctuations to guide your investment decisions. Second, one ought to invest in stocks that possess a margin of safety. In other words, as Seth Klarman says, “Buying at a discount creates a margin of safety for the investor–room for imprecision, error, bas luck or the vicissitudes of volatile markets and economies.”
These two concepts are key to making successful, long-term investments.
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