The Intelligent Investor is the famous book written by Warren Buffet’s mentor, Benjamin Graham. This is one of the must read books for both average investors and Wall St. Brokers. In this Benjamin Graham’s book, he lays out his philosophy of investing and some key investing ideas that allow anyone to beat the market by following sound investing principles. He teaches you how to make a business out of investing in the stock market by giving you important advice to remember. The book primarily focuses on the analysis of three points which I will briefly describe below.
The Intelligent Investor’s author starts out by giving various examples of why there are stocks that are undervalued in the market place. This can occur for a number of reasons including one-time events, a bad quarter or just that the stock is out of favor with Wall St. These stocks present the best opportunities for purchase according to Graham; however, the financials must not be ignored in these cases. A company may be undervalued but you still need to make sure that there is no impact to the earnings and revenues. The goal is to find companies that are financially sound but out of favor and undervalued.
Graham likes to find good companies to research by looking for stocks where the price to book value is relatively low (1.4 for example). If you look hard enough, you will also find a few that are trading below 1. A close price to book ratio means that the price of the stock is essentially equal to the value of the company’s assets (cash, buildings, inventory, etc.). By targeting these companies, you are getting an investment with little downside risk but great potential for upside since the companies you will be targeting are healthy ones. Sometimes it can take some time for the investment community to recognize the diamond in the rough that you’ve found, but if you stay the course, it will eventually catch on says Graham. He gives many detailed examples to show you how the process works and how some of his trades turned out.
Event Based Investing
Another point that Graham drives home in the book is the opportunities that one-time events can play on our investing success. Sometimes there is a negative news article on a stock and this can present us with a great buying opportunity. For instance, maybe a popular CEO is retiring and the company’s stock crashes over the course of the week. The company is still healthy and now is valued very cheap based on the price to book model. This event would represent a great buying opportunity for us to get the stock at an even better value. Both Buffett and Graham have used this over and over again to make better returns in the stock market than most professional money managers.
Some people will argue that value investing is dead because the market is too efficient and technology makes information faster and decreases advantages. This is simply not true. There are still value plays out there if you look for them. Every day the market also presents us new one-time events that could make us money. I highly recommend that you read this book for yourself and apply some of its principles to your financial investments. Reading this book will completely change the way you invest and the results will speak for themselves.