The Intelligent Investor by Benjamin Graham | Summary & Basic Principles
Table of Contents
- The Intelligent Investor by Benjamin Graham
- The Intelligent Investor Summary
- The Three Principles of Intelligent Investing
- Lesson Summary
What did Warren Buffet say about The Intelligent Investor?
Warren Buffet says the book is the best book on investing in the stock market. Buffet added some parts to the 1973 edition of the book, and he also uses the book to guide his investments.
What are the main points of the Intelligent Investor?
The main points of the Intelligent Investor revolve around passive investing and value investments. Passive investing, Graham says, is "boring" and involves a lot of work and effort upfront but not so much once the investments are made. Finding companies that are undervalued and buying those stocks is value investing.
Table of Contents
- The Intelligent Investor by Benjamin Graham
- The Intelligent Investor Summary
- The Three Principles of Intelligent Investing
- Lesson Summary
The Intelligent Investor by Benjamin Graham is a national bestseller book about value investing. The first edition of the book was published in 1949, with several editions being released at later dates, the most recent being the 2003 edition and the 2015 audio version. The Intelligent Investor is one of the most popular books on investing in the stock market and has built up Graham's legacy as the "father of value investing." Graham began teaching some of the methods found in the book at business school but adapted the content to the book in order to engage audiences of amateur investors. The book is highly regarded by billionaire investor Warren Buffet as well. Warren Buffet read the book when he was starting out in investing and has since held the book in high acclaim.
Warren Buffet on The Intelligent Investor
Warren Buffet, also known as the "Oracle of Omaha," is a well-known value investor and philanthropist. He is regarded as one of the most successful investors in the last century. The buffet was inspired by Graham's teachings and writings. After reading The Intelligent Investor, Warren Buffet was so inspired he began using Graham's strategies described in the book in his own investing practices. Buffet even added a preface and appendices to the 4th edition of The Intelligent Investor in 1973. On a review of the book, Buffett is quoted saying, 'By far the best book ever written about investing.'
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The Intelligent Investor summary can be broken down into several categories of strategies to use when investing.
- Value investing - The concept of investing is that it seeks out businesses that are undervalued and have the potential to grow.
- Long-term investing - Graham argues for staying in the market rather than buying and selling stocks.
- Staying away from trends and crowd pressure - Graham argues for staying away from investing in "group think" or "Mr.Market" pressures.
- Emotions vs. Logic - Investing can be emotional, and Graham tells readers to stick to what they know.
- Methods to determine value - Graham discusses different factors and ways to calculate stock value.
- Teaching Tools - In chapters 17-18, Graham uses historical examples, company comparisons, and management styles to display investing flaws.
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Benjamin Graham writes about three main principles of intelligent investing in his book. The three principles are investing with a margin of safety, "Mr. Market" allegory, and being aware of one's investment self.
Invest With a Margin of Safety
Graham said that investors must know how much they can lose when being involved with investing. Humans make mistakes, and these mistakes can be amplified when making investing decisions. Investors need to be aware of possible investing errors when dealing with the market. Graham says a great way to accomplish a healthy degree of margin of safety is to seek out undervalued stocks. He also mentions several other ways to provide for a margin of safety:
- Do not get involved in the trends of other investors
- No one can predict the future
- The constant ups and downs of the stock market is okay as long as an investor sticks to their plan
- Diversifying investment portfolio
- Purchasing companies that pay high dividends and have little to no debt
Mr. Market
"Mr. Market" is an imaginary persona Graham uses throughout the book that represents the irrationality of the stock market, investing trends, and following the crowd flaw. Graham uses this character to personify the constant volatility in the market and how people make the biggest mistakes by thinking irrationally. This allegorical character was introduced in Chapter 8 of The Intelligent Investor and shows up every day to offer stocks for sale. Sometimes the prices seem reasonable, and sometimes they are absurd. Graham uses this allegory to teach investors not to give in to the whims of the stock market's ups and downs. Profits can be made with the volatility, but most investors lose when they try to play the short game. Graham says to focus on the real-life value of the companies investors want to invest with and stick to that plan rather than worrying about Mr. Market.
Being Aware of One's Investment Self
Graham advocates investors to be aware of their own investing personalities. Each investor will approach the stock market and the investing world with different attitudes, skills, knowledge, and confidence. Understanding these traits and using them to an advantage is important for any investor to understand before investing in the stock market. Graham divides investors into two main groups: Enterprising investors and defensive investors.
Enterprising investors are investors who go into the stock market that practice speculation or take more aggressive measures in investing. Graham does not totally denounce enterprise investing in his book, but he does heavily warn against it and urges the reader to seek a more defensive portfolio. The book does include a few chapters and sections that provide advice for enterprising investors. Graham warns enterprising investors to stay away from market pitfalls like initial public offerings, day trading, and foreign bonds. He also tells enterprising investors to seek wiser investments like buying in low markets and selling in high markets. Graham's continued to advise enterprises in choosing growth value stocks and finding bargain stocks.
Defense investors are more inlined with the teachings of the book. Graham says that most investors will fall in this category and that they would be wise to have a passive or defense portfolio set up. Graham tells the readers that this style of investing is boring and not as exciting as enterprise investing. He tells defensive investors to balance their portfolios out with bonds, investment funds, government securities, and other conservative investment vehicles. Graham does say that defensive investors can set aside some money to put into individual stocks, as long as the investor is doing their proper research and homework.
