Have you ever wondered who taught Warren Buffett how to invest? You know he started at a young age, but did he have any formal training or a mentor?
Turns out he did. While in graduate school at Columbia University, Buffett met famed investors Ben Graham and David Dodd. Graham would become Buffett’s mentor. Who was this man, Graham?
Before he was a professor at Columbia when Buffett was a student around 1950, Graham had experienced poverty and became an excellent student at Columbia. When he graduated, he started his investing career with a job on Wall Street.
Benjamin Graham wrote down his investing principles in a book titled, “The Intelligent Investor.” Published in 1949, Buffett described this as “the best book about investing ever written.”
Can It Help You Become An Intelligent Investor?
Use of the many lessons taught in the book are valuable in your personal retirement planning and investing. Although written long before online financial advisors or mobile stock trading, Graham’s teachings are applicable today.
A review of the book on Motley Fool mentions Graham’s twin anchors of valuation and patience, and then explains, “do the research to estimate a company’s true worth. With that value in mind, successful investing becomes as simple as refusing to overpay for a company.”
“Once you’ve bought a stake in a bargain-priced business, be patient enough to wait for the market to realize its mistake and bid up the company’s shares.”
What Is Intelligent Investing?
Four Minute Books also reviewed “The Intelligent Investor,” suggesting three key lessons to help you start investing:
1. “There are three principles to intelligent investing: analyze for the long term, protect yourself from losses and don’t go for crazy profits.
2. Never trust Mr. Market; he can be very irrational in the short and medium term.
3. Stick to a strict formula by which you make all your investments and you’ll do fine.”
To define intelligent investing, Buffett’s two rules for investing are cited. Rule number one–Never lose money. Rule number two–Never forget Rule number one.
Four Minute Books continues, “That’s exactly what intelligent investing is. Nobody can predict the next Facebook, but everyone can protect themselves against losses.”
Who Is Mr. Market?
Graham’s allegory of Mr. Market pictures the entire stock market as a single person. According to Investopedia, “This imaginary person, ‘Mr. Market,’ turns up every day at the stockholder’s office offering to buy or sell his shares at a different price. Sometimes the proposed prices make sense, but other times, the proposed prices are off the mark, given current economic realities.”
Four Minute Books says of Mr. Market, “You’d be best off ignoring him altogether day in and day out. Sometimes the prices he tells you would seem suspiciously cheap, sometimes astronomically high.”
“That’s because Mr. Market is not very clever, totally unpredictable and suffers from serious mood swings.”
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Margin Of Safety
Graham, along with David Dodd, considered the founders of value investing, coined the term margin of safety in their 1934 book, “Security Analysis.” Graham further talked about margin of safety in the last chapter of “The Intelligent Investor.”
“Confronted with a challenge to distill the secret of sound investment into three words, we venture the motto, MARGIN OF SAFETY.”
To further clarify this concept, Business Insider wrote, “The beauty of ‘margin of safety’ lies in both the concept’s simplicity and in its effectiveness in protecting investors from making big mistakes.”
“Graham really was a pioneer in behavior finance before behavior finance was even a thing, and the margin of safety concept was one of the first tools that allowed investors to overcome their own biases, creating a protection against the ‘unknown unknowns’ of an investment.”
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