Investing Principles based on The Intelligent Investor

June has been all about money - earning money, money stuck in depreciating things, investment options and even the sarcastic post on ways to earn money. Whatever be the investment options, our goal will generally be protecting our principal amount invested and earning profits over the principal. This post is about establishing investment principles that will help us achieve this goal. This is based on The Intelligent Investor by Benjamin Graham. This is the book recommended by Warren Buffet who was mentored by Graham. I have also added detailed summary of each chapter which elaborates more on these - Intelligent Investor Summary (21 posts in a week!).  I tried my best to summarize it well and also keep it short here.

Investing Principles
Investing Principles

  • Do not speculate thinking that you are investing. Expert forecasts, friend's investing options, neighbor's advice, formulas etc shouldn't influence you. Think for yourself.
  • Identify what kind of an investor you are - defensive/aggressive. Here aggressive investor isn't someone who gambles money, it's someone who is willing to devote time and effort and keep analyzing, picking and revising securities in his portfolio. Defensive on the other hand mostly wants his portfolio on auto-pilot and wants to be free from stress and intellectual effort.
  • Better to start from the base foundation of 50-50 portfolio in stocks and bonds. Aggressive investor would deviate as needed from this when he can justify it. Defensive investor would be better off re-balancing this periodically.
  • Index fund on complete stock market will perform well over long period of time(20 years) and smooths out drastic losses.
  • Mutual funds are better for defensive, but they still need to check how each fund is performing and how well the money manager is managing the fund.
  • If you are new to investing, practice for at least 1 year(not with money), compare your approaches with money managers(fund managers) and check how you are doing. If you are not improving, then stock picking isn't for you.
  • Get help from analysts if you can't do this on your own.
  • Always keep margin of safety - the cushion amount that will absorb any future losses.
  • Do not pay too high amount when buying even if the company does well.
  • Pay same amount periodically no matter how the market fluctuates instead of a lump sum amount.
  • Invest as per your needs. Liquidity, taxes, risk etc.
  • Do not underestimate the brokerage costs, mutual fund fees, taxes on capital gains. Long term investment always pays off.
  • Never put all your eggs in one basket. Diversification is the key.
  • Management of a company plays key role. Do not ignore this. Read all financial and proxy statements of a company. Look for any warnings.
  • Check the poorest year performance of a company in past 10 years - if you can't afford to lose that much, then don't invest in it.

Happy Investing :)


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