Every investor has to start somewhere. For me, it all started with a book calledThe Intelligent Investor, written by a man namedBenjamin Graham, who was a teacher atColumbia Business School. First published in the late 1940s, The Intelligent Investor became an instant hit: the book soon found itself on the bookshelves ofmany Wall Street professionals.
And The Intelligent Investoris still relevant today. The content is timeless and it should be on the reading list of every investor. Many of the worlds 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 isnota 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, TheIntelligent Investor tries to change your opinion of the markets. Specifically, the bookmakes 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 youre buying an asset, hoping to sell at a higher price, youre speculating. Buy an asset for a series of cash flows and dividends, then youre investing.
So, if you buy a share without researching the underlying business but hoping the share price will rise, thats speculation, and speculation is usually a risky business.
Two key differences
The investment vs speculation argument also ties in with TheIntelligent Investors 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 whats the best piece of investment advice I ever received? Its 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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