The Intelligent Investor

Number 3 is my favorite...

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Welcome to Wealth Wednesday!

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Dear Investor,

In this newsletter, Iā€™ll unpack some of the best lessons from the book that forever changed Warren Buffettā€™s life. It could change yours, too.

Letā€™s talk about The Intelligent Investor by Benjamin Graham widely regarded as the best investing book ever written.

Warren Buffett himself calls it ā€œthe Bible of investing.ā€

When Buffett was just 19, he stumbled across this gem. It rocked his world.

Inspired by Grahamā€™s teachings, he enrolled at Columbia University to study under the legendary professor. After graduating, Buffett spent a few transformative years working directly with Graham before heading back to Omaha to start Buffett Partners.

For me, The Intelligent Investor has been a cornerstone of my investing philosophy.

I started reading it at 20, and Iā€™ve made it a tradition to revisit it once a year.

This book wonā€™t teach you how to ā€œbeat the market,ā€ but it will arm you with tools to reduce risk, protect your capital, and generate sustainable returns over the long term.

Ready to dive in? Letā€™s break down six key lessons:

1. Mr. Market

ā€œMr. Marketā€™s job is to provide you with prices; your job is to decide whether it is to your advantage to act on them. You do not have to trade with him just because he constantly begs you to.ā€

Most people think of stocks as ticker symbols with prices attached. Thatā€™s completely wrong. A stock represents ownership of a business, even if you own just a single share.

Enter Mr. Market.

Picture Mr. Market as your quirky, overly emotional business partner. Every day, he shows up with a new offer to buy or sell your stake at wildly fluctuating prices. Some days, heā€™s euphoric and willing to pay top dollar.

On other days, heā€™s pessimistic and offers pennies on the dollar.

Hereā€™s the secret: Mr. Market doesnā€™t control your decisions. His moods are opportunities, not mandates.

  • Sell to him when his euphoria drives prices sky-high.

  • Buy from him when his pessimism creates discounts.

Think about it this way: If you bought a house for $300,000, knowing itā€™s worth $500,000, youā€™d be thrilled.

But what if, the next day, someone offered you $100,000 for it? Youā€™d laugh them off, right?

Now imagine someone offering you $1 million; youā€™d probably take it on the spot.

A stock works the same way. Donā€™t let daily price quotes distract you. Stick to your assessment of value.

Pro Tip: Keep your long-term account off your phone. Constantly checking prices makes it harder to ignore Mr. Marketā€™s emotional outbursts.

2. Insist on a Margin of Safety

ā€œThe margin of safety is always dependent on the price paid. It will be large at one price, small at some higher price, nonexistent at some still higher price.ā€

No matter how confident you are in an investment, thereā€™s always a chance you could be wrong. The market has a way of humbling even the best investors.

But hereā€™s how you can protect yourself: demand a margin of safety.

Simply put, the margin of safety is the difference between a stockā€™s intrinsic value and its market price.

Grahamā€™s rule?

Buy a stock priced at no more than two-thirds of its true value. This cushion minimizes risk and maximizes potential reward.

For example, I once sent out Marathon Digital (MARA) to my premium subscribers at $0.95. I was confident it could hit $50 (it eventually went to $68).

In that case, buying at $5 still offered a huge margin of safety because the upside was enormous.

Now, letā€™s translate this into something more relatable:

Would you board a cruise ship built to hold 100 passengers if you knew it would sink with 101 onboard? Probably not.

Youā€™d only feel safe if the ship had room for, say, 40 people. Thatā€™s your margin of safety.

The same logic applies to stocks. If a company is worth $100 but trading at $101, skip it. But if itā€™s worth $100 and trading at $40? Thatā€™s your ship with plenty of extra room.

3. Be Wary of IPOs

ā€œThe really dreadful losses of the past few decades were realized in those common stocks where the buyer forgot to ask ā€˜How much?ā€™ā€

Graham wasnā€™t a fan of initial public offerings (IPOs), and for good reason.

IPOs often debut in bull markets when optimism inflates prices beyond reasonable valuations.

When the tide inevitably turns, these overpriced stocks are the first to crash.

Take the IPO frenzy from 2020 to 2021. Many companies had their IPOs and absolutely went NUTS on opening day. Letā€™s take Rivian, for example. Its stock went all the way up to $150. Today, it sits at $13 a share.

Hereā€™s a sobering stat: An investor who bought every IPO at its closing price from 1980 to 2001 and held for three years would have underperformed the market by 23% annually.

Remember: Overhyped doesnā€™t mean undervalued. Focus on businesses with proven track records, not flashy debuts.

4. Diversification: A Double-Edged Sword

ā€œThere is a close logical connection between the concept of a safety margin and the principle of diversification.ā€

Youā€™ve probably heard the phrase, ā€œDonā€™t put all your eggs in one basket.ā€ Diversification is important, but Graham warns against over-diversification, which can dilute returns.

Instead of owning 100 stocks, consider focusing on a smaller number of high-quality investments you understand deeply.

For example, when I first invested in Meta at $102 in October 2022, I had high conviction in its recovery and growth potential. By focusing my portfolio on quality rather than quantity, I rode that position to nearly $500 two years later. It currently is at $597. (I guess I sold too soon)

Smart diversification is about balance. Spread your risk, but donā€™t spread yourself so thin that you lose track of what you own.

5. Risk and Reward Are Not Always Correlated

ā€œAn investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.ā€

The old academic theory goes: ā€œThe greater the risk, the greater the reward.ā€ Benjamin Graham?

Heā€™d call nonsense on that.

Instead, Graham argued that your return depends more on your ability to find undervalued assets than on the risk youā€™re willing to take. Itā€™s not about high risk for high rewardā€”itā€™s about smart risk for high reward.

Letā€™s break this down:

Imagine a stock worth $25 per share. Mr. Market, in his erratic mood, offers it to you for $5. If you buy, youā€™re taking minimal risk (youā€™re buying far below value) for maximum reward (a potential 400% gain when it reverts to $25).

Hereā€™s a better analogy:

Letā€™s say youā€™re in Las Vegas, deciding between two casino games. The first game has a payout with odds of 1 in 20, meaning you have only a 5% chance of winning. The second game, however, offers odds of 1 in 2, giving you a 50% chance of winning. Which one would you play? Obviously, youā€™d choose the game with higher odds of success.

The stock market isnā€™t a casino. Itā€™s real businesses that have real value. If you buy a company for 60 cents on the dollar, youā€™re minimizing risk while maximizing reward. Better yet, find one trading at 40 cents on the dollar. Thatā€™s where the real magic happens.

6. Patience Pays

ā€œTo achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.ā€

One of Grahamā€™s core teachings is that investing requires patience. The market can stay irrational longer than you expect, but value eventually prevails.

For example, during the dot-com bubble, Graham-style investors were ridiculed for sticking to fundamentals.

But when the bubble burst, those who stayed disciplined scooped up bargains while others nursed heavy losses.

Patience also applies to holding your winners.

Too many investors sell a stock after a small gain, only to watch it climb higher. If youā€™ve done your research and believe in the long-term potential, let your winners run. (Maybe I should have done this with Meta?)

As Buffett says, ā€œThe stock market is a device for transferring money from the impatient to the patient.ā€

Final Thoughts

The Intelligent Investor isnā€™t just a book; itā€™s a toolkit for navigating the market with confidence and discipline. Whether youā€™re sidestepping Mr. Marketā€™s emotional whims, demanding a margin of safety, avoiding IPO hype, focusing on smart diversification, redefining risk and reward, or practicing patience, Grahamā€™s principles can help you build lasting wealth.

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See you on Sunday!

Matt Allen

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