The Intelligent Investor

KEY TAKEWAWAYS

Some of the most important concepts in the book:

Intelligent investors take a long-term approach when evaluating a company’s value. They analyze the company’s growth potential and consider the broader picture.
They diversify their investments to mitigate risk and only invest when they believe an asset is undervalued.
They understand that market crashes are inevitable and prepare both financially and mentally to weather them.
They factor in the inflation rate when evaluating potential returns on an investment and make decisions accordingly.
They recognize that the market is subject to fluctuations of over optimism and pessimism, and do not let emotions drive their investment decisions.
They do not blindly follow the crowd or market trends, instead they rely on their own research and analysis. They do not let the whims of “Mr. Market” dictate their investment decisions.
A sound investment is one that, upon thorough analysis, guarantees the safety of the principal and offers an adequate return. Investments that do not meet these criteria are speculative.
Intelligent investors base their decisions on their own analysis and facts, not on the opinions of others.
They are aware of their own risk tolerance and do not over-extend themselves.
They use the strategy of dollar-cost averaging to reduce the risks associated with higher volatility.
They continually evaluate an asset’s fundamentals and only invest if they would be comfortable owning it even if they had no knowledge of its daily price.
Intelligent investors do not panic and sell at the first sign of a market drop, they only sell when the fundamentals and long-term outlook of the asset change.
They understand the importance of learning from past experiences.
Intelligent investing is about self-control and not about outperforming others.
A stock represents ownership in a business and its underlying value should not be based solely on its share price.
While some level of speculation is unavoidable, there are many ways in which it can be imprudent, such as mistaking speculation for investment and risking more money than one can afford to lose

by Benjamin Graham

THE INTELLIGENT INVESTOR – BOOK SUMMARY

The Intelligent Investor, written by Benjamin Graham and first published in 1949, is considered one of the most important investment books of all time. It focuses on value investing, which involves choosing stocks on the basis of their intrinsic value rather than their market price.

This book provides an analysis of how to look for undervalued stocks and how to analyze the performance of a portfolio. The book also covers the psychology of investing and how to identify potential risks and rewards. The Intelligent Investor is an essential read for anyone interested in value investing, regardless of their experience level.

TOPICS COVERED

Other topics covered are taxation, the power of compounding and the importance of investment planning. It stresses the need to stay informed about current market trends and economic news. Furthermore, Graham provides advice on how to buy and sell stocks, when to hold onto a stock and how to control costs. The book also includes several case studies that demonstrate how to apply the principles of value investing to real-world situations.

You will find practical advice on developing a successful investing strategy, such as budgeting, setting financial goals and managing expectations. Graham advises investors to focus on the long-term and develop a portfolio that can withstand potential downturns in the market. He emphasizes the importance of learning from past mistakes and staying disciplined in order to achieve success.

The Intelligent Investor also provides guidance on the use of margin and includes tips on avoiding common mistakes. The book also discusses the importance of setting realistic expectations and understanding the risks associated with investing in the stock market.

Graham provides insights into how to monitor investments, track performance, and adjust to changing conditions in the market.

HISTORY OF THE STOCK MARKET

When exploring the history of the stock market, many new investors tend to use past data to predict future outcomes. However, as “The Intelligent Investor” author Benjamin Graham explains, the true value of an investment is determined by the price paid for it. He illustrates this point by providing multiple examples of common mistakes made by investors, such as buying into hype during strong bull markets, neglecting to conduct personal research, relying on unqualified experts, and becoming overconfident when stocks perform well.

INFLATION

The purchasing power of cash decreases over time due to inflation, for instance, a dollar from ten years ago is worth less than a dollar today. As a result, instead of hoarding cash, it is crucial to invest it to outpace inflation. However, many investors do not take inflation into account. This phenomenon is referred to as the money illusion by psychologists. A 2% salary increase is equivalent to a reduction in available money if inflation has risen by 4%.

Nevertheless, people generally prefer this scenario over taking a 1% pay cut during a year with zero inflation. Thus, it is essential to measure the success of your investments by the amount retained after inflation rather than the amount gained from investments.

BEATING INFLATION

Investing in stocks is a risky but potentially rewarding area of investment. According to Benjamin Graham, stocks tend to outpace inflation in 80% of the cases. However, it’s important to note that most stocks do not perform well during high inflation. The stock market, for instance, has lost money in 8 out of 14 years when inflation exceeded 6%. A slight inflation is beneficial for stock prices as it allows companies to raise prices. However, high inflation results in consumers cutting back on purchases. Therefore, investing in stocks is a viable option when inflation is not at an alarming level.

REAL ESTATE

An investment option that remains safe regardless of the level of inflation is Real Estate Investment Trusts (REITs). REITs are companies that own and rent out buildings, such as medical or commercial properties, but the specific type of properties they own is not as important as the fact that they are a reliable way to combat inflation.

AGE AND RISK APPETITE

According to Benjamin Graham, the type of investor one should be should not be based on risk appetite or age, but rather on their willingness to put in time and effort into their portfolio and their personal circumstances.

He provides examples to illustrate how age should not dictate one’s investment strategy. For instance, an 89-year-old with a substantial amount of money, a pension and children should not necessarily move most of their money into bonds.

