I recently finished reading The Intelligent Investor – The Definitive Book on Value Investing by Benjamin Graham. This is a book that has been on my reading list for a while – as The reference in the investment field (from a fundamental analysis perspective). As Benjamin puts it in the introduction: “the purpose of this book is to supply, in a form suitable for the laymen, guidance in the adoption and execution of an investment policy.”
The author makes it very clear from the beginning of the book (and throughout it) that his advice is addressed to investors and not speculators (see excerpts below). Within the investor class – he further makes a distinction between the “defensive” and “aggressive” investor as it relates to the time and energy intended to be spent on research/analysis and in conjunction the expected associated returns. Regardless of which class the investor belongs to, the main premise of the book revolves around value investing – buying securities when they are undervalued based on their fundamentals. Benjamin goes on to discuss a breadth of topics in the area of investing including inflation, market fluctuation, portfolio management, stock selection, convertible issues, bonds etc.
Last but not least, the commentary by Jason Zweig, adds a more modern context and further explains the concepts presented by Graham. By reading both texts, the ideas and concepts are in definite reach of any reader.
A must read for any investor, whether a beginner or pro. As an investor myself, I have found (as I am sure others have as well) that the perspective Benjamin brings is both timeless and very applicable.
Below are excerpts summarizing some of the key investing principles outlined in the book:
1) “1 – Obvious prospects for physical growth in a business do not translate into obvious profits for investors. 2 – The experts do not have dependable ways of selecting and concentrating on the most promising companies in the most promising industries.”
2) “Note that investing, according to Graham, consists equally of three elements: a) you must thoroughly analyze a company, and the soundness of the underlying business, before you buy its stock; b) you must deliberately protect yourself against serious losses; c) you must aspire to “adequate”, not extraordinary, performance.
3) “The more enthusiastic investors become about the stock market in the log run, the more certain they are to be proved wrong in the short run.”
4) “The only thing you can be confident of while forecasting future stock returns is that you will probably turn out to be wrong. The only indisputable truth that you will probably turn out to be wrong…And the corollary to that law of financial history is that the markets will most brutally surprise the very people who are most certain that their views about the future are right. Staying humble about your forecasting powers, as Graham did, will keep you from risking too much on a view of the future that may well turn out to be wrong.”
5) “To obtain better than average investment results over a long pull requires a policy of selection or operation possessing a twofold merit: (1) It must meet objective or rational tests of underlying soundness and (2) it must be different from the policy followed by most investors or speculators.”
6) “Investment policy, as it has been developed here, depends in the first place on a choice by the investor of either the defensive (passive) or aggressive (enterprising) role. the aggressive investor must have a considerable knowledge of security values – enough, in fact, to warrant viewing his security operations as equivalent to a business enterprise. There is no room in this philosophy for a middle ground, or a series of gradations, between the passive and aggressive status. Many, perhaps most, investors seek to place themselves in such an intermediate category; in our opinion that is a compromise that is more likely to produce disappointment than achievement.”
7) “A great company is not a great investment if you pay too much for the stock.”
8) “Those formulas (forecasting and trading) that gain adherents and importance do so because they have worked well over a period, or sometimes merely because they have been plausibly adapted to the statistical record of the past. But as their acceptance increases, their reliability tends to diminish. This happens for two reasons: First, the passage of time brings new conditions which the old formula no longer fits. Second, in stock-market affairs the popularity of a trading theory has itself an influence on the market’s behavior which detracts in the long run from its profit-making possibilities.”
9) “Basically, 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. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.”
10) “The most realistic distinction between the investor and the speculator is found in their attitude toward stock-market movements. The speculator’s primary interest lies in anticipating and profiting from market fluctuations. The investor’s primary interest lies in acquiring and holding suitable securities at suitable prices.
11) “Which factors determine how much you should be willing to pay for a stock?…Graham feels that five elements are decisive. He summarizes them as: a) the company’s “general long-term prospects” b) the quality of its management c) its financial strength and capital structure d) its dividend record e) and its current dividend rate. ”
12) “Nevertheless, the future itself can be approached in two different ways, which may be called the way of prediction (or projection) and the way of protection. Those who emphasize prediction will endeavor to anticipate fairly accurately just what the company will accomplish in future years…By contrast, those who emphasize protection are always especially concerned with the price of the issue at the time of study. Their main effort is to assure themselves of a substantial margin of indicated present value above the market price 0 which margin could absorb unfavorable developments in the future.”
13) “No matter which techniques they use in picking stocks, successful investing professionals have two things in common: First, they are disciplined and consistent, refusing to change their approach even when its unfashionable. Second, they think a great deal about that they do and how to do it, but they pay very little attention to what the market is doing.”
14) “Our preference for the analyst’s work would be rather that he should seek the exceptional or minority cases in which he can form a reasonably confident judgement that the price is well below value. He should be able to do this work with sufficient expertness to produce satisfactory average results over the years.”
15) “In the short run the market is a voting machine, but in the long run it is a weighing machine.”
16) “To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.”
17) “…the intelligent investor must focus not just on getting the analysis right. You must also ensure against loss if your analysis turns out to be wrong – as even the best analyses will be at least some of the time.”