The Intelligent Investor is widely regarded as the definitive book on value investing. The book provides strategies for using value investing successfully on the stock market.
This book has historically been one of the books of the most popular investment and Graham’s legacy lives on.
In 1928, Graham began teaching value investing at Columbia Business School, which was further refined with David Dodd. Walter Schloss and Irving Kahn echoed this sentiment as well.
Having read Graham’s book at age 20, Buffett started using value investing to construct his own investment portfolio.
Similarly, Graham’s work, such as Security Analysis, marked a significant departure from his earlier works on stock selection. He explained the change as follows:
“The thing that I have been emphasizing in my own work for the last few years has been the group approach. To try to buy groups of stocks that meet some simple criterion for being undervalued — regardless of the industry and with very little attention to the individual company… I found the results were very good for 50 years. They certainly did twice as well as the Dow Jones. And so my enthusiasm has been transferred from the selective to the group approach.”
You may be wondering if you should read the book. This book review will tell you what important lessons you can learn from this book so you can decide if it is worth your time.
Without further ado, let’s get started.
Table of Contents
Key Insights
Benjamin Graham’s book, “The Intelligent Investor,” is considered the best investment advisor of the twentieth century. It’s a stock market bible that inspires people worldwide with Graham’s philosophy of value investing, which helps investors avoid costly mistakes and devise long-term strategies to achieve financial goals.
Graham identifies two types of smart investors: enterprising and defensive. Enterprising investors aim to beat the market by investing in undervalued stocks, while defensive investors diversify to match the market. This book is a must-read for anyone interested in investing.
To beat the market, investors must be better informed than their competition. Those who lack the necessary skills and knowledge to beat the market are likely to perform poorly. So, for most of us, it’s better to settle for the stock market’s annual average return of around 10%.
Graham began teaching value investing at Columbia Business School in 1928 with David Dodd, and they published “The Intelligent Investor” in 1949. Here are some of the book’s key lessons:
Lesson 1: An intelligent investor examines the long-term value of a company rationally, not impulsively.
Investing can be a great way to make money, but it also carries a lot of risk. There are many examples of successful investors, like Warren Buffett, who have made a lot of money by investing in the right companies. However, there are also many people who have lost everything by making poor investment decisions. So, is the potential reward worth the risk? It can be, if you follow a smart investment strategy.
Intelligent investors do thorough research and analysis before making investment decisions. They focus on long-term growth rather than short-term market fluctuations. This is different from speculation, which is risky because the future is unpredictable. For example, a speculator might hear a rumor that a company is about to release a new product and buy a lot of stock based on this rumor. If the rumor turns out to be true, they might make a lot of money. If it’s false, they could lose a lot.
Intelligent investors, on the other hand, look at the price of a stock in relation to its intrinsic value, or the company’s potential for growth. They only invest in a stock if they believe the price is lower than the potential return they can expect as the company grows.
This is similar to shopping for a dress. If you’re going to spend a lot of money on a dress, you want to make sure it’s high quality and will last for a long time. If the quality is poor, it might be better to spend less on a cheaper dress that will last just as long.
Smart investing isn’t always exciting, but the goal is to make money, not to have a thrilling life.
Lesson 2: Three principles underlie intelligent investing.
Smart investors follow these three principles:
- Before buying any stock, they research the long-term development and business principles of the company. This includes looking at the company’s financial structure, the quality of its management, and its dividend policy (how it distributes profits to investors). It’s important to consider the long-term performance of the company rather than just focusing on short-term earnings.
- They diversify their investments to protect themselves from serious losses. Even if a stock looks promising, it’s not a good idea to put all your money into it. If something goes wrong with the company, you could lose everything. Diversifying your investments means that you won’t lose everything at once if something goes wrong with one of your investments.
- They aim for safe and steady returns rather than trying to outperform Wall Street professionals. It’s not realistic to expect to beat professional traders, and trying to do so can lead to greed and carelessness. Smart investors focus on meeting their personal financial goals rather than chasing big profits.
Lesson 3: Stock-market history is important to intelligent investors.
Before investing, it’s important to not just look at a stock’s history, but also consider the overall trend of the stock market over time. The stock market is known for its ups and downs and these fluctuations can be unpredictable. As an investor, it’s important to be mentally and financially prepared for this unpredictability.
It’s also a good idea to have a diverse portfolio of stocks so that if one stock loses value, it doesn’t have a huge impact on your overall investments.
In addition, you should be mentally and emotionally prepared for tough times in the market, like a crash. Don’t panic and sell everything at the first sign of trouble. Instead, remember that the market has always recovered after even the most devastating crashes.
