Watch on Youtube: Investing lessons that will last FOREVER
The best way to get started on investing if you’re starting from scratch?
Study timeless investing lessons.
These are ideas that have withstood the test of time; they have lasted for decades and will continue to stay on for decades.
Let’s go back in history, and explore the works of legendary investors like Warren Buffett, Charlie Munger and Benjamin Graham.
1. All Intelligent Investing is Value Investing
All intelligent investing is value investing.
The core idea of value investing is to buy an asset for much less than it’s worth.
So regardless of what type of investments you make, you are actually a “value investor”.
2. Mr Market is Your Servant, Not Your Guide
Many people know about Buffett, but not many might have heard of Benjamin Graham.
Warren Buffett was a student of Benjamin Graham at Columbia Business School.
Graham is the pioneer of value investing, and he is the author of the book “The Intelligent Investor”.
In the book, he introduces a term called “Mr Market” which is an analogy for the stock market.
Mr Market is an imaginary person, who comes and knocks at your door every day to ask you whether you want to buy or sell stocks.
When he is in a good mood, he will be excited about the business prospects and quote you a high price.
When he is depressed, he will be negative about the business outlook and will quote you a low price.
His terrible mood swings are like the swings of the stock market, constantly swinging between greed and fear.
How can we cope with Mr Market’s mood swings? We don’t swing along with him.
The stock market has emotions but never let Mr Market’s opinions dictate what you should do.
When he is irrational, take advantage of his mood swings because there is a gap between the market expectations and the true business potential of it.
As Howard marks said, “The worst thing you can do is to buy a stock at its peak of its popularity. When everyone is all excited about the stock, all favourable factors are priced in.”.
3. Always Invest with a Margin of Safety
Buffett calls “Margin of safety” the cornerstone of successful investing.
This concept is best explained using the bridge analogy.
Imagine you want to build a bridge with trucks.
You want the bridge to be able to handle a load of a 30-tonne truck, although the maximum load might only be 10 tonnes per truck.
Translating this to investing, this “buffer” is the gap between the current share price and the intrinsic value of the stock.
Margin of safety prevents you from losing money. Why is losing money bad?
Because it’s hard to recover losses – say if you lose 50% in a year, you need to double your money to earn back the returns.
So protect your portfolio by having a sufficient margin of safety in your investments.
To succeed in stock marketing investing, you need patience and a willingness to invest for a long period of time.
Often, this is easier said than done. But we have to remind ourselves that,
In the short run, the market is like a voting machine — tallying up which firms are popular and unpopular. But in the long run, the market is like a weighing machine — assessing the substance of a company.
Never interrupt the power of compounding unnecessarily.