Do you want to be the intelligent investor?

Have you ever thought of making stock market investments? All of us have given careful thought to it. Yet, because of the financial crises, collapsing bubbles and economic collapses we have experienced, most of us have been reluctant to take action. There’s a way to invest in the market, however, which doesn’t leave you at risk of losing everything: smart investment. Intelligent investing, first outlined by Benjamin Graham in 1949, takes a longer-term, more risk-averse approach to the stock market. And it’s working.

Many have used Graham’s method and made fortunes in the decades since the book, The Intelligent Investor, was released, including, possibly, Warren Buffett, the most popular. As well as comments from journalist Jason Zweig, the novel, based on Graham’s original advice, shows how you can become an intelligent investor yourself.

By saving, there is a great deal of money to be made. But there’s still a lot to lose. The history of finance is full of stories of investors like Warren Buffett, who earned large sums of money in return by investing in the right companies. There are just as many tales of tragedy, if not more, in which people place the wrong bets and end up losing everything.

So, we have to ask ourselves: is the risk really worth the investment? As long as you follow the strategy of smart investment, the answer is yes, it can be. In order to ensure healthy and steady returns, intelligent investors use rigorous research. This is somewhat different from speculation, where investors concentrate on short-term profits made possible by volatility in the market. Speculations are also very dangerous, precisely because the future can not be predicted by anyone.

Smart buyers, by contrast, concentrate on pricing. Only when its price is below its intrinsic value, i.e. its value as it relates to the growth propensity of a business, do these investors purchase stock. As a smart investor, you can only buy a stock if you assume that there is a likely margin between what you pay and what you can gain as the business grows. Think of this protection margin the same way you would if you were shopping outside. For instance, an expensive dress is only worth it if you end up keeping it for a while. If the standard is inadequate, then you may also buy a cheaper one that will last the same amount of time.

A smart investor’s life is not really exciting, but that’s not the point. The benefit is the point. For all smart investors, there are three concepts: First, smart investors evaluate the long-term growth and business principles of the companies they are considering investing in before purchasing any stock. The long-term worth of a stock is not subjective. Instead, it relies directly on how well the business behind it does. So, be sure to analyze the financial structure of the firm, the efficiency of its management and whether it pays steady dividends, i.e. the distribution to investors of profits.

Don’t slip into the pit of looking solely at earnings in the short term. Look at the big picture instead, by analyzing the financial history of the company. These steps will give you a clearer understanding of how well a business performs, regardless of its market value. For example, a business that is currently not famous (and thus has a low share price) but shows encouraging records, i.e., has earned consistent profits, is likely to be undervalued, and will therefore make a prudent investment.

Second, by diversifying their portfolios, intelligent investors secure themselves against significant losses. No matter how promising it looks, never put all your money on one stock!

Just imagine the horror you would experience if a tax evasion scandal emerged in the news about the successful business that you put all your money into. Immediately, the investment will lose its value, and all the time and effort will be wasted forever. You guarantee that you will not lose all at once by diversifying. Finally, intelligent investors understand that they won’t pull in extraordinary profits, but safe and steady revenues.

The smart investor’s goal is to meet her personal needs, not to outperform Wall Street’s competent stockbrokers. We can’t do better than those who trade for a living, and anyway, we shouldn’t reach for quick cash; chasing dollar signs just makes us greedy and sloppy.

The first thing that you can do before investing is not look at the past of a stock. Sure, that’s important, but the most important thing is to look at the past of the stock market itself. Looking back through history shows that frequent ups and downs have always characterized the stock market. These variations can’t always be foreseen. The market’s unpredictability means that investors, financially and mentally, need to be prepared.

Economic crashes, such as the 1929 crash on Wall Street, are a part of life, and they happen from time to time. Therefore, you need to make sure you can take a big hit and survive. This means that you can have a large portfolio of stocks, so that not all your assets get hit at once.

What’s more, you should be prepared for a crisis, emotionally and physically. At the first sign of risk, don’t sell it. Instead, note that the economy will still rebound, even after the most catastrophic crashes.

And while you can’t predict every crisis, you’ll get a better picture of its resilience by looking at the market’s background. If you have decided that the market is stable, reflect on the history of the company that you would like to invest in.

Look, for example, at the correlation over the past ten years between the stock price and the company’s earnings and dividends. Then consider the rate of inflation, i.e. the increase in prices in general, and see how much you will really gain, all things considered. For example, after one year, you calculate a 7-percent return on investment, but if inflation is at a rate of 4 percent, then you will receive a return of only three percent. Think carefully about whether the effort for just a three-percent return is worth it!

An appreciation of history is a fine tool when it comes to shrewd trading, so be sure to keep it sharp. It’s often easier to picture the whole stock market as being a person, let’s call him Mr. Market, to understand the whims of the market. Mr. Market is volatile, very moody and not very smart as far as individuals go.

It is easy to manipulate Mr. Sector, and this causes him to have big mood swings. In reality, you can see this in the way that the market often bounces between unsustainable optimism and unjustified pessimism. For example, when a new iPhone is launched, individuals lose themselves in their excitement. Mr. Market is no different, and when something interesting is going to happen, we see this mirrored in the stock market: stocks go up and individuals are more likely to overpay.

As a result, stocks can become too costly when the market is too positive about future growth. In the other side, the market is too cynical often, warning you to sell in unjustified circumstances. The smart investor needs to be a realist and avoid the crowd from chasing her. Likewise, she should disregard Mr. Market’s mood swings. In addition, when Mr. Market is satisfied, he lets you see potential gains that really aren’t there.

Check out my related post: What are type of scams that you should be wary of?

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