How to Invest With Smart Investor Style (2024)

Apparently, Graham's strategy worked. Although this book is a classic book written since 1949, the principles of this book are still relevant today and this book is often used as a reference for capital market players, especially fundamentalists.

Interestingly, in this book Graham does not discuss too much about analytical techniques and methods, but emphasizes more on investment principles and proper investor behavior.

I'll tell you a little story about Graham, he was one of the most influential teacher investors of the 20th century. If you are not familiar with his name, you may be more familiar with his student, Warren Buffet. Therefore, it is no exaggeration to say, Graham's book is one of the best investment books of all time.

First, Investment vs Speculation

What is the basic difference between investors and speculators? Smart investors use comprehensive analysis ranging from global, macro, industry, to corporate conditions to secure relatively safer and more stable returns.

This is in stark contrast to speculation, where speculators focus on short-term gains stemming from market fluctuations. This is very risky, because no one can predict the future.

To be a smart investor, you also have to be patient, disciplined, and open to learning new things. You have to be able to control your emotions and think for yourself.

Graham states that the intelligence required to be a good investor has more to do with character than intelligence. There is evidence that intellectual intelligence and higher education are not enough to make a person a savvy investor.

In 1998, Long-Term Capital Management LP, a joint asset management firm run by various smart people such as mathematicians, computer scientists, and two Nobel Prize-winning economists, lost more than 2 billion dollars in a matter of weeks, due to their huge bets that the bond market will return to "normal" prices.

However, their prediction was wrong. The bond market in those days continued to become more and more abnormal and Long-Term Capital Management had borrowed a lot of money and eventually went bankrupt.

How to Invest With Smart Investor Style

Most people who fail at investing are not because they are stupid, but because they have not developed the emotional discipline needed to be a successful investor.

The next question, should we not speculate in the capital market? Yes, it is okay. Most importantly, we must be able to distinguish between speculation and investment, it is very dangerous to think that we are investing, when we speculate.

Graham advises us to limit the allocation of speculative funds to no more than 10% of the total investment funds we have. Never combine the money in your speculative account with what is in your investment account. Because this will confuse your own mind, and you don't know if you are speculating or investing.

The savvy investor never dumps a stock because its share price has fallen. Savvy investors will always ask first whether the underlying business value of the company has changed or not. Graham repeatedly reminded that the good and bad performance of the stock in the future is only determined by the good or bad of the business it runs.

Second, Stock Market Volatility

Based on a hundred years of stock market historical data, a savvy investor should not predict the future of the stock market based solely on past performance data.

The stock market will not go up indefinitely. We must always be careful and remember that when the stock price goes up, someday it will go down too. Likewise, does anyone predict that in 2021 now, the stock market will collapse? Whereas in the previous year, the stock market experienced stable growth. Of course no one knows.

This means that you must have a diverse investment portfolio, so that your investments are not affected all at once. In addition, you must be prepared mentally and psychologically in times of crisis.

Don't rush to sell all the shares you own when the stock market crashes, you should carefully analyze the industry and the company you are investing in. Remember, even after the most devastating crash, the market will always recover.

To illustrate how volatile the stock market can be, Graham tells the story of Mr. Markets. Imagine we have a small stake in a private company that costs 1,000 dollars.

One of our partners is Mr. Market and he is very helpful. Every day Mr. Market notifies us of changes in the share price and offers us whether we want to buy or sell. Sometimes Mr. Market offers very high prices, but sometimes offers very low prices.

If we are savvy investors, do we let Mr. Market determine our view of the true value of the $1000 shares we hold in the company? Of course we are happy to be able to sell shares at high prices and buy shares at low prices from Mr. Markets.

But, what if the opposite happened? Do we buy stocks when they are too high and sell them when they fall? Therefore, we must be wiser in assessing the shares we own based on the performance of the company itself, its financial and operational reports.

Investing isn't about beating other people at their game, it's about controlling yourself at your own game. Most investors fail because they are too busy paying attention to price movements that occur in the stock market.

Third, Margin of Safety and diversification

Losing money in investing is, of course, something that cannot be avoided. To be a smart investor, you need to make sure that you never lose most, or all, of your money.

Therefore, Graham introduced the concept of Margin of Safety. So, Margin of Safety is the difference between the intrinsic value of a business and the selling price of its shares.

How to Invest With Smart Investor Style

Investors must ensure that there is an adequate margin of safety, in order to withstand future declines in value. Graham analogized the safety limit of a bridge.

When you build a bridge, even though the bridge can be traversed by vehicles weighing a maximum of 30,000 pounds, you are only driving a vehicle that weighs a maximum of 10,000 pounds. The distance between 30,000 pounds and 10,000 pounds is the Margin of Safety.

In addition to the margin of safety, another important issue is diversification. Smart investors will never put all their money in one stock or in just one industry. He understood this was a dangerous move.

By diversifying, savvy investors can protect themselves from big money losses. Graham repeatedly reminds us that we must treat investments the way we treat our business.

Closing

That's what I wrote about How to Invest With Smart Investor Style, Stocks are not only about price movements, but behind it all, there are employees who move the company. Therefore, we must minimize investment risk by diversifying.

To be a smart investor, you don't need high intelligence, but you need character as an investor. Smart investors are investors who are patient, disciplined, and open to learning new things.