What You Can Learn from the Book that Changed Warren Buffett’s Life
If there’s one book that I recommend every new investor, or anyone who is interested in investing, read, it’s the Intelligent Investor by Benjamin Graham. Warren Buffet recalls that “one of the most luckiest moments in [his] life” was when he picked up a copy of this book from a library in Lincoln, Nebraska. In this post, I’m going to give you a quick rundown of the top lessons I’ve taken away from this book.
- Dollar Cost Averaging
- The 80/20 Rule
- Diversification
- The Market is Capricious
- Create a Speculation Portfolio
Dollar Cost Averaging
Dollar cost average investing means that you always (and the key word here is always) invest a fixed amount of money every month, or every quarter, into a portfolio of diversified stocks or stock funds regardless if the stock market is soaring high or barrelling down.
The reason why you would invest a fixed amount is because if stocks/funds are at an all time high, your fixed dollar amount would naturally buy less. When stock/funds are trading at a low, your fixed dollar amount would naturally buy more.
The method of dollar cost averaging is in sync with Buffet’s mantra of value investing – finding investments that are at a discount, and avoiding investments that are overpriced (i.e. buy more when prices are low, buy less when prices are high). For example, if you go into a clothing store, and all the items in the store have been marked up by 50%, would you be encouraged to buy? Now let’s say you go into the store and there’s a 50% sale on everything. In that case, I would be more encouraged to buy something. Graham encourages that this mentality should also be transferred to how you think about buying stocks. You should be wary and purchase less when the markets are soaring high. When there is fear and everyone is selling, it’s your chance to grab stocks at a discount.
| Date | QQQ Price | Monthly Investment | Shares Purchased | Shares Owned | Value |
| 1/3/2007 | 43.24 | $250.00 | 12 | 12 | $500.00 |
| 7/2/2007 | 48.01 | $250.00 | 10 | 44 | $2,134.49 |
| 1/2/2008 | 50.45 | $250.00 | 10 | 74 | $3,717.85 |
| 1/6/2009 | 31.33 | $250.00 | 16 | 149 | $4,664.05 |
| 1/5/2010 | 46.42 | $250.00 | 11 | 232 | $10,749.85 |
| 1/3/2011 | 55.31 | $250.00 | 9 | 294 | $16,268.23 |
| 1/4/2012 | 57.14 | $250.00 | 9 | 347 | $19,816.80 |
| 1/3/2013 | 66.85 | $250.00 | 7 | 392 | $26,217.32 |
| 1/8/2014 | 87.31 | $250.00 | 6 | 432 | 37714.4602 |
| 1/7/2015 | 101.36 | $250.00 | 5 | 463 | $46,968.48 |
| 1/6/2016 | 108.26 | $250.00 | 5 | 491 | $53,166.63 |
| 1/4/2017 | 120.19 | $250.00 | 4 | 518 | $62,245.01 |
| 1/3/2018 | 160.03 | $250.00 | 3 | 539 | $86,231.28 |
| 1/2/2020 | 216.16 | $250.00 | 2 | 572 | $123,719.21 |
| Total Invested | $40,000.00 |
The table above shows a rudimentary calculation of the outcome of investing $250 a month over the course of 13 years (2007-2020). Your final portfolio would be valued at around $123,000. If you just kept the $250 a month as cash, you would only have $40,000 saved. You can also see that the amount of shares you buy decreases as the value of QQQ reaches higher prices.
The 80/20 Rule
Graham recommends that of all your investments, you should keep a 80/20 split between high risk investments (stocks) and non-risk investments (bonds, CDs, and treasuries). The percentage of investments in stocks should be no more than 80% but no less than 20%. Likewise, your investment should contain no more than 80% bonds, certificates of deposits, or treasures but no less than 20%. As you grow older, you may want to allocate a greater percentage of your investment into risk free assets because you no longer have the luxury of time. After the 2008 financial crisis, it took about 7 years for the S&P 500 to reach the same level as it was before the crisis. If you’re in your 20’s or 30’s, you may have the luxury of waiting 7 years for your investments to recover, however, if you’re in your 50’s or 60’s with a fixed income, the drop may mean a lot less for you in retirement income.
| Age | Bonds | Stocks |
| 20 | 20% | 80% |
| 30 | 30% | 70% |
| 40 | 40% | 60% |
| 50 | 50% | 50% |
| 60 | 70% | 30% |
| 70 | 80% | 20% |
The chart above is an example of how you may want to split your asset allocation based on your risk tolerance. Ask yourself: If your stock investments dropped 50-60% in the next month because of a recession, what would you do? This book taught me that having a portion of your wealth in risk-free investments can be a great pillar to lean on through difficult times, and help you resist the urge to sell everything at the bottom.
Diversification
Graham’s book recommends diversifying with a portfolio of 20-30 stocks, choosing from stocks that have a history of consistent profits with increasing revenue. If you are more of a passive investor, or a beginner investor, the best way to do this would be through the purchase of ETFs or mutual funds. For example, your diversification strategy could look something like this (This isn’t my actual allocation, but an example).
| Category | Allocation |
| Large Cap Growth | 50% |
| Mid Cap Value | 5% |
| Small Cap Growth | 20% |
| Foreign Large Blend | 5% |
| MSCI China Index | 30% |
You can find ETFs and Mutual Funds that can help provide you exposure to these categories, as well as specific industries, if you are interested.
The Market is Capricious
The stock market can sometimes be fuelled by irrational exuberance or overstated fear. If we go into it without a clear strategy or plan we will be caught into the turbulent swings that can capture the market, and those who invest in it. One of the most important lessons I took away from this book is to create an investment plan and stick to it. Graham recommends going as far as creating a personal contract for yourself to keep yourself accountable. For example:
I, (your name here), will invest (some dollar amount), every (month or quarter), into ( X, Y and Z asset classes). I will reassess investment categories every year and I will increase the investment amounts by (some percent) every (some amount of time). My bond to stock split will be (some ratio). I will not sell until I reach the age of (some age, long time in the future).
Create a Speculation Portfolio
If there’s a part of you that wants to see if you can beat the market, become a master swing trader, or see if you can ride the wave on stocks that double or triple overnight, open a completely separate portfolio on a separate trading platform. For example, you can have a TD Ameritrade account for your disciplined investment strategy, and a Robinhood account for speculation. You can then allocate no more than 10% of your to this account and see how well you do compared to the market long term. Having a separate account for speculation will keep your large funds safe in case the worst happens, and satiate the urge to test your luck (or skill).
Conclusion
The Intelligent Investor, by Ben Graham is a long read, but I definitely recommend taking the time to go through it for yourself. There’s also an audiobook you can listen to during your commutes.