Warren Buffett said chapter 8 + 20 of the intelligent investor has been a bedrock of his investing for the past 60 years.

He suggests reading and rereading Benjamin Graham's book when the market has been strong or weak. Since we have been through both strong and weak markets in the past few years, now is as good a time as ever to review the key concepts.

Let's dive into key takeaways from chapter 20!

If a margin of safety works for bonds it can work for stocks as well. If you buy a bond, there is a coupon you earn, then you get your principle back. Bond prices take into account the chance of a decline in future income. Which is why they're not alway traded at par.

The margin of safety (MOS) is there to ensure your mistakes in accurately forecasting the future are unnecessary for success. If you have a large enough MOS, and earnings fluctuate, you should be protected against "the vicissitudes of time." For bonds, you measure the probability you will paid your coupon based on the ability of the business to generate funds to pay you.

If the business is worth significantly more than the debt it owes, this is your MOS.

In stocks, you can get a good MOS when earnings power > debt. If you buy a stock at "average" prices, you should have an adequate MOS. Problems arise when you buy stocks at expensive prices, which nullify your MOS.

When you buy company's with no margin of safety, a decrease in earnings power will cause your investment to decrease.

Graham says the chief hazard for the investor ISN'T paying too much for a good-quality stock. Instead, he observes that big losses come from purchasing low-quality business during economic booms. This causes increased prices, and short-term unsustainable earnings increases.

So be weary of assigning quality to low-quality businesses with rose colored glasses.

Growth stocks can be profitable, but it's important to use conservative growth metrics in your MOS. Unsustainable growth can fully eliminate a MOS, so be conservative in your analysis. The margin of safety depends on the price you pay for your asset. You can acquire a great MOS at one price, a smaller MOS at a higher price, or have zero MOS at a very high price. So pay attention to where the market is pricing a business.

The market often pays too much.

There is no set definition of investment vs. speculation. Graham suggest utilizing the MOS to differentiate between an investor and speculator. This means, people who use no MOS are speculators.

Decide which bucket you want to put yourself in.

Graham likes "unconventional investments." They cover a wide range of industries. But his favorites are ones that can be bought at 2/3 or less of indicated value. It's hard to say if he means book value or intrinsic value here, but anyway you interpret it, u should have a MOS.

Much of Grahams philosophies were created from the great depression.

Many bonds in the 20's had no MOS making them speculative. Advisors who pushed these in the 20's no longer found them attractive even when prices dropped 90%! So stay away from overvalued investments!

Investing is most intelligent when it's businesslike.

When you own a stock, you own a fractional share of the business. You can operate your equity investments like an owner of a collection of businesses. But most investors don't operate this way.

His 4 principles of operating like a business owner:

1. Know your business:

Do not buy a stock if you do not know how the business operates.
You should understand how the business operates, what it's selling, industry knowledge.
Only then will you have the owners mindset.

2. Management tenets:

You should be able to evaluate a managers performance based on your comprehension of the business.
You should have good reasons for placing confidence in their integrity and talent.
Only then should you let someone decide what to do with your money.

3. Do not buy businesses that are unlikely to yield profits:

The whole MOS premise depends on being able to maintain or increase a companies earnings power.
If your business has low or negative earnings power increase risk.
Stay away from those companies.

4. Have courage in your knowledge and experience:

This is the self-reliance Buffett is so well known for.
You are right because your data and reasoning support you, not because the crowd agrees or disagrees with you.
You must have courage to move against the herd.

Chapter. 20 Of The Intelligent Investor Has Made Warren Buffett Billions in Profits. Here Are 9 Points That Can Get You Closer To Financial Freedom.

Warren Buffett said chapter 8 + 20 of the intelligent investor has been a bedrock of his i

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