The Intelligent Investor is the famous book written by Warren Buffet’s mentor, Benjamin Graham, who is regarded as the father of value investing. Buffet learnt a lot of his skills from Graham when the latter was his professor. Other investors can get the benefit of Graham’s wisdom by reading this enlightening book.
The Intelligent Investor is one of the must read books for both average investors, looking to improve their personal finance, and Wall St. Brokers. It’s regarded by many as being the best book about investing ever written. 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.
About Benjamin Graham
Before I go on to talk about the book itself, I thought it might be useful to give a brief introduction to the man behind it. Benjamin Graham is widely regarded as being one of the finest investment advisers of the 20th century. He has advised and inspired investors across the globe with his philosophy of “value investing”. It’s a long-term approach that helps to guard against substantial risk and error.
Overview of the intelligent investor
This is a book which covers many different topics including:
- Managing a portfolio.
- Allocation of assets.
- How and why to diversify.
- How to deal with market fluctuations.
- The margin of safety.
If you spend time reading this book you will notice that it’s not exactly light reading. There is a lot of data to deal with and numbers are in evidence throughout. However, you should not let this put you off because this book is a very worthwhile read.
You may be wondering how a book that was written in 1949 can still be relevant today. The fact is that Graham’s book still has great relevance in the world of investing. It’s also worth noting that the book is now in its fourth edition. This latest version includes a 2002 commentary by Jason Zweig, who is a finance columnist at the Wall Street journal and is a stock market expert. I’ve covered the basics of what you can expect from the book, now I’m going to look at it in more detail.
The basics of Intelligent Investing
In the book, Graham talks about the key principles of intelligent investing. These principles are:
- You should always know about the company you are investing in.
- Knowledge of the people running the company you are investing in is important.
- Investments should be made with profits over time in mind and not quick wins.
- Investment choices should be made based on value and not popularity.
- There should always be a margin of safety in place when you invest.
- Having confidence in your own security analysis and observations is important. You can speak to a financial advisor but you should always trust your own knowledge.
Graham’s basic ethos is that investing should not be about trying to make quick wins. It should be about searching for value opportunities based on research and knowledge. Following the Graham philosophy you should always know as much as possible about the company you are investing in. This gives you the best chance of being successful.
Graham talks about the difference between speculators and investors. He mentions that speculators are people who always believe that the odds will favour them, no matter what actions they take. On the other hand, Graham states that investors are people who give themselves the best chance of being successful by understanding their investment and calculating a margin of safety.
With this in mind, 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 choosing to invest in companies like these, 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. You should never choose whether to invest based on one event. 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.
The dangers of Mr Market
Closely related to the discussion regarding event based investing is Graham’s assertion that investors should be wary of Mr Market. This means that market fluctuations should be something that is regarded as being the norm rather than a reason to panic.
Often the market swings based on sentiment rather than solid information. Graham emphasizes that investors should stick to their plan and not be tempted to follow the crowd. It’s all about trusting knowledge and research and being prepared to settle in for the long term in order to make a profit.
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 on investing 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.