The Intelligent Investor

The Intelligent Investor: A Book of Practical Counsel by Benjamin Graham is considered a classic text on the subject of investing. Originally published in 1949, The Intelligent Investor has been updated several times to remain relevant in changing market conditions. This guide refers to the First Collins Business Essentials Edition published in 2006. This edition contains a reprint of the Fourth Revised Edition published in 1973 and a new commentary after every chapter by financial journalist Jason Zweig. The Intelligent Investor seeks to provide enduring principles and strategies to navigate the stock market.

Summary

Graham states that he intends to present an investment philosophy that can be applied by both the defensive and the enterprising investor. The defensive investor is someone who does not wish to invest much time or energy in stock selection and prefers a passive investment approach. The enterprising investor, on the other hand, is willing to commit significant time and effort to analyze stocks. Graham’s main goal is to provide guidance that will help investors avoid mistakes and achieve satisfactory results in the stock market.

In Chapter 1, Graham emphasizes the importance of distinguishing between investing and speculation. Investing is a rational and disciplined approach that focuses on the long-term prospects of a company, while speculation is driven by short-term market fluctuations and the desire for quick profits. He suggests dividing one’s portfolio equally between stocks and bonds and only deviating from this balance after careful analysis.

Graham continues discussing his 50-50 portfolio policy in Chapter 4, addressing the needs of the defensive investor. He reiterates that a balanced portfolio consisting of equal parts stocks and bonds is the safest and most prudent approach for this type of investor. In Chapter 5, he delves into the stock component of the defensive investor’s portfolio. He emphasizes the need for adequate diversification in stock selection and also recommends that the defensive investor set price limits for buying stocks to avoid overpaying for them. He also introduces the technique of dollar-cost averaging, which involves buying a fixed dollar amount of a particular investment at regular intervals, regardless of its price. This technique helps investors smooth out the impact of short-term market fluctuations and take advantage of lower prices during market downturns. Aside using from dollar-cost averaging, Graham believes that risk can be reduced by ensuring an adequate margin of safety in stock purchases. This means buying stocks at prices below their true value to provide a buffer against unforeseen market fluctuations.

In Chapters 6 and 7, Graham addresses enterprising investors—individuals who are willing to commit more time to investing and who therefore expect better results. He cautions these investors that while achieving satisfactory returns is easy, achieving exceptional gains is difficult and often comes with increased risk. In Chapter 6, he advises such investors on what to avoid: preferred stocks, low-grade bonds, foreign bonds, and initial public offerings (IPOs). In Chapter 7, he focuses on opportunities for the enterprising investor to achieve better-than-average results. He suggests that this type of investor should focus on undervalued stocks or “bargain issues” (166).

In Chapter 8, Graham discusses market fluctuations. He argues that short-term market movements should be seen as noise and not as indicators of the intrinsic value of a stock. He introduces the concept of Mr. Market, a hypothetical character representing the stock market. Mr. Market is described as an emotional and unpredictable counterparty who offers to buy or sell stocks at different prices every day. The intelligent investor should view Mr. Market’s offerings with skepticism and use them as opportunities to buy stocks when prices are low and sell them when prices are high.

In Chapter 11, Graham outlines basic guidelines for analyzing securities. These guidelines include considering the overall financial health and stability of the company, analyzing the company’s past performance and future prospects, and examining the quality of management.

In Chapter 14, Graham discusses techniques for selecting stocks as part of the defensive investor’s portfolio, presenting seven ways to select value stocks from the market. These include: focusing on large and well-established companies; examining the balance of assets versus liabilities; looking at past earnings; seeking out companies with histories of uninterrupted dividend payments; evaluating earnings growth; examining price-to-earnings ratios; and looking at price-to-asset ratios.

In Chapter 15, Graham provides stock selection advice to enterprising investors. He suggests that these investors should focus on approaches that are not popular on Wall Street and seek out undervalued stocks with the potential for growth.

In Chapters 17 and 18, Graham provides several case studies of companies to show a wide variety of stock performance. He analyzes both undervalued and overvalued companies, showing that the market does not always accurately reflect the intrinsic value of a stock—though it tends to correct itself over time.

In Chapter 20, Graham reviews and synthesizes his key principles for the intelligent investor. He emphasizes the importance of achieving a margin of safety in investing. He also reiterates the need to diversify one’s portfolio, as well as the importance of being patient and disciplined in the face of market fluctuations. Overall, he promotes the idea that the intelligent investor should approach the stock market with a careful mindset, focusing on value investing principles and aiming for modest, long-term returns.