Market learning is the ability to learn from others, the experience of our lives, history, our own experiences, and experience of markets. What have been the best books for stocks market learning ?
Lesson #1: Investing is not a science, it is an art.
The best book for stock market learning, of course, is Benjamin Graham’s book “Security Analysis”.
Graham shows his mastery of the art of security analysis. His ideas have been implemented by other famous scholars of security analysis, such as J.J. Lehmann.
Lehmann has made a chart of the top performing stock picking strategies from 1956 to 2012, based on the average return on their investments.
Lesson #2: Take learning seriously.
“People think it is easy, but then they say, ‘I really didn’t learn much in school.’” Benjamin Graham.
You can’t be a successful investor without learning how to learn.
If you have the opportunity to learn from many different sources, you will be able to learn something from them all. If you only learn from your money managers and stock analysts, you will learn nothing.
Lesson #3: Don’t trust everything you read in the media.
“On a three-month basis the President of the United States and the head of the Federal Reserve might vote with different interest rates.” Benjamin Graham
Benjamin Graham is saying here that there is a small chance, albeit a great possibility, of different rates of interest in the same period.
Of course, in most of the times the economic conditions and conditions in the stock market and the government’s interest rates are very similar, so it is very unlikely that there will be two votes in the same period on two different interest rates.
Lesson #4: There is no such thing as a completely free lunch.
“A free lunch is not a free lunch if you have to pay for it.” Benjamin Graham
In this case, you have to pay taxes to be able to get the free lunch. In the words of Benjamin Graham, “in order to get the full value of the free lunch, you have to pay for it.”
When you buy a stock, you pay tax and often a transaction fee, too.
Learn to be able to spot a good bargain, by knowing what you are paying for and why.
Lesson #4: Pick the best companies.
“Don’t bother buying what other people are buying.” Benjamin Graham
In Graham’s article “Beating the Market with low cost” he explains how many investors can make money in a diversified portfolio of very similar stocks, but with different return on their investments.
This is like picking the best companies. But it is easier to do, because it’s an art and not a science. In most of the times, picking the best companies will help you to make money on the stock market.
Lesson #5: But don’t overthink the investments
“There are two ways to lose money on a stock: to be seduced by its expected rate of return and to pay too much for it.” Benjamin Graham
You can easily overthink a situation, or overvalue a stock because of the expectations of a higher future return.
Avoid paying too much for a stock, as this could lead you to getting overconfident.
Lesson #6: Read the trend in the market
“It is always wise to remember that the market is always right”
Few investors, of course, are able to see things in this perspective, because it requires a huge amount of discipline.
One of the best examples that illustrates Graham’s point here is a market crash in 1987. People thought that it was the end of the world and that the stock market was going to crash forever.
In reality, the stock market recovered pretty soon, and not only that, the stock market never made any significant correction in the past, until the recent 9/11/01.
The best that Benjamin Graham could say about this particular event, is that it showed that there is nothing you can do to stop the market from falling down.
Lesson #7: Don’t try to make a quick buck.
“If you are trading with a view to making a quick profit, you may get away with it once. But if you are trading with a view to making money in all market conditions, you are either a fool or a traitor.” Benjamin Graham
We read many articles every day on the web, about how to buy stocks at low prices and sell them at high prices. We often hear people saying that the prices of these stocks will double within 5 months.
It is not always true that stocks will go up in a short time, especially for stocks, that have nothing special to offer.
In most of the cases, if a stock goes up a lot, that means the underlying business is really good, and the investors were right to buy the stock at a lower price.
If a stock starts to fall, however, you can be pretty sure that it is a bad stock, and that you were overpaying for it.
Learn to spot a bad stock with the best of them, and focus on the companies, that are financially sound, and have strong fundamentals.
Lesson #8: A good stock has to go down first
“If you keep your eye on the long term, you won’t have to worry about short-term problems.” Benjamin Graham
During most of the times, a stock will go down, not to high levels, but to levels that you can get a good price for your investment.
For example, some investors would buy 5 million dollars’ worth of a stock for $100, and when the stock price goes down to $80, they get around $60 from that purchase.
When a stock starts to fall, however, there is a lot of profit to be made.
Lesson #9: A good stock has to go down first, to have a good price
“If you expect a stock to fall, buy it when its price is low. But if you expect it to go up, don’t buy it. Because it will go down.” Benjamin Graham
The reason that Graham mentioned, is that there is a lot of profit to be made when a stock falls.
You might get a good price for your investment, after the stock price goes down.
A stock that is overvalued, and that is on its way to a short-term correction, is a good buy.
When there is a high stock price, the investors have already created a lot of profit, so they do not care about the fall of the stock.
But in a correction, when the stock price goes down to a lower level, then there is usually a lot of profit to be made.
You can look for a good price to buy the stock, while it is on the way to a correction.
After the correction is over, the stock price usually starts to rise again, and there is more money to be made.
Lesson #10: The value of a stock should increase over time
“The real value of a stock is the value of its dividends.” Benjamin Graham
The first reason why we have that Graham is an investor’s hero is that he does not just invest in a stock, but also owns many shares in the same stock.
If a stock that Graham owns is not moving in a positive direction, Graham will start selling the stocks he owns and moving his money to other stocks.
This is because Graham knows that, in the long term, the stock price should be higher, and that the stock dividend represents an additional percentage point of return for the investor.
In other words, the stock price is more important than the share dividend.
Lesson #11: The stock price should always go up
“The prices of stocks are basically determined by the amount of surplus in the market.” Benjamin Graham
We read many quotes from Warren Buffett, but one that stands out is the following, from his biography Buffett:
“In my experience, the quality of the business tends to be a good indicator of the price we will pay. I’ve long held that the most reliable indicator of whether I’ll buy a stock or not is the price paid for it. When a company can pay a reasonable price for its own stock, it’s my kind of business.”
What this means, is that investors, who only focus on the share price, have a very low probability of finding a good investment.
Lesson #12: The investor should have a higher dividend yield
“The less risky a company, the higher the dividend yield it can afford to pay.” Benjamin Graham
The best companies in the world will pay a lot of dividends, because they have a strong business.
For example, Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL), which is the parent company of Google and many other subsidiaries, has the highest dividend yield among the tech companies.