I have finished reading the investors’ bible, The Intelligent Investor by Benjamin Graham. The book puts heavy emphasis on value investing and describes how the reader should adopt a defensive investment style, to manage risk, and to avoid becoming a speculator on the financial markets.
A lot of different securities are covered in the book, from bonds to mutual funds, and various investments strategies to implement a defensive investment style. The author gives relevant examples from real-life events thus strengthening the author’s points.
One of my favorite passages from the book, which apparently is Warren E. Buffett’s favorite part too, is the on about Mr. Market. The allegory is describing as a fellow who requests the investor to buy or sell shares at different prices – sometimes the prices are bargains, other times they are ridiculous. The defensive investors should thereafter contemplate if the stocks should be sold or bought. If not, Mr. Market will come back tomorrow with different prices.
Mr. Graham wants to explain through this parable that a defensive investor should not be influenced by the current value on his securities. It is important that the investor focuses on the actual performance of the company and gaining dividends rather than Mr. Market’s sometimes irrational actions.
What I personally understood from this allegory, as an investor, is that I should not join Mr. Market but capitalize and profit from it by understanding its psychology. Any rational person would sell when the price is high and buy when the price is low. To sell when the price has gone down or buy when the price has gone up is foolish, according to Graham. An investor should confirm his or her decision through fundamental analysis.
If one should read a book on investment, I recommend reading the investors’ bible: The Intelligent Investor.