'The Intelligent Investor' by Benjamin Graham is a classic book on the principles of value investing. Praised by Warren Buffet, it's a book that every investor should try to read at least once in their lifetime. Warren Buffet first read 'The Intelligent Investor' when he was 19, and later when he went to Columbia Business School, the author of the book Benjamin Graham actually became Warren Buffet’s professor. Warren Buffet has referred to the book as by far the best book on investing ever written and they definitely slap that across all covers. The book provides a basic understanding of how the stock market and investment works.
Graham commences the book by talking about the difference between investment and speculation. He comments on various rules when we are actually investing and not speculating. The first of which is the fundamental analysis through which safe and steady returns can be achieved, protecting against loss.
The next takeaway is we need to determine what type of investor we are. The book categorizes the types of investors in two ways - the active or enterprising investor and the passive or defensive investor. An active or enterprising investor is going to be an investor that is always researching and analyzing the fundamentals of different stocks or bonds. This type of investment is going to take more time on our part. A passive or defensive investor usually has a long term portfolio that they kind of put on autopilot. A lot of the time they may include different types of funds in the portfolio since that makes it a little bit easier to manage and they don't have to research and analyze those individual stocks.
Investing passively takes less time, but the book does point out that no matter which way we go with, we have to take emotions out of our investing decisions. Knowing that stock prices will fluctuate, even if we are a passive investor, we will still need to be able to get through all of the highs and lows of the market.
The third take away from the book is to invest in order to protect yourself from inflation. Inflation happens when the dollar loses the value of purchasing power. To put this into perspective, if we had $1 in the year 1900, we could have bought 70 lbs of potatoes, but today if we have $1, we would be lucky to find a pack of gum or a piece of candy that costs less than $1. When talking about inflation, Benjamin Graham also talks about this psychological effect that he calls the money illusion. So he gives an example where the inflation rate is going up - meaning the dollar is losing value, but we get a raise; however that raise doesn't actually make up for the rate of inflation, so in the end we are losing money. But we kind of overlook that because of the feelgood effect of getting that initial raise.
Graham basically points out that if we have two dollars, and if we put one in a bank or under the mattress, and if we invested the other, the dollar that we had invested has a lot more potential to grow over time than the dollar that we tucked under our mattress, which would eventually lose its value over time.
One of the best known bits from 'The Intelligent Investor' is the imaginary character, Mr. Market
The fourth lesson from the book is the importance of fundamental analysis. According to the author, our investments should be based on numbers and performance, and not our emotions or hype. While selecting stocks, Graham looked at EPS (earnings per share), P/E ratio (price to earnings ratio), and long term growth rate. Throughout the book, Benjamin Graham reiterates this idea of the importance of fundamental analysis and he also talks about investing in stocks that are performing well versus the stocks that we know, of our likings or of the company towards which our feelings are attached; because our feelings towards the company do not necessarily override how the company is actually performing, or the familiarity with the company doesn’t make any sense to invest in if the numbers didn’t line up.
The fifth take away from the book is the whole idea of value investing. The whole goal of using fundamental analysis is to find the intrinsic value of a company, meaning how much a company is actually worth. Once we find the intrinsic value of a company, the whole idea with value investing is to find companies that are trading under that intrinsic value. Benjamin Graham’s investing strategy was to always buy stocks that were undervalued, and keeping a diversified portfolio and The Intelligent Investor definitely reinforces this. The style of diversification in the portfolio can be of personal preference, and Graham emphasizes to not put all the eggs in one basket.
One of the best known bits from 'The Intelligent Investor' is the imaginary character, Mr. Market. Mr. Market shows up every day with price quotes for what he will buy or sell things for, but this is all dependent on Mr. Market’s mood, which swings from extreme optimism to extreme pessimism. Benjamin Graham created Mr. Market as an allegory for the emotional swings that the stock market takes and the groupthink that happens in the stock market and with investors. With this character, he points out that optimism towards the market makes prices go higher and pessimism makes prices go lower. He advises against reacting immediately to swings in the market or swings in Mr. Market’s mood.
The next lesson is that price does matter and not to over pay. Benjamin Graham broaches that even if a stock is a good stock it's still possible to over pay for it, and if you are buying a good stock at a bad price, then that isn’t a good investment. And of course an investor is never going to be 100% right on the price that they think a stock should be and this is why Benjamin Graham always encourages people to go back to their fundamental analysis to really get the best idea of what a stock is worth.
One of the biggest concepts that is repeated throughout the book is to have a margin of safety. A margin of safety is partially based on the intrinsic value of the stock and the price that we ideally buy it undervalued for. Buying a stock at an undervalued price does give us a little bit of buffer room if that price moves. But another part of that margin of safety does go back to diversification. By having a mix of where we are putting your money, we are making sure that everything in our portfolio isn’t necessarily dependent on one area doing well.