The Intelligent Investor by Benjamin Graham, also referred as the bible of the stock market, was originally written in 1949 by Benjamin Graham, a legendary investor and also known as the father of value investing.
Ben Graham was also the mentor and professor of well-known billionaire investor, Warren Buffett.
Why You Should Read This Book:
Warren Buffett (worth over 88 billion dollars) says- ‘This book is by far the best book on investing ever written’. Needless to mention that this book is Warren Buffett’s all-time favorite.
Also read this article :Warren Buffett: 8 Important Lessons About Investing
He also admitted that the book helped him in developing a conceptual framework for his future investments and capital allocations.
The Intelligent investor by Benjamin Graham book has a number of great concepts and a must read for all the stock market investors. The first few chapters of the book are dedicated to the general concepts of the market.
It’s a wide-ranging book, covering such topics as portfolio policy, asset allocation, inflation, diversification, market fluctuation, dividends, and of course Graham’s famous margin of safety.
Although there are lots of concepts covered in the book, however, the key five points in the book the intelligent investor by Benjamin Graham can be summarized here from the book:
1. Investing vs. Speculating
By Graham’s definition, speculators always believe the odds are in their favor even when they do something outside normal investment practices.
Investors, by contrast, do everything conceivable to increase their chances of success by calculating their margin of safety “by figures, by reasoning and by reference to a body of factual data.”
Their goal is to preserve their investment capital and generate some income from their holdings rather than focusing on share price appreciation for profits.
Let’s understand this concept with the help of an example. Imagine you are planning to buy a textile company. Now, to buy this company you can use two approaches.
First, you visited the company, calculated the asset value of the printing shops, checked the total income and cash flow of the company, verified the effectiveness of the managers, established the total assets & liabilities and then finally come up with a final price for the printing company.
The second approach is that you met with the owner, and decided to pay the price whatever he is asking for.
From the example, we can establish the difference between an investor and a speculator. The Investor follows the first approach while the speculator follows the other. Here is the key difference between these two:
|1. Goes through thorough analysis||Does not meet these standards.|
|2. Considers safety of principle|
|3. Gets adequate returns|
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2. Fundamental analysis
Fundamental analysis is vital and is the responsibility of the investor. To succeed as an intelligent investor, you must learn how to value companies on the basis of sound financial analysis.
It is only when you have systematically and thoroughly gone into the financials in detail that you can assess the business, understand the potential and compare the merits of investing in one company’s stock rather than another.
3. Value investing made simple
The lessons embedded in The Intelligent Investor are an absolute must for anyone with money in the stock market. They can be boiled down to these four simple points:
- Estimate a fair value for a company.
- Buy only if the price is safely below that value.
- Look for a strong dividend policy as a signal of financial strength.
- Diversify appropriately to spread the risks.
If you invest based on those four key principles, the odds are quite high that you’ll do fine. All in all, The Intelligent Investor is a superb reference book, and one with which every investor should be acquainted.
Also read this article: How To Invest In Share Market (And Earn Money)
4. Margin of Safety
This is another one of the pronounced concept introduced by Benjamin Franklin. He says that one should always invest with a margin of safety. Let us understand this by an example.
Imagine you are in a construction business. You took an order to make a bridge, which can hold up to 8 tons. Now, as a constructor, you must consider making the bridge with additional 2 tons of weight holding capacity so that it will not collapse in some extra-ordinary situation. So, you will make the bridge with a total of 10 tons with holding capacity.
Here, your 2 tons additional is the margin of safety.
In the same way, while investing also we consider this margin of safety. It is the central concept of value investing. If you think a stock is valued at Rs 1000 per share (fairly), there is no harm in giving yourself some benefit of the doubt about if you are wrong about this calculation and buy at Rs 700, Rs 800 or Rs 900 instead.
Here, the difference in the amount is your margin of safety.
5. Mr. Market
Graham’s last principle is to have confidence in your investing decisions and beware of “Mr. Market,” a now-famous parable Graham invented to illustrate the dangers of getting caught up in market sentiment that causes share prices to rise and fall on investor emotions driven by panic, euphoria and apathy, rather than fundamental analysis.
Daily fluctuating share prices can be largely ignored because, in reality, the underlying value of a company doesn’t vary dramatically from day to day. Base your buy-and-sell decisions on your own analysis of the company’s business prospects rather than the short-term movements in the share price.
Six Key Principles of Intelligent Investing:
Graham details six key principles of “intelligent investing”:
- Know the business you’re investing in.
- Know who runs the business.
