The Intelligent Investor Summary – Benjamin Graham

This summary presents the 5 greatest takeaways from Benjamin Graham’s classic, The Intelligent Investor. This is value investing at its greatest.

Meet Mr. Market

  • Mr. Market opinion of the price of what a company is worth is gibberish
  • Stock is not a company with a price tag, but an ownership interest in a business
  • Therefore, value does not equal price
  • Mr. Market easily becomes overly optimistic or too pessimistic
  • Advise only investing in stock that you can hold in the long term without worrying about the volatility in the price the market presents you with
  • Happy to buy when there are bargains, sell when price is way overvalued

How to Invest as a Defensive Investor

  • 2 types of investors: Defensive (passive) and Enterprising (active)
  • Most people are better suited defensive because of the time commitments required to be actively trading
  • Defensive traders should have a mix of stocks and bonds. Allocation between these 2 assets depends on risk profile and age.
  • Invest regularly so that it averages your cost
  • Focus on diversification (10-30 companies is enough and exposed in multiple industries)
  • Large companies (Sales >$700M)
  • Conservatively Financed (Current Ratio of 200%)
  • Dividends should be paid with no missed dividends in 20years
  • No earning deficient in 10 years
  • Earning growths in the last 10 years
  • Cheap assets (Market Cap < (Asset – Liabilities) X 1.5
  • Cheap earnings (P/E < 15)

How to Invest as an Enterprising Investor

  • Requires patience, discipline, eagerness to learn and lots of time
  • Profits are finite so prices must also be finite
  • Avoid growth stocks since future earnings are less reliable than current valuations
  • If Price < Net Working Capital, you’re paying nothing for buildings, machines and goodwill
  • Net working capital is calculated by Current Assets – Liabilities

Insist on a Margin of Safety

  • Margin of safety minimizes the risk of being wrong
  • Value = Current Normal Earnings x (8.5 + 2X Expected Annual Growth Rate)

Risk and Reward are Not Always Correlated

  • Rate of return which an investor can expect must be proportional to the degree of risk that he’s willing to invest
  • Risk is measured as the volatility of the returns on the investment
  • Graham doesn’t agree with the top statement and argues that price and value of assets are disconnected
  • Therefore, the return of an investor can expect is a function of how much time and effort he brings in his pursuit of finding bargain assets
  • The minimum returns goes to the defensive investor and maximum goes to the active investor