Thread by @inderkapoor04

What Warren Buffett Learnt About Investing from Benjamin Graham?

Decoded!🕵️

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Benjamin Graham aka the “Father of value investing” is best acclaimed for his book The Intelligent Investor. In his book, he has presented the core principles of his investing philosophy.

- The Intelligent Investor, even after seven decades, has remained as relevant as ever.

- Warren Buffet considers Ben Graham as his mentor and credits all his success to his investing principles.

Principle 1: Investment vs. Speculation

- An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return.

- Operations not meeting this requirements are speculative.

a) Thorough Analysis
- An investor must thoroughly analyze a company & the soundness of its underlying business operation before buying the stock.

b) Safety of Capital
- An investor must deliberately protect himself against serious losing. Excessive risk must be avoided.

c) Adequate Return
- An investor must aspire for adequate return on his stock investments.

- The investors who go after extraordinary risks end up taking more risk than warranted thereby putting their capital in danger.

- The speculator’s primary interest lies in anticipating and profiting from market fluctuations while the investor’s primary interest lies in acquiring and holding suitable investments at suitable prices.

Principle 2: : Investor must think like a businessman

- Graham said that “Investment is most intelligent when it is most businesslike”.

- The investor should understand that stocks are not merely pieces of paper but are fractional ownership of a business.

Principle 3: Concept of Mr. Market

- Stocks are subject to frequent and wide fluctuations in their prices and an intelligent investor must learn to profit from these wild swings.

- These fluctuations are influenced by investor emotions: Over-optimism and greed.

- Graham succinctly captured his philosophy through his famous analogy of Mr. Market.

- To understand the whims of the market, let’s imagine the entire stock market as a person by the name, Mr. Market.

- The character of Mr. Market is highly unpredictable, subject to mood swings and is not very clever.

- Each day, Mr. Market shows at your doorstep with a price quote to either buy the share you own or sell the one he owns.

- If he feels elated and sees favorable factors affecting the business, he will quote far higher value than the true value to buy your stocks.

- At other times, he is depressed and can see nothing but trouble ahead for both the business and the world.

- On such occasions, he will give a very low price, as he is terrified that you will unload your interest on him.

Principle 4: Investor must focus on Intrinsic Value

- The investor must learn to calculate the value of the underlying business. He must understand that the intrinsic value is not similar to the market value of the stock.

- The only way investment can take advantage of the market folly is by comparing the current market value to the intrinsic value.

Principle 5: Margin of Safety

- Warren Buffett describes ‘’Margin of Safety” as the single most important thing he learned from Graham.

- Intrinsic value of a stock is estimated using numerous assumptions which may or may not hold true in the future.

- That means the intrinsic value calculated always has an element of uncertainty attached to it.

- Graham suggests the investor buy the stock at a discount to its intrinsic value.

- In The Intelligent Investor, Graham wrote that “You are neither right nor wrong because people agree with you.”

- Graham was a strong proponent of taking an investment call independently.

- The investors should never shy away from intensive research before putting their hard earned money in the stock markets.

- These were the 5 Core Principles of Ben Graham.

It's time to end the thread with Buffett's famous quote: