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02.0004 The Intelligent Investors
The Intelligent Investor (Revised Edition)
2003 Benjamin Graham / Jason Zweig
Bibliophilist Publisher Books
| Chapter | Value Investing |
|---|---|
| Preface to 4th Edition, by Warren Buffett | if you pay special attention to the invaluable advice in Chapter 8 and 20 – you will not get a poor result from your investment. |
| A note About Benjamin Graham, by Jason Zweig | Before Graham, money manager behaved like a medieval guild, guided largely by superstition, guesswork, and arcane rituals. The Intelligent Investor is the 1st book ever to describe, for individual investors, the emotional framework and analytical tools that are essential to financial success. It remains the single best book on investing ever written for the general public. |
| Graham core principles: 1. A stock is not just a ticker symbol or an electronic blip; it is an ownership interest in an actual business, with an underlying value that does not depend on its share price. 2. The market is a pendulum that forever swing between unstainable optimism (which makes stocks too expensive) and unjustified pessimism (which makes them too cheap). The intelligent investor is a realist who sells to optimists and buys from pessimists. 3. The future value of every investment is a function of its present price. The higher the price you pay, the lower your return will be. 4. No matter how careful you are, the one risk no investor can ever eliminate is the risk of being wrong. Only be insisting on what Graham called the “margin of safety” – never overpaying, no matter how exciting an investment seems to be – can you minimize your odds or error. 5. The secret to your financial success is inside yourself. | |
| The goal of the revised edition of The Intelligent Investor is to apply Graham’s ideas to today’s financial market while leaving his text entirely intact (with the exception of footnotes for clarification) | |
| Introduction | This is not a “How to make a million” book. This book is directed to investors not speculators or those trade in the market. |
| Commentary On The Introduction | This book will not tell you how to beat the market, No truthful book can. Instead, this book will teach you 3 powerful lessons: 1. How you can minimize the odds of suffering irreversible losses. 2. How you can maximize the chances of achieving sustainable gains. 3. How you can control the self-defeating behavior that keeps most investors from reaching their full potential. |
| 1. Investment versus Speculation Results to Be Expected by the Intelligent Investors | Defensive investor: The simplest choice would be to maintain 50:50 proportion. Reduce the common stock component to 25% “if he felt the market was dangerously high,” and conversely to advance it toward the maximum of 75% “if he felt that a decline in stock prices was making them increasingly attractive.” |
| Commentary on 1. | – |
| 2. The Investor and Inflation | – |
| Commentary on 2. | – |
| 3. A Century of Stock Market History | – |
| Commentary on 3. | – |
| 4. General Portfolio Policy: The Defensive Investor | The rate of return sought should be dependent, rather, on the amount of intelligent effort the investor is willing and able to bring to bear on his task. |
| Commentary on 4. | Graham: There are 2 ways to be an intelligent investors: 1. by continually researching, selecting, and monitoring a dynamic mix of stocks, bonds, or mutual funds. (Active or enterprising – Physically and intellectually taxing). 2. or by creating a permanent portfolio that runs on autopilot and requires no further effort (but generates very little excitement). (Passive or defensive – emotionally demanding). |
| Charles Ellis: If you have time to spare, are highly competitive, think like a sports fan, and relish a complicated intellectual challenge, then the active approach is up you alley. If you always feel rushed, crave simplicity, and don’t relish thinking about money, then the passive approach is for you. | |
| Rebalancing Portfolio every 6 months, no more and no less. The beauty of this periodic rebalancing is that it forces you to base your investing decisions on a simple, objective standard. | |
| 5. The Defensive Investor and Common Stocks | 4 Rules for defensive investor: 1. Diversification: 10 issues < x < 30 issues 2. Each company selected should be large, prominent, and conservatively financed. 3. Each company should have a long record of continuous dividend payments. 4. Impose some limit on the price he will pay, PE <25 times (7 years average earnings), PE <20 (over last twelve months). This will eliminate growth stocks. |
| A true Growth stock should be expected at least to double its per-share earnings in 10 years (with compounded annual rate of over 7%). | |
| Commentary on 5. | – |
| 6. Portfolio Policy for the Enterprising Investor: Negative Approach | – |
| Commentary on 6. | – |
| 7. Portfolio Policy for the Enterprising Investor: Positive Side | The activities specially characteristic of the enterprising investor in the common-stock field may be classified under 4 heads: 1. Buying in low markets and selling in high markets. 2. Buying carefully chosen “growth stocks” 3. Buying bargain issues of various types 4. Buying into “special situations” |
| Commentary on 7. | In an ideal world, the intelligent investor would hold stocks only when they are cheap and sell them when they become overpriced, then duck into the bunker of bonds and cash until stocks again become cheap enough to buy. |
