Lessons from an intelligent investor

Warren Buffett, the world's most successful investor, says that 'The Intelligent Investor' by Benjamin Graham is the best book on investment ever written. But for readers expecting some kind of a definitive method of picking stocks that will go up this treatise is something of a disappointment.

Graham's main insight from years of experience - and he was close to 80 when he last updated 'The Intelligent Investor' - is that the investor's enthusiasm for investing is his own worst enemy, and far more likely to loose money than anything connected to stock analysis.

His most brilliant creation is 'Mr. Market'; the idea of viewing the stock market as a person and asking 'how is Mr. Market feeling today?' If Mr. Market is feeling optimistic, stay out. If this manic depressive is having a bad day, month or year, then that is likely the time to buy.

At least by following this strategy the intelligent investor is likely to buy when prices are low rather than when prices are high. And as Graham points out most investors do exactly the reverse, preferring to buy when Mr. Market is feeling optimistic and others are driving up stock prices.

But what should you buy? Graham rules out whole categories of stocks as far too risky for the intelligent investor. You should basically look for boring companies with a long, stable profit record with stocks trading at a discount to net asset value.

This is not as easy as it seems, and you need to be what Graham turns an 'enterprising investor' and devote a lot of time to research to get this right.

Otherwise, he suggests the average 'passive investor' will be much better off buying a tracker fund which will follow the stock market up and down; of course, the trick here is to buy the tracker fund when Mr. Market is having a bad day.

Day trading does not work

Graham can point to a legion of evidence that shows that day trading in stocks does not work due mainly to the fact that the constant payment of commissions on trades will erode capital faster than the market can increase it. He notes that expert fund managers frequently fail to keep up with the market, so how can average investors compete?

This exceptionally able investor also knocks initial public offerings on the head. Graham says that IPOs are only sold when Mr. Market in his most optimistic mood, and therefore by definition are almost always a bad buy, with the promoters cashing in on the enthusiasm of investors.

In short, Graham is telling investors that a patient, long-term strategy of conservative investment in financially secure stocks will always outperform short-term stock picking which is doomed to failure.

This is partly how Warren Buffett became the world's second richest man, but this not an exciting or fun approach to investment likely to appeal in a bullish market. Graham himself often remarked that his books were the most read and the most ignored on Wall Street, noting that human nature was not an easy thing to change.