Ben Graham's Intelligent Investor should be read every few years. Rising valuations tempt even the most conservative investors to stray from sound practices.
He takes investment much more seriously than the television gurus. All things excellent are as difficult as they are rare. The aggressive investor must view security investment as a business enterprise. Investors need time, determination and mental training and capacity. There are only three guaranteed methods: unpopular large company, undervalued stocks, and special situations concerning mergers or workouts.
Behavioral finance seeks to explain investment errors. If something happens two or three times in a row the mind reflexively expects it to keep going. Success releases dopamine. Failure stirs up fight or flight response.
The five elements for picking companies are simply put.
- Understand the companies long term prospects
is there a moat of brand identity, monopoly, intangible asset, resistance to substitution.
- Know the quality of management
CEO pay, managers or promoters
- What is the financial strength and capital structure
Owner earnings: net income plus amortization and depreciation.
- What is the dividend record
- What is the current dividend rate.
Really understanding a balance sheet and income statement is difficult even for a trained securities analyst. Stock valuations are dependable only in exceptional circumstances.
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