When you’ve determined that the market is stable, you can then look into the history of the specific company you’re considering investing in. Look at factors like the stock price, earnings, and dividends over the past ten years. Take into account the inflation rate, or the overall increase in prices, to see how much you’ll really earn on your investment. For example, if you calculate a 7% return on investment in one year, but the inflation rate is 4%, you’ll only earn a 3% return after accounting for inflation. This may not be worth the effort.
In summary, having a good understanding of history can help you make smart investment decisions. Make sure to keep your knowledge sharp.
Lesson 4: Don’t rely on the crowd or the market.
It can be helpful to think of the stock market as a person, Mr. Market, to understand its unpredictable and moody behavior. Mr. Market is easily influenced and tends to swing between overly optimistic and overly pessimistic views. For example, when a new iPhone is released, people get excited and the stock market reflects this excitement with rising prices and people being willing to pay more.
Sometimes the market becomes too optimistic, causing stocks to become overpriced based on unrealistic expectations for future growth. On the other hand, the market can also become overly pessimistic, causing you to sell in unnecessary circumstances.
To be a smart investor, you need to be a realist and not get caught up in the market’s mood swings. It’s important to remember that just because a stock is currently profitable doesn’t mean it will stay that way. In fact, stocks that have performed well in the past may be more likely to lose value in the future because demand can drive the price up to unsustainable levels.
It’s easy to get swayed by short-term gains, especially when profits are consistently rising. We tend to see patterns and assume they will continue, even when there is no actual pattern.
Lesson 5: Defensive investors need portfolios that are well-balanced, safe, and very easy to manage.
When you start investing, it’s important to choose a strategy that’s right for you as an individual. One option is to be a defensive investor, which means you prioritize safety over high returns and are willing to accept lower profits in exchange for less risk.
As a defensive investor, your first step should be to diversify your investments. This means investing in both stocks and bonds, with a balanced split between the two. For example, you might aim for a 50-50 split between stocks and bonds, or if you’re extremely risk-averse, you might choose a 75-25 split in favor of stocks. Bonds are generally more secure but offer lower profits, while stocks are less secure but have more potential for rewards.
In addition to diversifying between stocks and bonds, you should also diversify your portfolio of stocks by investing in a variety of large, well-known companies with a history of success. A good rule of thumb is to invest in at least ten different companies to reduce your risk.
To make the process of diversifying your stock portfolio easier, you can consider aligning it with the portfolios of successful investment funds. This doesn’t mean you should blindly follow trends, but rather choose investment funds with a proven track record of success.
Finally, consider hiring an expert to help you make informed investment decisions. They have more experience and can provide valuable guidance.
By following these simple principles, you can minimize risk and achieve positive outcomes in the long run.
Lesson 6: Following a formula makes investing easy.
Once you’ve chosen your investment companies, it’s time to decide how much money you want to invest regularly and keep track of your stocks. One way to do this is through a process called formula investing, where you follow a predetermined formula to determine how much and how often you’ll invest. This can include dollar-cost averaging, which involves investing the same amount of money each month or quarter in a specific stock.
To make this process easier, you can set up your investments on autopilot once you’ve found a stock you feel is safe and secure. For example, you might decide to invest $50 every few months and buy as many stocks as you can with that amount. This way, you don’t have to constantly monitor your investments or make impulsive decisions.
However, one downside of formula investing is that it can be emotionally challenging. You may not be able to buy more stocks even if the price is low because you’ve already reached your predetermined spending limit.
As a defensive investor, it’s still important to periodically check your investment portfolio to make sure it’s performing well. You should aim to rebalance your stock and bond allocation every six months, and consider consulting with a professional once a year about adjusting your funds.
By following these steps, you can start your journey as a defensive investor and be on your way to success.
Lesson 7: Entrepreneurial investors start similarly to defensive investors.
As an enterprising investor, you should still have a balanced portfolio that includes both stocks and bonds, like a defensive investor. However, you’ll likely invest more heavily in stocks, which offer higher profits but also come with more risk. It’s also a good idea to work with a financial planner, but as a partner rather than just following their guidance.
In addition to stocks and bonds, enterprising investors may also consider other types of stocks with higher risk and potential for higher rewards. For example, you might come across a startup that has the potential to become the next Google. While this could be a great opportunity, it’s important to remember to limit these types of high-risk investments to no more than 10% of your total portfolio.
It’s also important for enterprising investors to continuously research and monitor their portfolios to ensure they are generating income.
Keep in mind that even the most intelligent investors make mistakes, and sometimes the market is too unpredictable to make reliable predictions. By setting limits and being cautious, you can protect your capital in the event of a recession or a poor investment.
