In 1949, when asked what it means to be an “intelligent” investor, Benjamin Graham, the father of Value Investing, said…
The word “intelligent”…will be used…as meaning “endowed with the capacity for knowledge and understanding.” It will not be taken to be “smart” or “shrewd”, or gifted with unusual foresight or insight. Actually the intelligence here presupposed is a trait more of the character than the brain.
Then, in 1976, he summed up “investing” with these words…
The main point is to have the right general principles and the character to stick with them.
In short, when Graham said an investor must possess good character, he was thinking of a set of traits – call it Graham’s Mental Toolkit – that he so often praises throughout his writings.
So what exactly is Graham’s mental toolkit to become an “intelligent” investor? Well, here it is…
Source: Benjamin Graham, Building a Profession
There’s no doubt that you need all these four tools in your investment toolkit to become an intelligent investor.
Arithmetic – or working with numbers – is just one part of it, though an important part. But most investors I meet or those who write to me with their questions on how to become intelligent investors, are largely worried about this one part only.
You see, quantitative analysis (arithmetic of investing) is easy to learn. How to analyze financial statements, how to calculate intrinsic value, and how to assume margin of safety can be learnt with practice. In fact, my 20-lesson course on value investing can teach you all that.
But these skills can only take you so far.
The idea, as Graham has suggested so often, must be to build a “good overall character” – which most importantly includes developing self-control and emotional discipline. No investing course can teach you this, and this is where lies your real challenge as an investor.
But then, are you up to this challenge?
Benjamin Graham was a true legend when it came to sensible investing.
It is so true that successful investing is not just about number crunching. As they are generally based on assumptions, which in turn can always go haywire. Beauty lies in the fact that success in dealing with Mr. Markets lies with self discipline. Controlling yourself when everyone else is loosing control. Be greedy when others are fearful and vice versa..
Investing is also about character. Character and guts to go against the crowd behavior. And it is easier said than done. It is really not easy to start buying when everyone else is selling. But that is the irony of stock markets. Being happy in short term can cause a lot of pain in long term.
For an average investor, it makes sense to focus more on self control and discipline before trying to look for mutlibaggers or great stocks. And never forget two things –
1) As an investor, we can never eliminate the risk of being wrong.
2) Remember God in good times and equities in bad times.
PS – And as a long term investor, pray for corrections 😉
In so little words so much is said. In fact as man is delving deeper and deeper he is discovering truth is simpler and simpler.
Indeed Sudhir!
Einstein had the opinion there were 5 ascending levels of intelligence – 1. Smart > 2. Intelligent > 3. Brilliant > 4. Genius > 5. Simple.
Simplicity is what we must all settle at for success and happiness in life. Regards.
ha ha … i like the ascent and the order …. the top most is obviously the most difficult (and sophisticated).
such an effective quote by einstein…really
True…..
Being simple is the most complicated thing….
So much is captured in so few words. The rules are so simple, bordering on common sense, but difficult to practice? Common sense is uncommonly found among people!!