| 8. The Investor and Market Fluctuations | Since common stocks, even of investment grade, are subject to recurrent and wide fluctuations in their prices, the intelligent investor should be interested in the possibilities of profiting from these pendulum swings. There are 2 possible ways by which he may try to do this: the way of timing and the way of pricing. 1. By timing, we mean the endeavor to anticipate the action of the stock market – to buy or hold when the future course is deemed to be upward, to sell or refrain from buying when the course is downward. 2. By pricing we mean the endeavor to buy stocks when they are quoted below their fair value and to sell them when they rise above such value. |
| Commentary on 8. | Mr. Market: When stocks are going up, he happily pays more than their objective value; and, when they are going down, he is desperate to dump them for less than their true worth. |
| 9. Investing in Investment Fund | – |
| Commentary on 9. | – |
| 10. The Investor and His Advisers | – |
| Commentary on 10. | – |
| 11. Analysis for the Lay Investor: General Approach | Financial analysis is now a well-established and flourishing profession, or semi-profession. Financial analysists have textbooks, a code of ethics, and a quarterly journal. They also have their share of unresolved problems. |
| Factors Affecting the Capitalization Rate: 1. General Long-Term Prospects: price/earnings ratios. 2. Management: An outstandingly successful company has unusually good management. 3. Financial Strength and Capital Structure: Stock of a company with a lot of surplus cash and nothing ahead of the common is clearly a better purchase (as the same price) than another one with the same per share earnings but large bank loans and senior securities. Such factors are properly and carefully taken into account by security analysists. A modest amount of bonds or preferred stock, however, is not necessarily a disadvantage to the common, nor is the moderate use of seasonal bank credit. 4. Dividend Record: uninterrupted record of dividend payments going back over many years. 5. Current Dividend Rate: 12x earnings or x18 dividends | |
| Valuation of growth stock (over the next 7 to 10 years): Value = Current (Normal) Earnings x [8.5 x (1+ 2 x annual growth rate)] | |
| Commentary on 11. | Graham’s 5 decisive elements – Putting a Price on the Future 1. the company’s “general long-term prospect” 2. the quality of the management 3. the financial strength and capital structure 4. its dividend record 5. and its current dividend rate |
| 12. Things to Consider About Per-Share Earnings | 1. Don’t take a single year’s earnings seriously. 2. If you do pay attention to short-term earnings, look out for booby traps in the per-share figures (i.e. special charges or credits – closing down losses and future losses might not be reflected, dilution – large bond issue convertible into common stock will reduce the earnings). |
| To use Average Earnings over a long period in the past (7 to 10 years) – solve the problem of special charges and credits. | |
| Commentary on 12. | A few pointers will help you avoid buying a stock that turns out to be an accounting time bombs: 1. Read backwards: Anything that the company doesn’t want you to find out is buried in the back – which is precisely why you should look there first. 2. Read the notes: Never buy a stock without reading the footnotes to the financial statements in the annual report. Usually labeled “summary of significant accounting policies”. 3. Read more: If you are an enterprising investor willing to put plenty of time and energy into your portfolio, then you owe it to yourself to learn more about financial reporting. |
| 13. A Comparison of Four Listed Companies | – |
| Commentary on 13. | – |
| 14. Stock Selection for the Defensive Investor | Graham’s criteria for Stock Selection: 1. Adequate size of the Enterprise. 2. A sufficiently Strong Financial Condition. 3. Earnings Stability. 4. Dividend Record. 5. Earnings Growth. 6. Moderate Price/Earnings Ratio, 7. Moderate Ratio of Price to Assets |
| Qualitative Approach: It emphasizes prospects , management, and other non-measurable, albeit highly important, factors that go under the heading of quality. Quantitative Approach (Statistical Approach): It emphasizes the measurable relationships between selling price and earnings, assets, dividends, and so forth. Incidentally, the quantitative method is really an extension – into the field of common stock – of the viewpoint that security analysists has found to be sound in the selection of bonds and preferred stocks for investment. | |
| Commentary on 14. | Defensive investor: Keep 90% of your stock money in an index fund, leaving 10% with which to try picking your own stocks. Due Diligence: 1. Do you homework: Access to a company’s annual and quarterly reports, along with the proxy statement that discloses the managers’ compensation, ownership, and potential conflict of interest. 2. Check out the neighborhood: Check what percentage of a company’s shares are owned by institutions. Anything over 60% suggests that a stock is scarcely undiscovered and probably “over-owned”. If there are money management firms that invest in a style similar to your own, that’s a good sign. |
| 15. Stock Selection for the Enterprising Investor | – |
| Commentary on 15. | – Practice, practice, practice – Looking under the right rocks – Who’s the Boss? Are the company’s financial statements easily understandable, or are they full of obfuscation? Are “nonrecurring” or “extraordinary” or “unusual” charges just that, or do they have a nasty habit of recurring? – Keeping your eye on the road |
| Successful Investing professionals have 2 things in common: 1. They are discipline and consistent. 2. They think a great deal about what they do and how to do it, but they pay very little attention to what the market is doing. | |
| 16. Convertibles Issues and Warrants | – |
| Commentary on 16. | – |
| 17. Four Extremely Instructive Case Histories | – |
| Commentary on 17. | – |
| 18. A Comparison of Eight Pairs of Companies | – |
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