An intelligent investor adopts a methodical approach to investing, akin to purchasing a business or becoming a partner in one. By adhering to robust investment principles, one can enhance the outcomes of their investment strategy. Those aiming for significant stock market returns should govern their investment activities by robust and rational business principles. Benjamin Graham posited that successful investing could largely be attributed to techniques and criteria that can be taught, rather than to some mystical, unteachable cognitive abilities. Despite the unpredictable and transformative events of the past fifty years, steadfast investment principles have consistently yielded sound results. We must proceed with the belief that these principles will persist in their reliability.
Before making an investment in a company, it is crucial to thoroughly understand its products, operational mechanisms, and strategies for profit generation. A comprehensive grasp of the company's competitive landscape, including its challenges and opportunities as well as its strengths and weaknesses, is essential before committing any funds. This foundational knowledge is what separates investing from mere speculation. According to the principles laid out by Benjamin Graham and David Dodd in their seminal work, "Security Analysis," a true investment operation is one that, after in-depth analysis, assures the safety of the principal and yields a satisfactory return. Anything that does not meet these criteria falls into the realm of speculation. Investing should be based on rational decision-making, with a clear understanding of why one investment is chosen over another. This requires a meticulous and thorough analysis from a vast array of potential investments. Investments that are sound will naturally increase in value over time due to the robustness of their long-term business operations, rather than fleeting market trends. The key to successful investing lies in the ability to accurately predict a company's future prospects. This can only be achieved with a deep understanding of the company's business model and its plans for future profitability. Investors must maintain a vigilant and businesslike approach not only when selecting securities to purchase but also after becoming security owners. The majority of the real gains from an investment come from holding a security over time, benefiting from interest or dividends, and participating in the long-term appreciation of value. Investors should adopt an ownership mindset, focusing their efforts on ensuring optimal operational results. This involves appointing honest and competent management, striving to improve poor management, and actively engaging in the shareholder-management relationship. Graham also emphasized that to invest wisely in common stocks, one does not need to be exceptionally intelligent or knowledgeable, but must possess certain character traits that are not common. He cautioned against seeking 'business profits' from securities—returns that exceed normal interest and dividend income—without having a thorough understanding of security values, akin to the knowledge required in dealing with merchandise or manufacturing. Graham noted that while it is possible for anyone to match market averages by holding a representative list of stocks, the number of intelligent individuals who attempt to outperform these averages and fail is surprisingly high. He categorized investors into two major classes: defensive investors, who prioritize the preservation of their capital and seek long-term, low-maintenance investments, and aggressive or enterprising investors, who are willing to invest more time in managing their investments and conduct extensive analysis before making investment decisions.
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