Sunday, December 7, 2008

The Intelligent Investor: Chapter 20

The following summary was written by Frank Voisin, who regularly writes for Frankly Speaking. Recently, Frank sold four restaurants and returned to school to complete a combined LLB/MBA.

In this the final chapter, Graham distills the secret of successful investment into building a “Margin of Safety” into each and every investment. What is a margin of safety? It is coming up with a valuation of the underlying business, and then paying less! Warren Buffett describes this as building a bridge that can carry 30,000 pounds, and then only driving 10,000 pound trucks across it. Know the value, then pay less, and don’t cut it close!

How does one do this? Here are some key points:

  • Not overpaying for a security just because it is the latest market darling
  • Buying good companies that are undervalued
  • Diversifying across multiple companies and industries
  • Having a portfolio that is both bonds and stocks and reviewing the allocation at regular intervals (not every time the market seems to be throwing a fit)
  • Having the courage to buy even when the market is saying something else.
  • Having the courage to ignore the daily market fluctuations and hold on to the investment until the underlying fundamentals change
  • Recognizing that it is better to be safe and careful than to take risks in an effort to earn above-average returns

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