Lesson 8: Enterprising investors don’t follow the market’s ups and downs.
As an investor, it’s natural to wonder whether you should sell your stocks if their price drops or hold on to them. It’s also common to consider getting in on another stock’s rise before it’s too late. However, an intelligent investor knows that it’s dangerous to blindly follow the market or trust in Mr. Market’s mood swings.
In some cases, a stock’s price may rise rapidly due to overvaluation or risky investments. This can be seen in the housing bubble in the United States, where prices continued to rise beyond their intrinsic value and eventually caused the entire market to collapse.
Enterprising investors aim to avoid this by buying stocks when their prices are low and selling when they are high. It’s important to regularly examine your portfolio and the companies you invest in to ensure that management is doing a good job and finances are in good shape. If you realize that a company’s stock price is rising without any relation to its actual value, it may be a good idea to sell.
On the other hand, it can be a smart move to buy stocks when their prices are low. For example, Yahoo! Inc. made a great deal in 2002 when it purchased Inktomi Corp. for just $1.65 per share at a time when the company was not profitable and Mr. Market was depressed due to overvalued shares at $231.625 per share.
Lesson 9: There are real bargains to be found for enterprising investors.
At this point, becoming an enterprising investor may seem like a fun challenge. Does it really make sense to go to the trouble of checking your portfolio every day?
Indeed, because that’s where the best bargains can be found – but only if you start smart.
You should start your life as an enterprising investor by virtually tracking and picking stocks. To develop your ability to find a bargain and track the performance of your stocks, invest virtually for a year.
Virtual investing is offered on many websites today. All you have to do is sign up to see if you can get better results than average. The one-year trial period serves several purposes: not only does it help you become familiar with investing, but it also frees you from unrealistic expectations.
After gaining a year of virtual experience, you’ll be ready to go bargain-hunting. You will find the best bargains in undervalued shares of companies.
Companies whose shares are temporarily unpopular or that suffer economic losses are usually undervalued by the market.
Take Company B as the second strongest competitor in the refrigerator market. Over the past seven years, the company has generated solid, but not spectacular, profits. However, a production error has caused the company to be less profitable over the last two months, spooking investors and causing the share price to fall.
An intelligent investor would see this share price decline as an opportunity to pick up a great bargain once the production error is fixed.
However, bargains are hard to find. That’s why you have to practice for a year first. You can do it in the virtual world, and you can do it in real life!
The Intelligent Investor and Warren Buffett
Warren Buffett, a famous investor mentored by Benjamin Graham, considers “The Intelligent Investor” to be the best book ever written about investing. When he was 19, Buffett read the book and then went to Columbia Business School to study under Graham, with whom he became lifelong friends. Buffett worked at Graham’s investment company, Graham-Newman Corporation, until Graham retired.
In 2010, a signed copy of “The Intelligent Investor” by Warren Buffett sold for $2,900 at an auction. One thing all of Graham’s students had in common was creating a margin of safety as they developed their own investment strategies and philosophies.
Buffett’s investment strategy is value investing, which focuses on finding securities that are undervalued based on their intrinsic value. He considers factors like a company’s performance, debt, profit margins, public status, commodity dependence, and how cheap it is.
Unlike Graham, Buffett prioritizes a company’s quality and believes in holding stocks for the long term. He is not interested in capital gains but instead wants to own quality companies that generate large earnings. Buffett does not worry about whether the stock market will ever recognize a company’s value.
However, Buffett acknowledges that Graham’s methods never resulted in losses.
Praise
1. Timeless practical advice
The practical advice in the book is timeless and applicable to investors of all levels. Chapters 1, 8, 10, and 20 stood out to me as particularly enlightening. Chapter 1, in particular, distinguishes between speculation and investing, a concept that is often lost on modern investors.
Managing emotions, discussed in Chapter 8, is also an important but challenging concept to implement in the real world. Finally, Chapters 10 and 20 emphasize the importance of discerning advice from others and having a margin of safety in investing. These principles are just as relevant today as they were when the book was first published.
2. Two approaches to investing
One unique aspect of the book is that Graham discusses two different approaches to investing depending on the amount of time one can commit. For those with limited time, defensive investing in safer, larger companies with a bond-heavy approach is recommended.
For those with more time to commit, the enterprising approach to value investing is recommended. While the enterprising approach can yield greater returns over the long run, the defensive approach is still a viable option for those unable to commit enough time to make the enterprising approach effective.
3. Key principles of value investing
Graham’s book introduces three key principles of value investing: the concept of “Mr. Market”, a disciplined approach to investing, and the “margin of safety” concept. The “Mr. Market” concept reminds investors that the stock market can behave like a casino, and that daily price changes can be unpredictable and volatile. A disciplined approach to investing is necessary to avoid being swayed by these changes.
