Key Insights
1. There are no shortcuts
Graham emphasizes that there's no easy way to get rich quickly in any industry, especially not in the financial markets. The concept of earning above-average returns (anything over 10% historically) might sound appealing, and perhaps achievable. However, the reality is that a large number of intelligent people try and fail. The same goes for investment funds. Even teams of professionals often cannot produce the same returns as the stock market.
2. Technical analysis is useless
Intraday traders popularized this technique, but when looking at the success rates of this group alone, nearly 90% fail to make it long-term. Despite its popularity, this technique has been proven to be erroneous over extended timeframes because it relies on trading activity and trends. Generally, the extent of an investor's focus is price and volume.
Graham said didn't know anyone in 50 years who got rich using technical analysis to calculate their enter and exit position.
3. Focus on a company's actual performance and ignore shifting market sentiment
Graham’s approach was to find the discrepancy between a stock’s purported value (market price) and its intrinsic value (justified by the company's fundamentals).
He preferred to focus on undervalued assets, abiding by the practice: “To buy when the commodity is depressed and sell when it is on a high.” This is commonly referred to as the popular saying “buy low, sell high.” Graham worked to pick investments with an almost certain yield level and a worthwhile return over the inflation rate, thus sticking to his hallmark advice of purchasing with a margin of safety.
When looking for stocks to invest in, by all means analyze market quotes, but it's also crucial to explore data like company performance, company debt, profit margins, whether companies are public, how reliant they are on commodities, and how cheap they are, as well as other considerations.
As Graham would say, “Never buy a stock without reading the footnotes to the financial statements in the annual report.” Buffett is an example of one of Graham's pupils who took this systematic approach to heart and found great success with it. It's a much more deliberate and compelling analysis.
4. Don't make impulse purchases or be influenced by the crowd
Graham preached a somewhat stoic approach to investing: Investors should neither be upset nor overly excited by the rise and fall of their stock. Adhere to the motto: “Never buy a stock immediately after it has risen significantly and never sell immediately after it has fallen significantly.”
Similar to Graham’s third rule, always remember to avoid groupthink. This is the recurring bane he combats in his writing because it can lead to dire consequences for investors when they simply follow the pack.
5. Learn from your mistakes and stay persistent
A simple, down-to-earth rule that has an astronomical impact. Following the stock market crash in 1929, Graham learned about risk the hard way when he lost everything almost overnight. But he did not give up. Instead, he studied hard, stayed persistent, and through it all, became one of the most influential investors.
