“Investment/business is risky” I often hear many people say. Lets start by looking at the definition of Risk according to the Intelligent investor by Ben Graham. Then we will look at the rules of thumb for investing, which apply to all forms of investments.
What is risk?
Risk exists in another dimension: inside you, if you overestimate how well you really understand an investment, or overestimate your ability to ride out a downturn. Ultimately, financial risk resides not in what kinds of investment you have, but in what kind of investor you are. If you want to know what risk really is, go to the nearest bathroom and step up to the mirror. That’s risk gazing back at you from the glass.
As you look at the mirror, watch for:
- “Well-calibrated confidence” (do I understand this investment as well as I think I do?)
- “correctly-anticipated regret” ( how will I react if my analysis turns out to be wrong?)
Investment Rules of Thumb
Investment is most intelligent when it is most businesslike. Every investment should first be viewed as an ownership interest and if a person sets out to make profits from employment, security purchases and sales, he is embarking on a business venture of his own, which must be run in accordance with accepted business principles if it is to have a chance of success.
- The first and most obvious of these principles is, “know what you are doing-know your business.”
- A second business principle: “Do not let anyone else run your business, unless (a) you can supervise his performance with adequate care and comprehension or (b) you have unusually strong reasons for placing implicit confidence in his integrity and ability.” For the investor this rule should determine the conditions under which he will permit someone else to decide what is done with his money.
- A third Principle “Do not enter upon an operation unless a reliable calculation shows that it has a fair chance to yield reasonable profit. In particular, keep away from ventures in which you have little to gain and much to lose.” For the enterprising investor this means that his operations for profit should be based not on optimism but on arithmetic. For every investor it means that when he limits his return to a small figure he must demand convincing evidence that he is not risking a substantial part of his principal.
- A fourth business rule is more positive: “Have the courage of your knowledge and experience. if you have formed a conclusion from the facts and if you know your judgement is sound, act on it-even though others may hesitate or differ.”
Conclusion
The Intelligent investor by Ben Graham is such a wonderful book to read and this cannot be considered a summary of the wisdom imparted from it’s 640pages. It touches on various topics in investing and I would highly recommend you pick it up and pour through its pages.