So when a person thinks of value investment, you would think of Benjamin Graham, Warren Buffett, Peter Lynch, Seth Klarman, and Mohnish Pabrai. When it comes to stocks, one of the most read books within this century is the Intelligent Investor.
The author, Benjamin Graham, was the teacher of Warren Buffet as well as others who pretty much is known as the founder of value investing. In this book the main chapters that makes it amazing is his concept on Mr. Market and Margin of Safety.
Chapter 8 explains Graham’s metaphorical image of explaining how stocks are mispriced.
“Mr. Market does not always price stocks the way an appraise or a private buyer would value a business. Instead, when stocks are going up, he happily pays more than their objective value; and, when they are going down, he is desperate to dump them for less than their worth. “
As the commentary of Jason Zweig states “the intelligent investor shouldn’t ignore Mr. Market entirely. Instead, you should do business with him–but only to the extent that it serves your interests. Mr. Market’s job is to provide you with prices; your job is to decide whether it is to your advantage to act on them.” Essentially, it is important to think and judge wisely, do not be a victim of the NASDAQ crash or nifty fifty!
Chapter 11 summarizes the five elements that are decisive to buying a stock cheap:
- long term prospect (what is the company’s moat?)
- quality of management (are they managing or promoting?.. do they admit their failures or explain their goals?… do they do what they say?)
- financial strength and capital structure (does it have more cash available at hand than debt?)
- dividend (is the company using the cash at hand optimally or are they better of paying a dividend … is it consistent?)
- stock policy (Is the company buying stock back because there is an underlying value behind their business or are they fronting a facade to enhance shareholder value?)
This book is a must read. There are multiple version and editions of this book. I do not recommend to buy the intelligent investor classical text. I did struggle with the classical text because many of the examples are outdated and hardly makes any sense. “The Intelligent Investor” revised edition by Jason Zweig is a phenomenal start and will help you understand how to analyze a stock. The rest is up to you.
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