Every investor has to start somewhere. For me, it all started with a book called The Intelligent Investor, written by a man named Benjamin Graham, who was a teacher at Columbia Business School. First published in the late 1940s, The Intelligent Investor became an instant hit: the book soon found itself on the bookshelves of many Wall Street professionals.
And The Intelligent Investor is still relevant today. The content is timeless and it should be on the reading list of every investor. Many of the world’s most prominent investors have stated that The Intelligent Investor was the basis of their financial education. Indeed, Warren Buffett has commented several times that the book is an invaluable resource and is still giving him support to this very day.
The Intelligent Investor is not a ‘how to’ guide. The author makes this quite clear.
The book contains no sure-fire strategies to help you profit. No instructions on how to trade and no get-rich-quick tips and tricks.
Instead, The Intelligent Investor tries to change your opinion of the markets. Specifically, the book makes two distinctions. Firstly, the difference between investment and speculation. And secondly, the difference between a company and a stock price.
The different between investment and speculation is a grey area and few market participants are able to spot a noticeable difference.
However, in reality it comes down to two simple facts. If you’re buying an asset, hoping to sell at a higher price, you’re speculating. Buy an asset for a series of cash flows and dividends, then you’re investing.
So, if you buy a share without researching the underlying business but hoping the share price will rise, that’s speculation, and speculation is usually a risky business.
Two key differences
The investment vs speculation argument also ties in with The Intelligent Investor‘s second key point: the difference between a business and stock price.
You see, businesses are fully functioning entities: they employ people, service needs and generate economic output. Stock prices are just, well, prices. They indicate how much someone is willing to pay for a share of that business at that moment in time.
So what’s the best piece of investment advice I ever received? It’s the fact that share prices, while important for initial valuation purposes, are irrelevant on a day-to-day basis. Investments based on sound business analysis will profit over the long term, no matter which way the market moves.
The Motley Fool's top analysts also uses this way of thinking to analyse potential investments, they look at the long-term growth potential, not short-term market movements.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.