First chapter : Investors versus speculators

I finished reading the first chapter and I have documented below my interpretations of the first chapter.

By definition, an investor is someone who conducts a thorough analysis so that he would keep his principal safe and expect to have an adequate return. A speculator, on the other hand, doesn't follow this criteria.
To give the reader an illustration, if I have $1000 to invest, I would first make sure that there is almost no possibility of losing my $1000 in the first place. I have put an emphasis on the word "almost" because there will always be some probability of losing the principal, albeit very low. Then I would need to invest in a good business that would give me a nice return over time.
The question a reader may ask is, how will I know that my principal is safe? The only way to find out is to compare the price of a stock with the value of the underlying business. Ben Graham calls this "margin of safety". There are more details on margin of safety in subsequent chapters.

Speculation shouldn't be looked down upon. Indeed, speculation can be lucrative and some speculation can't be avoided. Problems occur when people imagine they are investors when they are, in reality, speculators. If you know what your boundaries are and you recognize you are a speculator, you can use intelligent speculation to make serious money. You may also switch between the roles of an investor and a speculator.

Introduction of this website

This website is dedicated to Benjamin Graham's principles of investing and valuation of stocks. Please note that I am a blogger and an individual investor. Certainly, I don't call myself an expert in computing intrinsic values of underlying businesses.
Please consult your financial advisor for individual advice.

I am currently reading Ben Graham's book called "The Intelligent Investor". This book is considered to be THE BIBLE of value investing. Warren Buffet has mentioned that this is the best book on investing. He read it when he was very young and since then, he has never turned back. As I go though the chapters in the book, I will update this blog with my interpretation of Ben Graham's notes. Having said that, if you have no plans to read more on value investing, you just need need to be aware of 2 basic principles :

1. Buy good businesses : Remember stocks represent companies which have employees, infrastructure and business models. When you are buying a stock, you are buying a fractional ownership of the underlying company.

2. Buy at a discount to the intrinsic value : No matter how much confidence you might have in a company or how much experience you might have in evaluating businesses, you can always end up with the possibility of paying more or paying the intrinsic price itself. This approach will leave you no room to account for huge market declines or an error on your part in evaluating a business in the first place. Your safest bet is to buy at a considerable discount so that you can leave enough margin to account for any misinterpretations on your part.

More to come....