Too often, investors misunderstand what investing actually means. It is about finding value and growth. It is confused with speculation and the idea that there is some “next big thing” that will bring immediate wealth. Similarly, it is confused with the idea of swing or day trading. There are a lot of ways that institutions and individuals make money in the securities markets, but many of them are not investing. I have tried a few of them, but as a small time investor with no connections to the worlds of the markets, I have made little money in those instances, and lost more.
The Intelligent Investor is probably the greatest book I have ever read on the subject. I think the most important point it makes is the difference between speculation and true investing.
The book in its overall structure and philosophy is actually very simple. Investing is finding value in companies, and allocating funds there because there will be growth. Speculation, on the other hand, is not investing. Speculation involves assumptions and usually excitement, while investing involves a fundamental analysis of the company, their financials, and the industry and market sector they are in.
One great example of speculation and the ruling of emotion was the dot-com bubble. Just like almost every other bubble, the driving force was overconfidence, lack of analysis, and greedy / excited emotions. In the late 1990’s, the stock markets in the United States saw soaring equity growth, largely because of the internet and tech companies innovation, growth, and assumed potential. Everyone wanted to get on the band wagon because it looked like a sure thing. Stock prices rapidly rose as more and more money was poured into these companies. The problem was not that the internet and related tech companies were growing quickly, but that would-be investors overlooked or completely ignored the traditional means of valuing a company in favor of the assumption of growth. Reality started to rear its head around early 2000 when companies were failing or “under performing”, and investors started to pull out. The result was as disastrous as it was spectacular.
In time, some companies recovered, and surpassed their dot-com bubble peak prices (an example would be Amazon). But many failed, and the investments were never recovered.
This is a great example of what not to do, and it can be easy to look back and see the ridiculousness of the bubble. But the truth is, tiny bubbles happen all the time. Either in overconfidence of an industry, a sector, or a company, the bubbles burst because there is a lack of analysis and too much emotional influence.
Benjamin Graham wrote the intelligent investor to share his and his associates experiences and address the issues that investors face in the marketplace; particularly around the temptation of speculation.
I have read it three times, not because I really wanted to, but I felt that the first two times I didn’t grasp or remember all of the concepts outlined in the book. Just a warning, it is a pretty dry read. That being said, I would recommend the book to anyone who has some basic knowledge on how securities investing works, and wants to learn more and grow in their understanding of what successful investing means. If you can pick out the advice from arguably one of the most successful investors in modern years, you have used the book for its purpose.