In 2009 I set out to find out what made Warren Buffet successful. One of the key things was that he always looked for value and as a result in much of my research value investing was sited as the most reliable and successful form of investing.
Buffet mentored (both as a student and employee) under Benjamin Graham the author of the book “The Intelligent Investor” and Buffet is quoted as saying it is the best book ever written on investing. Graham is considered the father of value investing and after reading this classic I began to develop my own value investing strategy using many of the concepts from this book, GuruFocus and other research on investing gurus.
This is a fairly long read of 640 pages but well worth it. It covers off a number of principles for investing. Some key ones I received from my reading are:
- Investment involves buying a piece of a business not a stock certificate. Value investing attempts to determine a fair price for a share of the business.
- Mr. Market – Graham describes the market as “Mr. Market” (MM) and that MM comes to you each day with a price for shares of a business, sometimes too high or sometimes too low when compared to the intrinsic value of the business (based on fundamental analysis of the business). When it come in at a price too low this is an opportunity to buy in with a margin of safety.
- Margin of safety – the difference between the price the market offers a share of a company when it is lower than the intelligent investors intrinsic value of a share of the company. I cover my way of determining intrinsic value in the section business risk in this website. By buying at a discount the intelligent investor increases chances of success due to the margin of safety.
- Various formulas are outlined for enterprising investors, defensive investors and buying stocks at less than their dissolution value in Net Current Asset deals.
This is a must read if you want to get a first step in value investing from the most renowned teacher of the subject, Benjamin Graham.
There is valid reason to follow the likes of Graham and Buffet. Benjamin Graham over 20 years is said by the John Reese in Forbes to have annualized 20% returns from 1936 to 1956 and for Warren Buffet to endorse means a lot as his returns have been in the neighbourhood of 19% annualized over the last 35 years and his partnerships before that averaged 30% for 13 years 1957 to 1969. Incredible long term records worth looking at these two investors closely to learn how they have succeeded.
StockStory is not a financial advice site and content should not be considered for investment recommendations.
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