The Intelligent Investor summary

There are three principles that apply to all intelligent investors:

First, intelligent investors analyze the long-term development and business principles of the companies in which they’re considering investing before buying any stock.

The first thing you should do before you invest isn’t to look at a stock’s history. That’s important, sure, but what’s more important is looking at the history of the stock market itself.

Looking back through history reveals that the stock market has always been defined by regular ups and downs. Often, these fluctuations can’t be foreseen. The unpredictability of the market means that investors need to be prepared – financially and psychologically.

To understand the whims of the market, it’s sometimes easier to imagine the entire stock market as being a person, let’s call him Mr. Market. As far as people go, Mr. Market is unpredictable, very moody and not very clever.

Mr. Market is easily influenced, and this causes him to have major mood swings. You can see this in practice in the way the market always swings back and forth between unsustainable optimism to unjustified pessimism.

When you start on the path of investing, it’s important that you pick a strategy that best matches you as an individual. You’ll need to decide whether you’re a defensive investor or an enterprising investor. Right now, we’ll focus on the defensive investor:

The defensive investor hates risks. Thus, safety is her main focus. This safety can only be achieved if she diversifies her investments.

Once you’ve chosen the companies you want to invest in, then it’s time to congratulate yourself. Most of your work is now complete! Now all you have to do is determine how much money you want to regularly invest and check your stocks from time to time.

During this time, you will use a process called formula investing, in which you act strictly according to a predefined formula that determines how much money you will invest and how often. This approach is also called dollar-cost averaging, whereby you invest in a common stock every month or quarter and always with the same amount of money.

To become a successful enterprising investor, you’ll want to employ many of the same strategies as defensive investors.

Just like a defensive investor, you will divide your funds between bonds and common stocks.

If you own stocks and their price falls, do you sell them immediately or keep them? If another stock is rising, is it a good idea to get in on the action before it’s too late?

This approach, known as trading in the market, is typical of investors, because they fear that going against the flow will result in financial losses. An intelligent investor, however, knows better!

By this point, the idea of becoming an enterprising investor should sound like a fun challenge. But is it really worth it to go through all this trouble of constantly checking your portfolio?

As a matter of fact, it is, since that’s where the best bargains lie — but only if you start smart.