Warren Buffet’s favorite book on investing, the Intelligent Investor by Ben Graham, is a fun read. Buffett particularly recommends Chapters 8 and 20 - so I decided to write a summary.

Notes from Chapter 8:

It is easy to give advice to people to not speculate, the hard part is resisting that temptation. If you want to speculate - do it with a small part of your portfolio, and with your eyes open. 9 times out of 10, you will lose money. Speculating is all about dopamine rushes at a hunch being right (or wrong, more likely).

Market Fluctuations as a Guide to Investment Decisions (or, buy in a bear market, sell in a bull market)

Buy from pessimists, sell to optimists. Profit from pendulum swings. Two ways to do this - timing (anticipate the action of the stock market) or pricing (buy when stocks are below their fair value, sell when above).

If you place your emphasis on timing, in the sense of forecasting, you will end up as a speculator. With a speculator’s financial results. Paying attention to market forecasts is not a great idea - that’s what most of Wall Street does.

Psychologically - you feel like the forecast of someone on money.com is somewhat more dependable than your own. This is a fallacy. Second degree chaos system. They don’t really know what they are talking about. Also, there is no reason for you to have any opinion of the future course of the stock market.

Tons of people work on market forecasting, lots of quants with Math PhDs work on market forecasting. People definitely make money because of market forecasting. But not the general public. And you are the general public.

There is no logical basis for assuming that any typical bedroom investor can anticipate market movements more successfully than the general public.

Trying to time the markets is 100% all about a dopamine rush (you’ve experienced this yourself). The speculator wants to make his profit in a hurry. ‘The idea of waiting a year before his stock moves up is repugnant to him’.

If you aren’t convinced already, do more research to understand why the average investor cannot deal successfully with price movements by endeavoring to forecast them.

Emotional discipline is tremendously important - if its a 10-year bull market, wait 10 years before you buy. The longer a bull market lasts, the longer people will be afflicted with amnesia - they will forget bear markets are a thing.

General rule: as the market advances, slowly sell stocks and invest in bonds. As the market falls, slowly buy stocks and sell bonds. Opposite of everybody else.

Don’t buy Alphabet stock. In the book he says don’t buy the stock of a company whose price is more than a third above its tangible asset value (I’m assuming this is similar to the PE ratio? Will have to do more reading). Perhaps in today’s times it is more like double its tangible asset value?

The primary reason for this, though, is pretty smart. You effectively become immune to the ups and downs of the market and the hordes of speculators. Tesla stock is a brilliant example of this. It has a PE ratio of 1038. Insane. All built on speculation. Which could vanish tomorrow.

The more successful the company, the more erratic the stock, and the more speculative it is going to be. Avoid these.

Here’s what a sound investment is:

  • a satisfactory P/E ratio
  • sufficiently strong financial position (whatever that means)
  • prospect that its earnings will be maintained ove the years (Colgate or Apple)

It is actually not that hard to find companies like this. There are thousands that go under the scanner every day.

THis lets you take a more detached view of stock market fluctuations than those who have paid high multipliers of earnings and tangible assets. You can use this superpower to buy low and sell high.

You don’t have to watch how your investments are doing like a hawk - but every now and then give it a long hard look. Most companies do badly over time.

Never buy a stock immediately after a substantial rise - and never sell a stock immediately after a substantial fall. Marekt quotations are there for your convenience, think of Mr Market.