Graham simplifies this concept by relating it as a story. Basically, there is you (the investor) and the stock market (Mr. Market) who own a business together. Mr. Market is moody. Sometimes he’s positive, other times he’s negative. And he usually keeps that negative attitude over short periods of time (weeks, months, and even a few years).
The key is not to let him pressure you and to use his mood to your advantage. When he’s got a bad attitude about the company, you buy stocks from him. When he’s got a good attitude about it, you sell to him. Just remember, it usually takes a long time for him to develop a positive attitude about the company.
So be patient. Buy and wait. Then when you think he’s getting into a good mood… wait some more. Let him show you that his attitude has changed over a consistent period of time. And when you are sure that it has, sell the stocks. His happy attitude is sure to guarantee a huge profit – one of much higher returns than what you initially paid.
Every stock has two prices: the price Mr. Market thinks it’s worth and the price you, as the investor, think it’s worth. Graham refers to your price on the stock as intrinsic value. The secret is to buy stocks that are priced far below their intrinsic value.
This limits your liabilities – or potential losses and thus provides you with a margin of safety on your investments.
It is important for one to determine how much time and effort one wants to put into investing and balance that by how much one hopes to gain.
Active investing involves researching, analyzing, and constantly watching the market. This basically becomes one’s full-time job. The potential to earn greater with this style of investing is apparent. You put more into it, so it is possible to get more out of it.
However, not everybody wins like this. In fact, this could work against some investors who aren’t fully committed to the process or overlook certain aspects of the market, the economy, or the particular business they are buying. It all depends on one’s knowledge, experience, and willingness to commit to a time-consuming endeavor.
The other option is the passive or defensive style of investing. Unlike, the active approach that requires full-time commitment, this investor buys and waits. (S)he doesn’t do much with the stocks other than allow them to grow and accumulate returns. It requires less time and effort.
It’s easy to ask, “why doesn’t everyone just take that approach?” The downside to this is that the potential returns are usually not as great for defensive investing as they are for active approaches. It is a long-term, slower way of accumulating wealth.
Neither of these options are better or worse than the other. The key is to understand yourself. Know your goals. Determine what you are looking to do and to accomplish with your investments. And to move forward based on which type of investor you see as a better fit for yourself.
Overall, The Intelligent Investor is packed with wisdom and key insights that provide timeless advice for investors today. Whereas these 3 ideas are huge concepts from the book, it is certainly advisable that anyone serious about investing consider reading the entire book.