Wednesday, 12 September 2012

A Warren Buffett Book - Three Key's to Ben Graham's "The Intelligent Investor"

A Warren Buffett Book - Three Key's to Ben Graham's "The Intelligent Investor"

By Preston G Pysh

Benjamin Graham's widely acclaimed book "Intelligent Investors" laid the foundation for investing strategies so that investors could develop long term plan regarding their investment portfolios. Through this book, the mastermind of investments was able to introduce core principle that must undermine the investment strategy. The advice offered by the book is priceless and investors that are interested in high returns must incorporate the principles in the decision making process.

The most important part of the book focuses on investors and the accompanying speculation. Benjamin Graham asserts that speculation can lead to trouble and therefore investment decisions must not be based on speculation. Rather they must be based on thorough analysis so that the investment results in long term benefits. The principle states that a complete analysis of the financial statements must be performed before hand in order to establish the viability and profitability of the organization. Graham also focused on the need to have an adequate return from the portfolio of stocks. He stated that the investor must get a return that is above the return generated from low cost index finance. Graham focused that an investor must act with reasonable intelligence and thus decides on a rate of return based on the risk that he is willing to accept. The book also focused on the intrinsic value of the share as opposed to the market price of the share. This is one of the most valuable principles put forth by Benjamin Graham. The intrinsic value of the shares is based on the cash flows of the organization and this is what investors must calculate when buying shares.

Perhaps, the most famous principle of Benjamin Graham described in the book is Mr. Market. Here, the book explains in detail the workings of the stock market through an imaginary friend named Mr. Market. The author explains how the stock market is subject to fluctuations on a daily basis which might actually convince the investor to buy or sell the stock. However, he emphasizes that the stock market is subject to great volatility and any investor that is looking for long term returns must avoid these signals. Instead, the investor must take advantage of the stock market fluctuation only at extreme times; that is too sell dead stock when prices are high or buy quality stock when prices are low. Except for these two extreme cases, the stock market fluctuations must be avoided.

Another important part of "Intelligent investor" is the margin of safety. Graham emphasized that irrespective of the calculation of intrinsic value and through analysis, investment decisions are subject to errors of calculation. Therefore, all investors must ensure that the investment has a "margin of safety". For example, if they think that the stock has an intrinsic value of $100, they might be willing to pay $60 for it. So that in case the value is a little less than $100, the investor is far better off.

These three principles put forward by Benjamin Graham form the foundation of the entire book that aims to provide investors with complete guidelines on stock investing.

If you're looking for more information on Graham's book, be sure to checkout these useful resources:

1. Read this Warren Buffett investing book. The link takes you to a book on Amazon that summarizes Ben Graham's guidance in the Intelligent Investor.
2. Watch the videos on this website. It's dedicated to teaching The Intelligent Investor to online students.

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