In this episode, we continue the conversation regarding investing and what better way to do this than to talk about the works of Benjamin Graham- Warren Buffet’s mentor. In his book ‘’The Intelligent Investor” he discusses the notion and value of investing, he teaches us how to invest without getting any emotions involved.
The book defines investing as; "One which, upon thorough analysis, promises safety of principal amount and adequate returns."
The keyword is adequate returns, not an extraordinary return. The opposite of this is speculation; when you are not looking at the financial statements and only expecting extraordinary returns.
Benjamin’s take on speculation is that it is a big mistake to make a future market decision based on what the past has shown.
Stock market history is also not considered relevant to what the future may hold, Grahams take on that was, that it is a big mistake to make future market decisions based on what the past has shown. Warren Buffets famous quote “If past history was all there was to the game then the richest people would be librarians”
Defensive and active investors
Defensive Investors are interested in safety and freedom from worry, this emotionally detaches the investor from the market. An intelligent investor does not play into the hype, they are emotionally detached from whatever is happening in the world and whatever is happening in the market currently.
As an active or enterprising investor, you put in a lot of time and effort, and this is unfortunately physically and mentally demanding. You can put in a lot of hours, you are doing thorough analysis and you are making decisions based upon that.
For all the companies that are publicly trading all the financial statements are available to anyone for analysis- to determine if a certain company is a good option to purchase from.
Regardless of the type of investor you are, you need to assess if a company has a good value or not. Below are a few tips which would help you make an informed decision based on the financial statements.
The Current Ratio should be 1.5 or higher
Avoid day trading and any trading that involves too much risk,
Outstanding debt should not be greater than 110% of net assetsNo deficits in the last 5 yearsEvaluate the P/E ratio Analyse the growth trends of the companyThe stock price should be less than 120% of the net tangible assets.
To invest and analyze the stock market requires a lot of patience. If you feel that you do not have such temperament, then your safe bet would be to opt for mutual funds.
Mutual funds are compensation for different individual companies and are the best way to diversify your income. The criteria to classify a mutual fund is by evaluating whether:
The managers are the biggest stockholders They are cheap to trade The expense ratio should be very low (.03%)They take limited/unlimited investments – good funds limit taking on investmentsTheir past performance has been adequateThe risk in involvement is high/low
Pay attention to what you are doing with your money. The concepts of Benjamin Graham may mean nothing if you don’t implement it. All our lives we earn money, worry about money and spend money.
It is time to evaluate your options, learn the tricks of the trade and invest your money to get higher returns.