Similarly, a 25-year-old saving for their wedding and a house deposit should not put all their money into stocks. Factors such as marital status, number of dependents, job security, the need for cash income, and the amount of money one can afford to lose on investments should be taken into consideration when determining the appropriate investment strategy.

DEFENSIVE INVESTING

According to the author, defensive investors should maintain a balance of 25% of their savings in bonds and a maximum of 75% in stocks. He advises against gradually buying a large number of stocks over an extended period, as the tax returns can become complicated. Instead, he suggests investing in a smaller number of stocks, ideally 10-30, across different industries.

When choosing stocks, Graham recommends considering certain characteristics of a company such as its size, stability, and financial health. Larger, less volatile companies with assets at least 2x greater than liabilities, positive earnings for the past 10 years, and a consistent dividend history for the past 20 years. He also suggests evaluating the company’s earnings growth, price-to-earnings ratio, and price-to-book value ratio.

ENTERPRISE INVESTING

For enterprising investors, Benjamin Graham suggests different criteria when evaluating companies. He recommends considering the company’s current assets, liabilities, and debt levels. He suggests that current assets should be at least 1.5 times current liabilities and debt should not exceed 110% of net current assets. Additionally, he suggests that the company should have no earning deficit in the last five years, have a dividend, have increasing earnings, and the stock’s price should be less than 120% of net tangible assets.

MAIN RULES OF STOCK INVESTING ACCORDING TO BENJAMIN GRAHAM

Benjamin Graham offers several pieces of advice for investing in stocks:

He advises against engaging in day trading as it is highly risky.
Initial Public Offerings (IPOs) are not recommended as they are often overpriced.
He suggests being cautious when considering buying cheap bonds.
Investing in foreign bonds should only be considered if you have a high level of confidence in them.
He emphasizes that even a great company is not a good investment if you are paying too much for the stock.
He advises against investing in large firms as they tend to grow at a slower pace and to avoid companies with price/earnings ratios over 25-30.
He recommends looking out for temporarily unpopular stocks as the market tends to quickly forget and these stocks might rebound if purchased at a reasonable price.

INVESTING APPROACH BASED ON FACTS

Graham emphasizes the importance of evidence-based investing and distinguishes it from speculation. He stresses the need for thorough analysis, safety of principal, and an adequate return for a true investment. He also describes two different approaches to investing: defensive and enterprising.

Defensive investors prioritize safety and minimal effort, while enterprising investors put a significant amount of time and effort into their investments. Both types of investors must be intelligent and make decisions based on the value of a company, rather than its share price alone.

Additionally, Graham advises allocating a small portion of funds, no more than 10%, for speculative investments in a separate account.

MARKET VOLATILITY COULD BE YOUR FRIEND

Market volatility can present both risks and opportunities for investors. To limit potential losses, it’s important to make well-informed investment decisions and avoid selling stocks in panic. Successful companies may experience greater fluctuations in stock prices, so buying stocks at a low point can yield good returns.

However, these types of investments may also be more speculative. The “Mr. Market” parable illustrates the idea that investors should not base their decisions on the daily fluctuations of the market and instead make their own informed decisions based on research. By using this approach, investors can take advantage of market dips to buy more stocks and sell when prices are too high.

A PEICE OF ADVICE ON FINANCIAL ADVISORS

Financial advisors are not a suitable option for everyone, as a minimum investment of $100,000 is typically required (at least back then). For individuals with less money, low-cost index funds may be a better choice.

However, for those who do have enough funds, it’s important to consider whether an advisor would be beneficial. Many investors find it helpful to have a second opinion when making investment decisions, particularly those who have difficulty calculating their required rate of return.

Some signs that you may need help with your investments include:

Struggling financially
Having a chaotic and poorly planned portfolio, or experiencing a significant life change such as retirement or self-employment.
Experiencing a significant loss of more than 40% in your portfolio

According to Graham, some advisors may be fraudulent and may try to discourage clients from researching their results further, ultimately leading to financial loss. To avoid falling prey to these frauds, Graham suggests looking out for the following phrases that fake investors may use:

“This is your opportunity of a lifetime”
“Don’t you want to be rich like me?”
“It would be best if you focused on performance rather than my fees”
“You can’t lose with my method”
“You have huge amounts of money to earn”
“This is a trick that only I know”
“You don’t even need to question the legitimacy of this method.”

By being aware of these red flags, you can make more informed decisions about who to entrust your investments with.

ANALYSIS

Graham emphasizes the importance of security analysis when evaluating stocks. This analysis involves estimating the intrinsic value of a stock and comparing it to its current market price to determine if it is a good investment. He emphasizes that security analysis should not be overly complex and should only require basic algebra.

Additionally, it is important to consider other factors such as a company’s long-term prospects, management quality, financial strength, capital structure, dividend record and current dividend rate. For bonds, Graham recommends evaluating the number of times that a company’s earnings have covered its total interest charges, and this should have occurred for at least seven consecutive years. By conducting security analysis and considering these factors, investors can avoid overpaying for stocks and make more informed investment decisions.

SAFE NET/MARGIN OF SAFETY

Graham emphasizes the significance of the “Margin of Safety” as the core element of an investment strategy. He suggests that investors should always aim to purchase a company’s stock at least 50% below its intrinsic value to minimize potential losses and maximize potential gains.