Warren Buffett's Lesson From The Intelligent Investor

Lesson from The Intelligent Investor – Chapter 8

At the 2018 Berkshire Hathaway Annual Meeting, Warren Buffett took a question from an audience member asking what the most important key to investing was. His response is one that he has given thousands of times in public and private. It is perhaps his greatest lesson and it comes from his mentor, Benjamin Graham, as laid out in his book The Intelligent Investor.

The lesson that Mr. Buffett tries to instill in every investor is that, when you make an investment you are buying a small piece of a business, not a blinking stock symbol on a screen.

The difference is explained in Chapter 8 of Graham’s book, the chapter that Mr. Buffett referred the audience member to. In it Graham tells the parable of Mr. Market, a fictional character that represents the buying and selling carried out each day in the stock market. As an investor, Mr. Market is your partner and everyday he offers to buy your ownership stake in the business you are invested in or sell you his. You decide whether you want to take advantage of Mr. Market by buying when he is in a depressed mood and offering to sell you his ownership stake at a price below what you think the business is worth, or conversely, sell to Mr. Market when he is in a manic mood and is willing to pay you more for your stake than you think it is worth.

The answer Mr. Buffett gave is timeless and simple, but in order for it to be followed investors need to be disciplined and not act irrational in times of stress or euphoria always remembering what they own.

“A serious investor is not likely to believe that the day-to-day or even month-to-month fluctuations of the stock market make him richer or poorer. But what about the longer-term and wider changes? Here practical questions present themselves, and the psychological problems are likely to grow complicated. A substantial rise in the market is at once a legitimate reason for satisfaction and a cause for prudent concern, but it may also bring a strong temptation toward imprudent action. Your shares have advanced, good! You are richer than you were, good! But has the price risen too high, and should you think of selling? Or should you kick yourself for not having bought more shares when the level was lower? Or—worst thought of all—should you now give way to the bull-market atmosphere, become infected with the enthusiasm, the overconfidence and the greed of the great public (of which, after all, you are a part), and make larger and dangerous commitments? Presented thus in print, the answer to the last question is a self-evident no, but even the intelligent investor is likely to need considerable will power to keep from following the crowd.” (The Intelligent Investor p. 197)

Click For a link to Video


%d bloggers like this: