Benjamin Graham was the father of value investing and author of the bible of value investing: the Intelligent Investor.
Assuming that you want to be an intelligent investor, Graham would tell you:
Do not look at market fluctuations.
Instead, focus on understanding the business you are buying. In one case only the investor must look with an eagle eye at Mr. Market: “when it is entirely off.”In words, when Mr. Market overvalues a stock that the intelligent investor owns; or if its market value irrationally exceeds its book value, then it is time for the rational investor to sell and benefit from market irrationality.
Conversely, if a stock is extremely underpriced compared to its book value, the intelligent investor will “shop at a discount.” Why do we wait entire months for “Black Friday” to have discounts on clothes and when it comes to stock investing we neglect those “discounts”? The best deals are found in times of irrationality; the intelligent investor knows that, and he does not follow the crowd, neither buys what is fashionable at the time.
Do not waste your time at forecasting how the Market will perform in the future.
You might get lucky once and make a lot of money. Although, this will lead to catastrophe. Why? Well, if you are like the average speculator, after jackpotting from your lucky forecast, you will convince yourself to be a “Market guru” and to have understood how the Market works.
In this moment of ultimate delusion, you will increase the stake, go “all in” and lose it all. You are warned, the intelligent investor “knows that he knows nothing” about future market movements. If you forget this basic principle, you will be easily deceived and doomed to failure.
Do not be fooled by the management.
The intelligent investor knows that good management is as important as analyzing the books. He must apply the same metrics used when valuing his returns when looking at the management’s performance over the years.
Have a deep understanding of a business
In few words, stop spending hours of your day watching business channels and reading the newspaper. Focus instead, on analyzing balance sheets and management of the organizations you want to invest in. Also, examine them at least with the same degree of due diligence you would use if you had to buy a new car or a new house.
Master your inner game.
Build your emotional strength, and do not listen to the continuous flow of information that is produced to “make noise.” “Know thyself,” understand how you feel, which emotional reactions you have when investing. Only by studying yourself you can master the world around you. Change your perception of the world, and suddenly the world will seem a different place.
Master your circle of competence.
Focus 100% of your brain power on things you understand and let the rest go. Warrant Buffet has followed this principle all his life long. He never put a dime in tech stocks because he could not understand them. That does not imply tech stocks must always be ignored, by your investment. However, ask yourself: do I know how this business works?
