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These five The Intelligent Investor quotes discuss major lessons in the book. Each of the five quotes has an excerpt from the book to provide you with a deeper understanding.
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The Intelligent Investor Quotes
These five The Intelligent Investor quotes offer insight on everything the book has to offer. The book covers how to think about investing and become a better investor, as well as practical advice for making good investments.
“The intelligent investor is a realist who sells to optimists and buys from pessimists.”
This is one of The Intelligent Investor quotes that offers advice on how to be a good investor. Investing well over the long term does not require incredible intelligence or deep insight. Instead, it requires two things:
- A rational framework for making decisions
- Preventing your emotions, and other people’s emotions, from overriding your framework
With these two elements, and without extensive trading experience, you can do better than more financially-educated people who lack patience, discipline, and emotional control.
Investing successfully in stocks requires keeping a few key principles in mind:
- A stock is not just a mere object you trade. It is a piece of ownership in a business. Therefore, the stock has a fundamental value that is often not the share price. Understand the business, and you understand the fundamental value.
- Pay attention to the price at which you buy stock. The more you pay for a stock, the lower your return will be. Buying stock carelessly, with the expectation that you can buy anytime at any price and still profit, is a mistake. As Graham says, “buy your stocks like you buy your groceries, not like you buy your perfume.”
- The market has constant mood swings. At times, it is over-optimistic, which makes stocks too expensive. At other times, it is pessimistic, which makes stocks cheap. The key is to buy from pessimists and sell to optimists.
- Keep a “margin of safety”—don’t get carried away and overpay for a stock, or a downturn can cause irrevocable losses.
“An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”
This is one of the The Intelligent Investor quotes that covers the idea of speculation vs investment.
What are investors? The term is thrown about loosely to describe anyone who buys or sells securities in the market. But since many people trade irresponsibly and by their emotions, describing them as “investors” seems too generous. For instance, if the stock market suffers a major drop, the media will report, “investors became bearish and pulled out of the market.” Yet these moments are precisely when sound investors would be buying stocks on the cheap.
Offering a more robust definition, Graham defines investment as an operation that, through extensive analysis, provides an adequate return and safety of principal. Everything that doesn’t fit this definition is speculation.
Investors and speculators therefore behave very differently.
Speculators trade on market movements of stock price They buy stocks as they move up, hoping to sell to someone who will pay more for it. When the price goes down, they sell to capture their gains or cap their losses. In all this, they ignore the fundamental value of what the company is worth.
Investors look at the fundamental value of the stock, independent of the stock price. In fact, Graham suggests that investors should be comfortable buying stock even if they could receive zero future information about its daily stock price. Investors also trade oppositely to speculators—they buy when the market is down, since stocks are cheap. Investors dread bull markets since it makes everything overpriced.
“The stock investor is neither right or wrong because others agreed or disagreed with him; he is right because his facts and analysis are right.”
You are not obligated to trade and sell with the market. You should use market pricing merely as an indicator for whether a stock is over- or under-priced, taking advantage of opportunities in your favor.
This sounds like common sense, yet countless traders behave as the market demands they do. They buy when stocks are going up and sell when they have gone down.
To illustrate how silly this is, Graham introduces his famous idea of Mr. Market. Say you own a piece of a business worth $1,000. Imagine a fellow named Mr. Market who is a manic-depressive sort of person and visits you once a day, asking to buy and sell your interest.
- When the market is up, he asks to sell another piece to you at exorbitant prices: $1,500, $2,000.
- When the market is down, he comes by asking to buy your stake for a steeply discounted $600.
Should you go along with this odd person, feeling exactly what he feels at every moment and doing what he demands?
Of course not. You know the piece of business is worth $1,000. You’d maintain your own rationality and politely ask this oddly behaving person to leave your house.
Mr. Market represents the whims and folly of other traders. His behavior should not influence yours. If you know the fundamental value of a business, why should the mistakes of other people influence your behavior? Behaving this way is like having your emotions and behavior dictated by other people.
You have no obligation to act according to market fluctuations. You should deliberately choose to transact only when it is in your favor. You shouldn’t ignore Mr. Market entirely, nor should you blindly follow whatever he tells you, but rather use his prices only when it is to your advantage. You are not obligated to trade with him.
“People who invest make money for themselves; people who speculate make money for their brokers.”
Graham has a lot of opinions about brokers, and this is one of The Intelligent Investor quotes that points out the issues with brokers. The key point to remember about stock brokerages is that they make money when you trade, not when you make money. Therefore, brokerages try to make trading as easy and fast as possible, regardless of whether this is actually good for you.
In fact, since speculators nearly certainly lose money on average and in the long-term, if brokerages had their customers’ best interests in mind, they would make trading more cumbersome. But the least they often do is avoid outright encouraging speculation; otherwise, they throw up their hands, saying, “If customers want to trade using our tools, so be it.”
If you deal with any individual brokers, remember that they typically make their money on commissions, so beware of anyone promoting what smells of speculation. (Earlier in this chapter we’ve discussed red flags for language.)
“Buy cheap and sell dear.”
Is it a good time to buy stocks? This is a perennially difficult question to answer. Investment professionals, whose job is to figure this out, constantly get it wrong.
Public sentiment is even less reliable—when a large crash occurs, most people, having incurred large losses, declare stocks too risky; in reality, this is the time of greatest opportunity to buy. Conversely, when people expect growth to continue perpetually, they’re willing to buy at any price; this ebullience is inviting a steep crash to more reasonable levels.
Here are some principles to stick to:
1) Even experts like Graham have trouble picturing exactly what will happen in the future. At times Graham was too conservative in estimating how strongly stocks would grow; at others, he predicted a major setback that didn’t occur for quite some time. Beware of relying on so-called experts; make up your own mind through independent thinking.
2) Beware of relying too strongly on extrapolating from the past. Graham himself cautioned in 1953 that the market was at a historical high. The market grew by 100% in the following five years.
3) Practice contrarian thinking. If someone says stocks will always go up, ask, “why? If everyone buys stock according to this belief, then won’t stock prices be unreasonably high? And if companies can only earn finite amounts of profit, won’t the stock price at some point exceed a reasonable value for the company?”
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