Top 3 Things Investors Must Know from the Book That Changed Warren Buffett’s Life

Benjamin Graham’s investing text The Intelligent Investorfirst published in 1949, is one of the most important books about the subject ever written. But you don’t have to just take my word for it. Warren Buffett, one of the best investors in the world (more on this shortly), said the following in 2013 about Graham’s book:

The Intelligent Investor changed my life.”

In a 1998 lecture, Buffett highlighted the seminal importance of the contents in Graham’s book:

“There’s a chapter 8 in Ben Graham’s Intelligent Investor about the attitude toward stock market fluctuations. That and the chapter 20 on the margin of safety are the two most important essays ever written on investing as far as I’m concerned.”

As for Buffett’s accomplishments in the investing world for those unaware, he has been the leader of the conglomerate Berkshire Hathaway since 1965 (he still is today, by the way). Over the past 50 years from 1965 to 2014, he has helped grow Berkshire’s book value per share – a good proxy for the firm’s intrinsic business value – by a phenomenal 19.4% annually through astute investments in stocks and private companies.

I was recently re-reading The Intelligent Investor and felt that there’s still so much to learn from it even though I had first read the book more than a decade ago when I first started investing. Here are three important takeaways from the tome.

The true meaning of investing

The Intelligent Investor starts out by giving readers a clear concept of what investing should really be.

Instead of speculatively jumping in-and-out of stocks over short timeframes, prudent investing, in the eyes of Graham, is about being a part-owner of a company and about having a mindset of being partners with a company’s management team.

This point-of-view of what stock market investing is all about can help us adopt a longer time horizon when investing (which is very important in helping to stack the odds of success in our favour) and make investing decisions based on the business fundamentals of a stock instead of its past price movements.

Getting a real grip on understanding investing returns

The concept of inflation is not an alien thing for most of us. Put simply, it’s the phenomenon of prices rising over time, such that the same S$100 today can buy you less goods 10 years from now.

But when we’re accounting for our investing returns, it’s common for many investors to fail to consider inflation.  Let’s look at why it’s important to factor in inflation when counting returns.

In Singapore, the rate of inflation has averaged 2.75% over the past 50 years. So, if your investments can generate a return of 8% a year – that’s pretty close to the 8.11% annual return that the SPDR STI ETF (SGX: ES3), an exchange-traded fund tracking the Straits Times Index (SGX: ^STI), has delivered over the past 13 years from April 2002 to June 2015 – you’d have earned a positive real return.

But if you had invested in a country like say Indonesia, where inflation has averaged at the low-teens since 1997, an investment giving you a 10% annualised return in rupiah (Indonesia’s currency) terms will mean you’re actually earning a negative real return. Your actual spending power has decreased even though you’ve more rupiah in the bank.

So as you can see, knowing how to differentiate between real and nominal (the latter’s a term used to describe figures that are unadjusted for inflation) returns can be important in helping us make better investing decisions.

Protecting our capital

In the first few paragraphs of this article, I quoted Buffett on his thoughts about Chapter 20 in The Intelligent Investor, which deals with the concept of a “margin of safety.”

Buffett finds it an extremely crucial topic – so do I. Graham understood that investing is not an exact science, and so, he thought it important that we give ourselves room for lots of error when we invest.

In Graham’s world, before any capital’s committed to a stock, one has to first estimate the value of the stock’s underlying businesses. But when that’s done, it does not mean that an investor should be buying if the stock’s price is near that value. Instead, a purchase should only be made if the stock’s price is significantly lower than that estimated intrinsic value. That’s how we give ourselves wiggle room, or that “margin of safety.”

By insisting on a low purchase price in relation to value, we can help put a thick barrier between us and danger, hence protecting our capital.

Foolish Summary

Things change all the time and that’s true in the investing world as well. But, there are timeless lessons from The Intelligent Investor and they’re well worth keeping in mind for all investors.

There're a lot more interesting things about investing to talk about and if you'd like to do it in person, you can come meet David Kuo and the rest of the Fool Singapore team on August 15! 

Please join us at Invest FAIR Singapore on 15 August. (Suntec Centre, Booth B-16). Come chat with us at our booth, and see our MAS-licensed Director, David Kuo, give his official SGX investor presentation.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim owns shares in Berkshire Hathaway.