If you look at a list of the wealthiest people in the world, you’ll see one name appear in the top five every year, year after year: Warren Buffett. No, he isn’t the inventor of the All-You-Can-Eat restaurant, despite being called the Sage of Omaha, he has nothing to do with delicious meats delivered right to your door. Warren Buffett is simply a man who buys and sells shares of other companies.
He’s also shockingly low-profile. Despite having a personal net worth large enough to buy Comcast without taking out a loan, Buffett still lives in the same Nebraska home he bought in 1958 for only $51,000.
While the world collectively drools over Jeff Bezos, Tim Cook, and Bill Gates (for understandable reasons), Warren Buffet just shows up to work every day, calmly examines the data, and as quietly as possible makes sound investments that often turn out to be a good idea.
With all that success, Warren Buffett has never actually taken the time to write a book. Yes, there are a few collected works of essays and transcribed speeches out there, but there is no definitive work on investing from the head of Berkshire Hathaway.
It looks like the closest we will ever come to an investment book by Warren Buffett is The Intelligent Investor by Benjamin Graham, of which Buffett wrote the foreword. Graham was a proponent of value investing, which means finding stocks to which the stock price is lower than the share value in the company itself.
I’m not going to lie, the deeper concepts of the book are hard to synthesize into a single book discussion, so I’ll do my best to summarize the main point of the number one recommended book of one of the wealthiest men in the world into one digestible sentence, one half a sentence at a time.
Part one: “Invest the same amount every month…”
If you want the complicated financial term for it, it’s called “dollar cost averaging,” but the basic idea is that you can spread out the risk of investing by have a set amount to invest every month. When the market is high, you’re buying higher value stocks that might be on the rise, but when the market is low, you’re getting a larger number of shares for your money. The risk of getting excited and making a bad investment is controlled in this way by being consistent.
Part two: “…in a mutual fund that matches a stock market index.”
This one probably needs more explanation. First, let’s define some terms. A mutual fund is basically a bunch of people who go in together to make a variety of investments, usually by giving their money to a firm who does it on their behalf.
A stock market index is a number that is used to represent the overall health of the market. You might have heard of the Dow Jones Industrial Average, or the S&P 500. These stock market indexes* are meant to show you how well the market itself is doing overall. An index fund is a mutual fund that buys stocks in a way that intends to mirror these stock market indexes*.
With that out of the way, we can shorten Graham’s advice to “Invest the same amount every month into an index fund.”
The reason for this, which Graham states over and over again in The Intelligent Investor, is that while investors make money, the market itself has consistently larger gains than the most investors.
Simply stated: instead of trying to figure out what stock to buy, you should have just bought a little bit of each of the top 500 stocks. Statistically you’ll do better.
The theory here is that investing in an index fund eliminates the risk of picking the winners and losers. It also eliminates the headache (and heartache) of trying to figure out what to buy and when.
Just to be 100% clear, I am not a financial planner (at least not yet). I am simply repeating what I’m pretty sure the book said. The rest of the book is worth the read if you want to understand why you should leave investing to people who are familiar with all the ways a company can be deceptive in their financial statements.
If you’re interested in books by big time investors, Ray Dalio from Bridgewater published the first half of his business manifesto called Principles: Life and Work in 2018. It’s a good but long read. For those looking for low-stress budgeting that incorporates the basic level of investment described in this book, you might try The Barefoot Investor by Scott Pape. It’s a much easier read (although I would caution you that some of the particulars of his investment plan are tailored to the Australian market). If you’re a U.S. Citizen looking for guidance on budgeting so you can invest, I highly recommend The Total Money Makeover by Dave Ramsey or You Need a Budget if you’re one of those people who has something against Dave Ramsey.
The Intelligent Investor is actually the fifth book I’ve read this year. If you’ve got any suggestions for other books, I would love to hear them since I’ve decided to read 100 books in 2019. If you want to see this year’s list, just check out revengemethod.com
Keep it real.
*Yes, I know that the proper plural of index is actually “indices.” I don’t like the word and I think it sounds weird. Just because tomato is technically a fruit doesn’t mean I’m going to put it in a smoothie.
The Intelligent Investor Revised Edition by Benjamin Graham, Foreword by Warren Buffett.
The Classic Text Annotated to Update Graham’s Timeless Wisdom for Today’s Market Conditions
The greatest investment advisor of the 20th century, Benjamin Graham taught and inspired people worldwide. Graham’s philosophy of “value investing” – which shields investors from substantial error and teaches them to develop long-term strategies – has made The Intelligent Investor the stock market Bible ever since its original publication in 1949.
Over the years, market developments have proven the wisdom of Graham’s strategies. While preserving the integrity of Graham’s original text, this revised edition includes updated commentary by noted financial journalist Jason Zweig, whose perspective incorporates the realities of today’s market, draws parallels between Graham’s examples and today’s financial headlines, and gives listeners a more thorough understanding of how to apply Graham’s principles.
Vital and indispensable, this HarperBusiness Essentials edition of The Intelligent Investor is the most important book you will ever listen on how to reach your financial goals.