Fresh Thinking

The Intelligent Investor - Benjamin Graham


21st September 2009

I've been reading a book called The Intelligent Investor by Benjamin Graham. Warren Buffet read this book when he was just 19 years old and later described it as 'by far the best book on investing ever written'. It was originally published back in 1949. It has been rewritten several times since and this latest revision was published in 2003. Although over 75 years has passed, investors still ask the same questions: when is the right time to invest?

One of the best bits so far is where Graham uses the allegory of Mr Market. Imagine you own a $1,000 stake in a business. Daily one of your partners, Mr Market, tells you what he thinks your stake is worth and offers to either buy it or sell you his stake. Sometimes his price seems plausible given what you know about the business and its prospects.

However, Mr Market is prone to wild mood swings. When experiencing a euphoric high, his offering price for the business is high. His outlook for the company is wonderful, so he will only sell you his stake in the company at a premium. Fortunatley, he will pay that same price for your stake if your want to sell. At other times, his mood collapses and he envisages a dismal future for the company, and is so concerned that he will sell you his stake for far less than it is worth.

Meanwhile, the underlying value of the company may not have changed, just Mr Markets mood. You can ignore this if you do not like his price and the next day he will make you a new offer. The more extreem his behaviour, the more opportunity you have to take advantage of him. As long as you have a strong conviction of what the company is worth, you will be able to look at Mr Markets offers and calmly reject or accept them.

This is exactly how an intelligent investor shout consider the stock market. By thinking of share prices as mere quotes from an unstable business partner, an intelligent investor is free from the emotional attachment others have to rising and falling share prices.

Financial Planning Week

September 2009

It's the 2nd annual Financial Planning Week commening Monday 7th September. Take a look at www.financialplanningweek.org.uk

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