No matter how much research you do, there are 3 skills essential to your success in the market.
Develop them now and they will give you the clarity and self-reliance you need to invest fearlessly.
Let me explain…
The 3 skills from Benjamin Graham who was an extremely successful stock market investor and Warren Buffett’s main mentor. One of his books is called “The Intelligent Investor” which he wrote in 1949.
In the book, he recommends a simple 3-step framework for those who want to do well in the stock market.
It’s not a formula to get rich quick, but an intellectual framework for how to look at investing.
Skill 1: Learn to approach investing as a business
It means you need to recognize that stocks are not wiggles and jiggles on a chart. They are businesses.
When you buy a stock, you become one of the owners of the company. you are entitled to a share of the earnings.
The minute you decide to manage your own money, you start a business. Treat it like one, know your business, run your business, make sure the odds favor a profit over the long term, and have the courage of your knowledge and experience.
The intelligent investor doesn’t buy a stock because they think they spot a pattern in the chart.
They buy a stock because they’ve reviewed the financials of the company and expect it to do well.
Be truthful with yourself.
Do you really want to approach your investing as a business.
Skill 2: Understand Mr. Market
The second skill is to understand that the market is there to serve you, not guide you.
Here’s what that means.
Imagine that the market is a person.
Let’s call him Mr. Market. He is manic depressive.
One day he knocks on your door, euphoric, and offers you some stocks for an audacious high price.
The following day, he knocks on your door again to sell you stocks, but this time he is glum and asking for a very low price.
Would you rather buy from him when he’s asking for the audacious high price, or when he’s glum and asking for the low price?
You would go with the low price.
Yet, too many investors do the opposite, because get swept up in the mood of the market.
They pay attention to Mr. Market’s mood, rather than the value of the deal he’s offering.
They buy when Mr. Market is euphoric and they lose interest when he’s glum.
Skill 3: Margin of Safety
The final step of Benjamin Graham’s framework is knowing your margin of safety.
Warren Buffett, who was Benjamin Graham’s student, said that the three most important words in investing are “margin of safety.”
If I asked you for several hundred dollars for an iPhone, you would likely agree that it’s a fair price.
However, if I asked you for several hundred dollars for “an Apple device,” you’d be more cautious. For all you know, I might be selling you an adapter worth $20.
If you know the value of what you’re buying, you need less of a margin of safety.
But if you’re investing in a company that’s risky and uncertain, you don’t know the true value of the stock. You need a bigger margin of safety and you must take more care when accepting the market price.
And I will add one more skill, learn how to think long term.
Investing in stocks requires a minimum five-year time horizon.
Think of it like sending some of your money on vacation while your other money takes care of the more immediate chores, like paying for car repairs, a house, or a kid’s college tuition.
I know It can be hard to be a long-term investor in a short-term world.
Successful investors have the ability to remain calm and levelheaded when everyone around them is freaking out. Warren Buffett says this is the key to his success.
When a group of business-school students asked Buffett why so few have been able to replicate his investing success, his reply was simple:
“The reason gets down to temperament.”
IQ points, won’t help when your investment is down 50%.
But if you can keep your emotions in check and ignore the noise, you’ll be able to hang on (even back up the truck and load up) rather than selling out at the worst times.
If you look back at history and study how investing fortunes were made, you’ll find it wasn’t by jumping in and out of stocks based on fear and greed, but by buying great businesses and investing in them over the long haul.