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Financial Principles by Jason Zweig. Guaranteed to Make You Smart.

Jason Zweig Investing Principles

When it comes to investing or personal finance, there’s a world of difference between a good advice and an advice that sounds good. It might not seem obvious at first, but there is.

And Jason Zweig is one of the best financial writers, who regularly doles out good advice. He prefers to say that he is not smarter than everybody else and that he only knows a lot about what he doesn’t know.

But like million others, I personally think that he is one of the best out there. In 2003, he edited Benjamin Graham’s The Intelligent Investor– a book which Warren Buffett has called ‘by far the best book about investing ever written’.

This speaks volumes about who Mr. Zweig is.

While reading through the archives of his site, I came across his set of principles (link), which I had somehow missed till now.

And this speaks volumes about my ignorance. 🙂

The principles are so accurate, clear, flawless and spot-on, that I couldn’t stop myself from sharing them with you.

The principles focus on using common sense in investing and personal finance, to achieve our financial goals. And that is something, which should be everyone’s concern.

Rest of the post is about those principles. I strongly recommend you read it now, bookmark it, print it and read it again… and again in future. Atleast I will be doing it.

So here it is…

Jason Zweig’s Statement of Principles

 Successful investing is about controlling the controllable. You can’t control what the market does, but you can control what you do in response. In the long run, your returns depend less on whether you pick good investments than on whether you are a good investor.

The first step to reaching your financial goals is to make sure you set goals that are reachable. Your expectations must be realistic. The stock market is not going to provide a high return just because you need it to.

The second step is to recognize what you are up against. Despite what all the daily market reports make it sound like, investing is not a game, a sport, a battle, or a war; it is not an endurance contest in a hostile wilderness. Investing is simply the struggle for self-control – the unrelenting effort to keep yourself from becoming your own worst enemy.

The market is not perfectly efficient, but it is mostly efficient most of the time. Attempting to beat the market may often be entertaining, but it is seldom rewarding.

There’s nothing wrong with gambling on poor odds, as long as you admit honestly that what you’re doing is gambling and as long as you put only a tiny proportion of your wealth at risk.

The brokers on the floor of the Exchange clap and cheer when the closing bell clangs every afternoon because they know that no matter what the market did that day, they will make money – because you tried to. Whenever you buy a stock, someone is selling it; whenever you sell a stock, someone is buying it. Most of the time, the person on the other side of the trade knows more about the stock than you do.

However, you don’t have to lose just because other people win, and you don’t have to win just because somebody else loses. You win when you stick to your own long-term plan, and you lose only when you let greed or fear goad you into changing that plan.

The right time to buy is whenever you have cash to spare. The right time to sell is when you have an urgent and legitimate need for cash. If you buy because the market has gone up, or sell because it has gone down, you are letting 90 million* strangers rule your life with their greed and fear.

* In American context

Once you lose money by taking too much risk, the only way you can earn it back is by taking still more risk.

If you lose 50%, you have to earn 100% just to get back to where you started. And if you lose 95%, you need to earn 1,900% before you break even. You may be able to do that once or twice through sheer luck alone, but the more often you have to try it, the more likely you are to end up broke.

All too many people live their investing lives like hamsters on a wheel, running faster and faster and getting absolutely nowhere.

If you want to have more money, save more money.

Investments that outperform in a bull market are certain to underperform in a bear market. There is no such thing as an investment for all seasons.

That’s what diversification is for: to protect you against the risk of putting too many eggs in the wrong basket. And buying something that has just doubled, in the belief that it will keep on doubling, is an extremely stupid idea.

Your goals are a function of all your life circumstances: your age, marital status, income, current and future career, housing situation, and how long your children (or parents) will be dependent on you. Risk is a function of probabilities and consequences – not just how likely you are to be right but how badly you will suffer if you turn out to be wrong. Investors tend to be overconfident about the accuracy of their own analysis – and to underestimate how keenly they will kick themselves if that analysis is mistaken.

Understanding your own shortcomings as an investor is far more important to your long-term success than analyzing the pros and cons of individual investments.

In the short run, hares have more fun; but in the long run, it’s always the tortoises who win the race.

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37 Quotes from The Best Book on Investing Ever Written

Benjamin Graham’s book – The Intelligent Investor is regarded as the Holy Bible of Value Investing. Even the master investor Warren Buffett has a very high regard for the book and refers to it as the best book that has ever been written on investing.

