Value investing

The price is not the value – Mr. Market and the margin of safety

The book Warren Buffett calls the best on investing, from 1949. A walk through the ideas in The Intelligent Investor – Mr. Market, the margin of safety, the difference between price and value – and what is worth carrying forward today.

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What this covers

  1. The line between investing and speculating
  2. Mr. Market as an image of how the market behaves
  3. Margin of safety – paying less than something is worth
  4. Price versus value, and why they are not the same thing
  5. The defensive and the enterprising investor
  6. Diversification and fixed, regular purchases
  7. Why Graham himself ended up recommending index funds for most people

Investing or speculating

Graham starts with a definition stricter than the one most people use: an investment presupposes thorough analysis, protection of the principal and a reasonable expected return. Anything that does not meet all three is speculation.

Graham's three requirements

Investing

All three must be met

  • Thorough analysis
  • Safety of principal
  • An adequate expected return

Speculating

Everything else

  • Can be perfectly fine
  • Provided you know that is what you are doing
  • And that the amount can afford to be lost
The mistake is not speculating. The mistake is speculating while believing you are investing.

Mr. Market

Margin of safety

The margin of safety

What you payThe price in the market today
What you think it is worthYour own assessment of the value

Low priceHigh price

The distance between the two is the margin. It is not a bonus – it is there because your analysis may be wrong, the future may disappoint, and unexpected things happen. The margin is what lets you come through when you are wrong.

Defensive or enterprising

What is dated

Key points

  • Investing requires thorough analysis and protection of the principal. Everything else is speculation.
  • The market gives you a price every day. It is an offer, not a verdict on the value.
  • The margin of safety is the gap between what you pay and what you believe something is worth.
  • Most people are defensive investors, and should arrange things accordingly.

Key points (cont.)

  • Graham himself concluded that index funds suit most people best.

Questions this answers

  • What is the difference between investing and speculating?
  • What is a margin of safety in investing?
  • Who is Mr. Market?
  • What is the difference between the price and the value of a share?
  • Should I pick shares myself or buy index funds?
  • What is a defensive investor?

Questions this answers (cont.)

  • Why is it dangerous to pay too much for growth?

Sources

  • Benjamin Graham – The Intelligent Investor (1949, revised 1973)

Spørretimen

Read the whole thing at

www.sporretimen.no/en/episodes/intelligent-investor/