- Invest for profits over time, not for quick buy-and-sell transaction profits.
- Choose investments for their fundamental value, not their popularity.
- Always invest with a margin of safety.
- Have confidence in your own analysis and observations.
Quotes From The Intelligent Investor
While preparing for The Intelligent Investor Book Review I underlined the great quotes from the book. They provide an interesting and valuable perspective of, what may be, the greatest investing book ever written. I have included the page number for each quote for easy reference.
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Timeless Investing Quotes from The Intelligent Investor:
- The intelligent investor is a realist who sells to optimists and buys from pessimists. (pg. xiii)
- No statement is more true and better applicable to Wall Street than the famous warning of Santayana:“Those who do not remember the past are condemned to repeat it”. (pg. 1)
- The investor’s chief problem – and even his worst enemy – is likely to be himself. (pg. 8)
- For 99 issues out of 100 we could say that at some price they are cheap enough to buy and at some price they would be so dear that they would be sold. (pg. 8)
- The distinction between investment and speculation in common stocks has always been a useful one and its disappearance is cause for concern. (pg. 20)
- Never mingle your speculative and investment operations in the same account nor in any part of your thinking. (pg. 22)
- An investor calculates what a stock is worth, based on the value of its businesses. (pg. 36)
- A speculator gambles that a stock will go up in price because somebody else will pay even more for it. (pg. 36)
- People who invest make money for themselves; people who speculate make money for their brokers.(pg. 36)
- Confusing speculation with investment is always a mistake. (pg. 36)
- The value of any investment is, and always must be, a function of the price you pay for it. (pg. 83)
- There is no reason to feel any shame in hiring someone to pick stocks or mutual funds for you. But there’s one responsibility that you must never delegate. You, and no one but you, must investigate whether an adviser is trustworthy and charges reasonable fees. (pg. 129)
- Thousands of people have tried, and the evidence is clear: The more you trade, the less you keep. (pg. 149)
- 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. (pg. 179)
- A great company is not a great investment if you pay too much for the stock. (pg. 181)
- The intelligent investor gets interested in big growth stocks not when they are at their most popular – but when something goes wrong. (pg. 183)
- It should be remembered that a decline of 50% fully offsets a preceding advance of 100%. (pg. 192)
- Even the intelligent investor is likely to need considerable will power to keep from following the crowd. (pg. 197)
- Price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. (pg. 205)
- Always remember that market quotations are there for convenience, either to be taken advantage of or to be ignored. (pg. 206)
- Never buy a stock because it has gone up or sell one because it has gone down. (pg. 206)
- The intelligent investor shouldn’t ignore Mr. Market entirely. Instead, you should do business with him- but only to the extent that it serves your interests. (pg. 215)
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- Investing isn’t about beating others at their game. It’s about controlling yourself at your own game. (pg. 219)
- If fees consume more than 1% of your assets annually, you should probably shop for another adviser. (pg. 277)
- High valuations entail high risks. (pg. 335)
- A defensive investor can always prosper by looking patiently and calmly through the wreckage of a bear market. (pg. 371)
- It’s nonsensical to derive a price/earnings ratio by dividing the known current price by unknown future earnings. (pg. 374)
- Although there are good and bad companies, there is no such thing as a good stock; there are only good stock prices, which come and go. (pg. 473)
- In the short run the market is a voting machine, but in the long run it is a weighing machine. (pg. 477)
- The intelligent investor should recognize that market panics can create great prices for good companies and good prices for great companies. (pg. 483)
- Investment is most intelligent when it is most businesslike. (pg. 523)
- Losing some money is an inevitable part of investing, and there’s nothing you can do to prevent it. But to be an intelligent investor, you must take responsibility for ensuring that you never lose most or all of your money. (pg. 526)
- Successful investing is about managing risk, not avoiding it. (pg. 535)
- At heart, “uncertainty” and “investing” are synonyms. (pg. 535)
I hope these great quotes make you want to read the book, if you want to read this book, you can make small investment in yourself .
The Intelligent Investor should be read by all investors as a foundation to developing a sound investing plan. Graham’s principles certainly seem to have stood the test of the last 70 years, as well as the 50 years preceding the publication of his book.
I think one of the biggest contributions of Graham’s work is his clear distinction between a speculator and an investor. This should cause many to realize they’re really speculators not investors.
Important takeaways: You have to make your own investment decisions based on doing the analysis — nobody else can do it for you, not even those professionals who offer their recommendations to you. When you do turn to professional advisors, you should be content with earning the market’s return, not more.