It has even been said that if you have to chose just one book on investing, it should be this one.

As for me, I have read this book quite a few times. Infact, I have made it a sort of annual ritual to go through it every January. 🙂

intelligent investor book

Sometime back, I found a large collection of quotes from this book here. So here I share a few of the better ones in this post:

  1. The sillier the market’s behaviour, the greater the opportunity for the business like investor.
  2. The intelligent investor is a realist who sells to optimists and buys from pessimists.
  3. No matter how careful you are, the one risk no investor can ever eliminate is the risk of being wrong.
  4. By developing your discipline and courage, you can refuse to let other people’s mood swings govern your financial destiny. In the end, how your investments behave is much less important than how you behave.
  5. No statement is truer and better applicable to Wall Street than the famous warning of Santayana: “Those who do not remember the past are condemned to repeat it”.
  6. The defensive investor will place chief emphasis on the avoidance of serious mistakes or losses. His second aim will be freedom from effort, annoyance, and the need for making frequent decisions.
  7. To enjoy a reasonable chance for continued better than average results, the investor must follow policies which are (1) inherently sound and promising, and (2) not popular on Wall Street.
  8. Speculative stock movements are carried too far in both directions, frequently in the general market and at all times in at least some of the individual issues.
  9. People who invest make money for themselves; people who speculate make money for their brokers.
  10. The beauty of periodic rebalancing is that it forces you to base your investing decisions on a simple, objective standard.
  11. There is no reason to feel any shame in hiring someone to pick stocks or mutual funds for you. But there’s one responsibility that you must never delegate. You, and no one but you, must investigate whether an adviser is trustworthy and charges reasonable fees.
  12. Thousands of people have tried, and the evidence is clear: The more you trade, the less you keep.
  13. In the financial markets, hindsight is forever 20/20, but foresight is legally blind. And thus, for most investors, market timing is a practical and emotional impossibility.
  14. A great company is not a great investment if you pay too much for the stock.
  15. It is absurd to think that the general public can ever make money out of market forecasts.
  16. It should be remembered that a decline of 50% fully offsets a preceding advance of 100%.
  17. Even the intelligent investor is likely to need considerable will power to keep from following the crowd.
  18. Price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal.
  19. Always remember that market quotations are there for convenience, either to be taken advantage of or to be ignored.
  20. Nothing important on Wall Street can be counted on to occur exactly in the same way as it happened before.
  21. Mr. Market does not always price stocks the way an appraiser or a private buyer would value a business. Instead, when stocks are going up, he happily pays more than their objective value; and, when they are going down, he is desperate to dump them for less than their true worth.
  22. The intelligent investor shouldn’t ignore Mr. Market entirely. Instead, you should do business with him – but only to the extent that it serves your interests.
  23. Mr. Market’s job is to provide you with prices; your job is to decide whether it is to your advantage to act on them. You do not have to trade with him just because he constantly begs you to.
  24. The best way to measure your investing success is not by whether you’re beating the market but by whether you have put in place a financial plan and a behavioural discipline that are likely to get you where you want to go.
  25. High valuations entail high risks.
  26. A defensive investor can always prosper by looking patiently and calmly through the wreckage of a bear market.
  27. The best values today are often found in the stocks that were once hot and have since gone cold.
  28. It’s nonsensical to derive a Price/Earnings ratio by dividing the known current price by unknown future earnings.
  29. Wall Street has a few prudent principles; the trouble is that they are always forgotten when they are most needed.
  30. Although there are good and bad companies, there is no such thing as a good stock; there are only good stock prices, which come and go.
  31. In the short run the market is a voting machine, but in the long run it is a weighing machine.
  32. The intelligent investor should recognize that market panics can create great prices for good companies and good prices for great companies.
  33. Losing some money is an inevitable part of investing, and there’s nothing you can do to prevent it. But to be an intelligent investor, you must take responsibility for ensuring that you never lose most or all of your money.
  34. By refusing to pay too much for an investment, you minimize the chances that your wealth will ever disappear or suddenly be destroyed.
  35. Before you invest, you must ensure that you have realistically assessed your probability of being right and how you will react to the consequences of being wrong.
  36. Successful investing is about managing risk, not avoiding it.
  37. Without a saving faith in the future, no one would ever invest at all. To be an investor, you must be a believer in a better tomorrow.

Have you read it? What are your thoughts?