Additionally, Graham outlines several characteristics of “value” stocks, including stability of earnings, dividend record, and a moderate price to earnings ratio. Finally, the “margin of safety” concept stresses the importance of investing in opportunities where the potential for profit is higher than the risk of loss.
Criticism
1. Outdated information
One of the most significant drawbacks of the book is that some of the information is outdated. For example, Graham suggests using a local bank to handle transfers of stock certificates, which is no longer relevant as most transactions are done online.
Moreover, Graham emphasizes the importance of dividend maintenance, which may be less relevant today. Strong companies today are less likely to pay out a significant portion of their surpluses as dividends. While these principles are still relevant to some extent, readers should be aware that the book was written in the early 1970s and some information may no longer be applicable.
2. Textbook-like writing style
Some readers may find the writing style of the book to be too textbook-like, which can make it a difficult and dry read. Additionally, the book could be condensed to about 150-200 pages, with the supporting evidence included in an appendix. While the commentary sections are valuable, they are not a summary of the prior chapter and should not be skipped over.
3. Limited focus on trading
The book is focused on value investing principles and does not cover other investment strategies, such as trading or options trading. While the principles taught in the book are valuable, readers looking to learn about other investment strategies may need to seek out additional resources.
Conclusion
“The Intelligent Investor” is a classic book that has stood the test of time and is still highly regarded today. It’s been praised by both experts and regular investors alike.
One reason for its popularity is Graham’s methodology, which is widely respected in the field. Even Ronald Moy, a professor of economics and finance, acknowledges the impact of Graham’s teachings. Famous investors like Warren Buffett, Bill Ruane, and Walter Schloss have even considered themselves his disciples.
This book is considered the go-to guide for the stock market. It’s been called the bible of investing, and it’s not hard to see why. Thousands of investors around the world swear by it, and for good reason. It teaches long-term strategies that can help protect investors from making costly mistakes.
FAQs
Is The Intelligent Investor a good book for beginners?
If you’re a beginner in investing and want to understand how the market works, then The Intelligent Investor is a great book for you. It has been updated and revised since its first publication in 1949 and is considered a must-have for new investors.
However, keep in mind that the book is intended for long-term investors and may not be for you if you’re looking for something flashy or trendy. Instead, it offers practical advice based on common sense rather than strategies for day trading or frequent trading.
Is The Intelligent Investor still relevant today?
Yes, even though the book is over 70 years old, it remains relevant. Graham’s philosophy of buying with a margin of safety is still applicable. After doing thorough research and determining a company’s worth, investors should buy it at a price that provides a cushion if prices fall. Graham also emphasized the importance of being prepared for volatility.
Despite changes in the economy over time, Graham’s investment strategies are still valuable today. According to Kenneth D. Roose of Oberlin College, “The Intelligent Investor” remains the most accessible and comprehensive discussion of the challenges that the average investor faces.
Should you read The Intelligent Investor?
If you want to build up your investment portfolio in your spare time this lockdown, this book is a must-read. It can help you reach your financial goals by showing you the path of an intelligent investor.
The author of the book believes that a smart investor can be an enterprising or a defensive investor. The former aims to beat the market by finding undervalued stocks, while the latter focuses on diversification to match the market. This book is a must-read for anyone who wants to learn more about investing.
To beat the market, investors need to be better informed than their competitors. Without the necessary skills and knowledge, investors attempting to beat the market average are likely to perform poorly. Therefore, settling for the stock market’s average return of around 10% might be a better option for most people.
Benjamin Graham, a British-born American, was a professor, investor, and economist who wrote two foundational texts for neoclassical investing, “Security Analysis” (1934) and “The Intelligent Investor” (1949). He is widely known for developing the investment philosophy of value investing, which emphasizes minimal debt, buy-and-hold investing, fundamental analysis, cost-conscious investing, activist investing, and a contrarian mindset.
At the age of 20, Graham began his career on Wall Street after graduating from Columbia University. He eventually founded the Graham-Newman Partnership and became a teacher at his alma mater, where he was hired by his former student Warren Buffett. Later on, Graham taught at the UCLA Anderson School of Management at the University of California, Los Angeles.
Graham’s contributions to the development of value investing have been significant within mutual funds, hedge funds, and diversified holding companies. His teachings have influenced many successful investors, including Irving Kahn and Warren Buffett, who described Graham as the second most influential person in his life after his own father. Sir John Templeton was also one of Graham’s famous pupils.
Buy The Book: The Intelligent Investor
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