Six Key Principles of Intelligent Investing

Investing is a word we are practically used to, especially when relating it to growing finance. What investing simple means is to allocate money in the expectation of some benefit/return in the future. In other words, to invest means owning an asset or an item to generate income from the investment or the appreciation of your investment, which is an increase in the value of the asset over a period of time. 

To have a detailed understanding of intelligent investing, we will explore a book written by a British-born American Economist, professor and investor, Benjamin Graham. He is widely known as the “father of value investing”. Graham wrote a founding text in neoclassical investing titled “The Intelligent Investor” in 1949, which provides foundational investing insights. 

Graham outlines principles that are remarkably just as valid today as they were when Graham penned the book. The six key principles of “intelligent investing” includes

1. Know the business you’re investing in.

Graham advises individuals to approach investing the same way he/she would look at buying into a business or having a partnership. Until you have a good feel for a firm’s competitive environment, its challenges and opportunities, and its strengths and weaknesses, you don’t really know enough to be investing in that business. 

He further added that since you won’t operate the business yourself, you need to know the company is headed by a management team that will run the business competently, efficiently and honestly.

2. Know who runs the business.

Buttressing the first principle, before investing in any business, it is important to understand and believe in what they stand for. In other words, what does the company do, and who is in charge of company affairs. 

3. Invest for profits over time, not for quick buy-and-sell transaction profits. 

Invest in companies you believe will generate profits through their ongoing business operations. In contrast to speculators — who acquire shares at what they consider to be a favourable price and then sell off as soon as possible for a profit — investors acquire and hold securities that they believe will grow in value over time as the businesses succeed. That means intelligent investors look to dividends and business growth as the source of their gains. This growth may or may not result in higher stock prices over time.

4. Choose investments for their fundamental value, not their popularity.

To succeed as an intelligent investor, you must learn how to value companies based on sound financial analysis. Only when you have systematically and thoroughly gone into the financials in detail can you assess the business, understand the potential, and compare the merits of investing in one company’s stock rather than another.

5. Always invest with a margin of safety.

Graham’s principle deals directly with the investor’s need to both understand and minimize inherent risk. This margin-of-safety concept further differentiates investing from speculating. By Graham’s definition, speculators always believe the odds are in their favour even when they do something outside normal investment practices. Investors, by contrast, do everything conceivable to increase their chances of success by calculating their margin of safety “by figures, by reasoning and by reference to a body of factual data.” Their goal is to preserve their investment capital and generate some income from their holdings rather than share price appreciation for profits.

6. Have confidence in your own analysis and observations.

The last principle is to have confidence in your investing decisions and beware of the dangers of getting caught up in market sentiment that causes share prices to rise and fall on investor emotions driven by panic, euphoria and apathy, rather than fundamental analysis.

When you’ve done the fundamental analysis and invested accordingly, you will have the confidence that your own reasoning is valid, enabling you to stick to your plan. It would be best if you did not worry about what others say because you can never tell whether they’ve done their own analysis or repeat what they heard someone else say. 

In conclusion, you have to make your own investment decisions based on doing the analysis — nobody else can do it for you.