Disclaimer:
This is not my advice.
These are my notes which are based on my interpretation of chapter 8 and chapter 20 from the book “the intelligent investor" by Benjamin Graham. Please do not treat these notes or this book as investment advice. Please consult a registered financial advisor before making any investment decisions.
Chapter 8 Summary: The Investor and Market Fluctuations
How Market Fluctuations Affect Investments:
Bonds: If you’re putting your money into high-quality bonds that mature in seven years or less, you don’t have to worry much about market ups and downs. The value of these bonds won't change drastically. But if you have longer-term bonds or stocks, expect their prices to bounce around a lot over the years.
Be Ready for Changes: Understand that the value of your investments, especially stocks, will go up and down. Be prepared both financially and emotionally. You want to see your investments grow, but be careful not to get too caught up in trying to buy and sell at the right time. It’s easy to say “don’t gamble with your money,” but it’s harder to actually follow that advice.
Two Ways to Deal with Market Movements:
Timing the Market: This means trying to guess when the stock market will rise or fall so you can buy low and sell high. The problem is, it’s really tough to do this well, and even the pros often get it wrong. If you focus too much on timing, you might end up behaving more like a gambler than an investor.
Pricing: A better approach is to buy stocks when they’re priced lower than their true worth and sell them when they’re priced higher. This doesn’t mean you have to wait for the absolute lowest or highest prices, just that you should aim to get a good deal. This method is easier and safer than trying to predict the market’s next move.
How Investors Should Think About Market Ups and Downs:
Don’t Get Caught Up in the Hype: Speculators (people who try to make quick money from market changes) are always watching the market closely, trying to predict what will happen next. But as an investor, your main goal should be to buy solid stocks at good prices and hold onto them. Don’t let every little rise or fall in the market make you panic or get excited.
Use Fluctuations to Your Advantage: Instead of reacting every time the market shifts, use those changes wisely. When prices drop, it might be a good time to buy more stocks. When prices are way up, you might consider selling some. The key is to stay calm and not just follow what everyone else is doing.
Understanding the Real Value of Your Investments:
Focus on Business Value, Not Just Stock Prices: A stock’s market price can jump around for all sorts of reasons, but that doesn’t always reflect how well the actual company is doing. As an investor, try to focus more on the company’s health and performance, not just its stock price.
The Mr. Market Story: Imagine you own a piece of a business, and every day a guy named Mr. Market comes to you with a new offer to buy your share at a different price. Sometimes his price is fair, other times it’s way off. The smart move? Ignore Mr. Market most days and only consider his offer when it lines up with what you think your share is really worth.
Key Takeaways:
Think Long-Term: Treat your stocks like pieces of real businesses, not just numbers on a screen. Market prices are just opportunities to buy more when they’re cheap or sell when they’re expensive. Don’t let the daily ups and downs mess with your head.
Avoid Trying to Time the Market: Trying to guess when the market will go up or down is a losing game for most people. It’s better to focus on buying stocks at reasonable prices and holding onto them for the long haul, regardless of what the market does in the short term.
In short, this chapter is all about keeping your cool during market swings, focusing on the actual value of what you own, and not getting sucked into the risky game of trying to time the market perfectly.
Chapter 20: Margin of Safety
What’s Margin of Safety?
Basically, you should never lose money in stocks. It's okay if you dont gain but dont lose. To achieve that you need to be super safe. To do that you should consider stocks that are priced way below their real value.
How It Works with Bonds and Preferred Stocks:
When you buy bonds or preferred stocks, you want to make sure there’s a big enough cushion. Like, if a company makes five times more money than it needs to pay its debts, that’s a good safety margin. This means even if things get rough, you’re probably still safe.
You can also look at the company’s total value compared to its debt. If a company is worth $30 million and only owes $10 million, you’ve got a nice cushion there.
What About Stocks?
Stocks can have a margin of safety too. Sometimes, a stock is so cheap it’s safer than a bond. This happened during the Great Depression when some companies’ stocks were priced super low but were still solid.
Usually, though, your safety margin with stocks comes from the company making a lot more money than what you’d get from a bond. If a stock gives you a 9% return and a bond only gives 4%, that extra 5% is your cushion.
The Risk Nowadays:
Here’s the deal, these days, stocks don’t always give you a big cushion compared to bonds. So, there’s more risk involved. The real danger is buying crappy stocks or bonds just because things look good right now. People often mistake good times for safety, and that’s where they get burned.
Growth Stocks & Safety:
Investing in growth stocks (those expected to grow a lot) is tricky. You’re betting on future earnings, which is harder to predict. If you’re careful and conservative in your estimates, you might still have a margin of safety. But watch out—growth stocks often get too expensive, which can wipe out that cushion.
Buying Bargains:
The best margin of safety comes when you’re buying undervalued stocks—ones priced lower than they should be. This gives you a buffer if things don’t go as planned. Even if the company stumbles a bit, you’re probably still in the clear.
Diversification:
Spreading your investments across different stocks and bonds helps. Even with a good safety margin, things can still go south with individual investments. By diversifying, you’re increasing your chances of coming out ahead overall.
Investment vs. Speculation:
If you’re investing with a good margin of safety, you’re investing. If you’re just guessing and hoping to make a quick buck, you’re speculating. The difference is huge, and it’s all about that safety cushion.
Wrap-Up: Be Businesslike
Treat investing like running a business. Know what you’re doing, don’t hand over control unless you really trust someone, and make sure your investments have a good shot at paying off. Stick to your guns if you’re confident in your judgment.
For most people, you don’t need to be a genius. Just stick to the basics, focus on safety, and you’ll likely do just fine.
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