The Intelligent Investor, written by Benjamin Graham, a former Columbia Business School professor, and first published in 1949, has widely been regarded as the investment bible, particularly for those new to the world of investments. But is it still relevant in 2021?
Written over 70 years ago, many believe that Graham’s book is outdated. What worked then no longer works in today’s markets, but while some of the information may not have stood the test of time, there are three key things we can take from the book that remain relevant today.
1. Understand which type of investor you are
Graham determines two ways to be an intelligent investor, you can be either an active or defensive investor. Knowing which one you are can help you be a better investor. So what is active investing and defensive investing?
- Active investing: These are investors that have the time and ability to evaluate their stocks. This type of investing can be exhausting, but also intellectually stimulating. Graham defines this type of investing as being suitable for people who are highly competitive or want complex intellectual challenges.
- Defensive investing: These investors have limited time, interest or skills to evaluate financial and company performance. It is best for investors who don’t have time or want simplicity.
As our lives are busier than ever, many investors adopt a buy and hold long-term strategy, this would be classed as defensive investing. Equally, during the pandemic when people had more free time, there was a rise in active retail investors. New platforms such as Robinhood make stock trading easier and can help facilitate active investing strategies.
Today, there is a third type of investor. Which is a combination of the two, where investors allocate a percentage of their portfolio to each type of investment strategy. For example, 80% of their portfolio may be dedicated to long-term, lower risk investments and 20% is reserved for short-term higher risk investments.
2. Be ready for Mr. Market’s mood swings
The market, or ‘Mr. Market’ as Graham refers to it, can be unpredictable and volatile at times when you expect it and at times when you don’t. Graham suggests that to be an intelligent investor you shouldn’t pay too much attention to market fluctuations in share prices.
This isn’t to say you should never look at it, but Graham suggests reviewing it periodically rather than watching it like a hawk. Being too focused on share prices, i.e. checking daily, can lead to emotional responses that could be costly.
For example, when the US stock market declined by around 30% in March 2020 as a result of the pandemic, many investors panicked and sold stock at a loss. Many also saw this as an opportunity to buy more stock while the price was low. By the end of 2020 the market rose by 68% – 16% higher than it was at the beginning of the year.
3. Ensure you invest with a margin of safety
Quite possibly one of the most valuable learnings to take from The Intelligent Investor, Graham encourages investors to always invest with a margin of safety to protect themselves from unforeseen risks, such as a global pandemic.
If investors buy low or at a discount, they benefit when prices rise but they are also better placed to weather a sharp downturn in the market. This is a valid risk-mitigation strategy and one that many of investors still follow