One of the biggest barriers to anything is a lack of knowledge. Whether its playing a sport competitively or investing, the first barrier to overcome is a knowledge on how to get started.
In 2013, I had the pleasure of reading The Intelligent Investor after researching Warren Buffett and seeing it as a recommended book. Now let me warn you, the book is dry as a box of saltine crackers in the summer, but if you can make it through and really absorb the information, you can take away some great lessons to get you started in your investing journey.
I invite you to read the book for yourself, however here are the six rules (more like principles) that I’ve committed to memory after reading the book.
Principle #1 – Stocks become more risky as prices increase
This is the first principle that is important to remember and take into context. Because Benjamin Graham was a Value Investor, he looked for stocks that were cheap but valuable that presenting a opportunity to obtain a sizable position. . Thus if a stock price was “expensive” it didn’t fit his criteria.
Principle #2 – Dread a Bull Market
If you’ve been on social media over the last year, you’ve likely seen the phrase “Stonks only go up”, which was championed by Dave Portnoy. A bull market tends to make a fool of us all. That greedy mentality by the collective market, should cause us to be (slightly) fearful if we are intelligent investors.
Principle #3 – Welcome a Bear Market
The opposite of a bull market is a bear market. This is a great opportunity to go bargain hunting because no one else is buying. The market is typically in a sell-off so great companies can be found at steep discounts. The market is fearful so as intelligent investors we should look to be greedy.
Principle #4 – Divide holdings between high-grade bonds and leading common stocks
Mr. Graham believed in bond investing, however that was a different time. High-grade bonds at the time of the books publishing produced yields which were extremely attractive to investors. That isn’t necessarily the case today. However bonds do have a place in your portfolio to decrease the risk that comes with investing in stocks and my preference is to invest in a total bond market fund.
Nevertheless make sure you have a good balance of high-grade bonds and common stocks. The classic portfolio construction is the 60/40 (stocks/bonds), however figure out what works for you and your risk tolerance, then go from there.
Principle #5 – Follow the Rules in Selecting Your Common Stocks
- Be diversified but aim for adequate but not excessive diversification.
- Look for large, popular, companies with healthy balance sheets.
- Target companies that pay a consistent dividend.
- Place a limit on the price you’re willing to pay for the company.
- The book uses a Price-to-Earnings (P/E) of 25 as an example. However Price-to-Sales (P/S), Price-to-Book (P/B) are some other popular ways to select common stocks.
Principle #6 – Stock Market and Bond Market have an Inverse Relationship
This principle has not held up well lately, however in theory if the stock market is up, the bond market should be down, and vice versa. However what we’ve seen over the last decade is the stock market has been up and to the right and bond yields have largely been depressed. Remember this principle however keep the true reality of the market in mind.
My stock market investing journey started with index funds however I’ve branched out to adding individual equity positions with the add of these six principles. While, The Intelligent Investor was originally written in 1949 and teaches the principles of value investing, the lessons are good for everyone to know.
As always if you have questions or concerns regarding creating an emergency fund, investing, real estate, insurance, or planning for the future, don’t be afraid to speak with qualified financial advisor. Smart Asset has a great tool to find an advisor in your area or feel free to email me (contact@surgifi.com) to help you on your path to financial independence.
Follow us on Social Media