One of the most illustrious investors in American history, Benjamin Graham, is also known as the "Father of Value Investing." From an educator to an investor, Graham has inspired millions, including another legendary investor, Warren Buffett.
In fact, Buffett idolizes Graham. He thinks Graham's book, The Intelligent Investor, is "by far the best book on investing ever written," and there's a good reason why he says so.
Here are the top five important lessons from Graham's book that Buffett loves so much.
1. Investment Versus Speculation
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Graham underscores the importance of understanding the difference between investment and speculation. At the end of the day, he says it's important to know what makes money.
"People who invest make money for themselves; people who speculate make money for their brokers," Graham says in his book.
2. Aim For The Long-Term
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While long-term investing has often been recommended by many investing legends, including Buffett, Graham puts it very succinctly.
“In the short term, a market is a voting machine; in the long term, it is a weighing machine.”
Investing in the short term can be more volatile because of several factors, including macroeconomic conditions. However, markets revert to the mean in the long term.
3. Learn From Your Mistakes
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This one comes from Graham's own loss, which he suffered during the stock market crash in 1929 and the Great Depression. This led him to co-author a book named "Security Analysis" where he explains how to analyze securities and price assets accordingly.
"Letting losses run is the most serious mistake made by most investors."
4. Bull Runs Increase The Risk
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While bull runs can be very captivating, especially when you've invested your money, Graham has a word of caution for investors.
"The intelligent investor realizes that stocks become more risky, not less, as their prices rise—and less risky, not more, as their prices fall."
Graham says an intelligent investor would dread a bull market because this makes stocks expensive, while they should welcome a bear market because this makes their preferred stocks less expensive.
5. Understand The Business You Want To Invest In
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Last but not least, Graham urges investors to understand the business they want to invest in. A long-term investor will want to understand if a stock is overvalued, undervalued, or fairly valued. Another factor to consider here is the potential for growth in the future.
"A stock is not just a ticker symbol or an electronic blip; it is an ownership interest in an actual business, with an underlying value that does not depend on its share price."
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