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The Intelligent Investor by Benjamin Graham is one of the most renowned books on stock market investing. The book goes into great detail on building a portfolio based on value investing. Warren Buffet has used the book to build his own portfolio and has added his own piece to the 4th edition of the book. The Intelligent Investor summarizes the importance of value investing, methods to finding undervalued companies, not giving into "group think" or market trends, and other investing teaching tools. The three main principles the book covers are: investing, knowing the margin of safety, "Mr. Market" allegory, and being aware of one's investment self. Graham divides the investors into two categories: enterprising and defensive. Most of his book is focused on defensive investing techniques and the advantages of passive investing. He does admit that enterprise investors can do very well but take a lot of risks.
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Investment for Everyone
The Intelligent Investor, written by Benjamin Graham in 1949, provides layman investors (think ordinary, 'mom & pop' investors) with guidance on the adoption and execution of an investment policy. This lesson will summarize The Intelligent Investor in chronological order, highlighting significant chapters and the concepts they introduce.
Chapters 1-7 Investment Versus Speculation
In the early chapters, Benjamin Graham seems to be setting the foundation for the rest of the book. He does this by laying out the historical stock market returns (Ch. 3), and giving his own market commentary at the time of the book's issuance (Ch. 2). The early chapters are best known for Graham's definitions of 'investments', 'speculation', and 'enterprising' and 'defensive' investors. He spends the majority of the early chapters defining these terms and then giving portfolio policy recommendations for enterprising and defensive investors. Investment versus speculation is summed up nicely by Graham when he says, 'An investment operations is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.' That's the first 'fork in the road' that Graham wants the reader to consider. Are you a speculator or an investor? What have you been in the past? What would you like to be?
He then places investors into one of two 'buckets': defensive or enterprising. A defensive investor is generally passive. He/she is completely fine with adequate returns so long as little time/energy is spent investing. The enterprising investor, on the other hand, has the time, energy, and desire to put more work into their investment portfolio. They may spend time researching companies to invest in, for example. Again, Graham provides a description of both because he wants readers to decide for themselves which type of investor they are or would like to be.
Chapter 8 - 'The Investor and Market Fluctuations'
Chapter 8 deserves its own section. It, along with Chapter 20, contains one of the most famous and long-lasting ideas from The Intelligent Investor. In Chapter 8, Graham provides a thought-provoking parable. He says: 'Imagine that in some private business you own a small share that cost you $1,000. One of your partners, named Mr. Market, is very obliging indeed. Every day he tells you what he thinks your interest is worth and furthermore offers either to buy you out or to sell you an additional interest on that basis.' Some days his idea of value is believable, but on other days his excitement or fear influence his suggestion.
Graham challenges the reader: 'Will you let Mr. Market's daily communication determine your view of the value of the $1,000 interest in the enterprise?' Graham argues that you should use Mr. Market to your advantage. First, develop your idea of the enterprise's value and then buy interest from Mr. Market when he is too pessimistic and sell to Mr. Market when he is too optimistic. The changes in price allow an investor to buy when prices decrease and to sell when they rise.
Chapters 9 - 16 Advice for the Layman Investor
In the middle of the book, Graham spends time answering questions a layman investor may have, like what are investment funds? Are financial advisers helpful? He also delves into some higher-level financial concepts like convertible bonds and warrants. The book was intended as a reference guide for the layperson. It was not intended to be read like a novel, chronologically. If the reader has specific questions, they jump to those chapters. The remaining bulk of Chapter 9-16 deals with stock selection for the defensive and enterprising investor. Graham spells out specific criteria each investor should look for when they decide to buy or sell a specific stock.
Chapters 17 - 19 Comparing Companies
In these chapters, Graham expounds upon his stock selection chapters by comparing companies. Graham was famous for doing this while a professor at Columbia University. He would have the students compare the financials, or the financial statistics for two similar companies. The companies could be in the same industry, for example. Graham would put the financial statements side-by-side and highlight the differences. In these chapters, he goes through several company pairs with the same level of detail and instruction.
Chapter 20 - ''Margin of Safety' as the Central Concept of Investment'
Like Chapter 8, Chapter 20 deserves its own section because of its introduction of a concept called 'margin of safety'. An analogy is useful for thinking about this concept. When engineers build a bridge to handle traffic that includes semi-trucks that weigh 80,000 lbs., they do not build the bridge to hold a maximum of 85,000 lbs. No, they build the bridge to hold a maximum of 100,000 lbs. or more. They build in a margin of safety. As another example, if your spouse is always concerned about you showing up for dinner late, you should not leave with just enough time on average to make it home. You should leave a little bit earlier, so if something unexpected happens, like you get stuck in traffic, then you can still show up on time. You build in a margin of safety to account for the unexpected.
Graham argues for the same approach in investing. If you have the opinion that a security's intrinsic value is $100, then you should be cautious about buying it even if it is priced at $105 or $110. Your estimate of intrinsic value is just that, an estimate. You may be, and are most likely, wrong. A large margin of safety gives you greater latitude in being wrong.
Lesson Summary
- Benjamin Graham wrote The Intelligent Investor in 1949 to give 'mom & pop' investors guidance on the adoption and execution of a sound investment policy.
- Graham's basic principles include treating a stock as not just a ticker symbol, and buying securities with a wide margin of safety, among other principles.
- Two of Graham's most celebrated concepts are the market as a manic depressive partner named Mr. Market, and the concept of margin of safety.
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