Book Summary
The Intelligent Investor by Benjamin Graham, also referred to 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. Interesting, Benjamin Graham was also the mentor and professor of the well-known billionaire investor, Warren Buffett.
The revised 2006 edition of the book “The Intelligent Investor” has added commentary by Jason Zweig, a famous wall-street investor, and editor. These added commentaries are used to relate Graham’s idea to the present world. Further, the commentaries highlight those sections of the book concepts that have time-tested techniques. This edition has over 600 pages (although originally around 450-500 pages but the added commentaries in the revised edition increased the size of the book). Overall, it’s a classic book with multiple value investing concepts along with quick notes.
In this article, we’ll cover The Intelligent Investor the best concepts covered by Benjamin Graham.
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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.
As defined by Graham, an “intelligent investor” approaches investing the same way he/she would look at buying into a business or partnership. Until you have a good feel for a firm’s competitive environment, its challenges and opportunities, and its strengths and weaknesses, you don’t really know enough to be investing in that business. And since you won’t be in the position to operate the business yourself, you need to know the company is headed by a management team that will run the business competently, efficiently and honestly.
In simpler terms, before investing in a business, you should make sure you understand and believe in the “what” and “who.” The same should be true of investors, hence Graham’s key principles #1 and #2.
Principle #3 is to invest in companies you believe will generate profits through their ongoing business operations. In contrast to speculators — who acquire shares at what they consider to be a favorable price and then sell off as soon as possible for a profit — investors acquire and hold securities that they believe will grow in value over time as the businesses succeed. That means intelligent investors look to dividends and business growth as the source of their gains. This growth may or may not result in higher stock prices over time.
The fourth principle, which is heavily covered in Graham’s book, is that 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.
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What Does The Intelligent Investor Teach You?
Graham, investors should analyze a company’s financial reports and its operations but ignore the market noise. The whims of investors—their greed and fear—are what creates this noise and fuels daily market sentiments.
Most importantly, investors should look for price-value discrepancies—when the market price of a stock is less than its intrinsic value. When these opportunities are identified, investors should make a purchase. Once the market price and the intrinsic value are aligned, investors should sell.
The Intelligent Investor also advises investors to hold a portfolio of 50% stocks and 50% bonds or cash, to be the pitfalls of day trading, to take advantage of market fluctuations and market volatility, to avoid buying stocks simply when they are fashionable, and to look out for ways that companies may be manipulating their accounting methods in order to inflate their EPS value.
Key Takeaways
- Economist Benjamin Graham, best known for his book The Intelligent Investor, is lauded as a top guru of finance and investment.
- Known as the father of value investing, The Intelligent Investor: The Definitive Book on Value Investing is considered one of the most important books on the topic.
- Graham’s method advises investors to concentrate on the real-life performance of their companies and the dividends they receive, rather than paying attention to the changing sentiments of the market.
- Graham also advocated for an investing approach that provides a margin of safety—or room for human error—for the investor.
- Most importantly, investors should look for price-value discrepancies—when the market price of a stock is less than its intrinsic value.
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