The Intelligent Investor by Benjamin Graham

The 3 Bullets

1. Early on in the book, there was a great analogy with the example of Mr. Market and the shares you owned within a private business. Many people have some great explanations of the way that the market moves and how it is influenced, this is a classic overview that provides decent depth and detail of understanding.

2. The segment that outlined the factors that influence the capitalization rate was one that I spent extensive time in. Benjamin Graham spent a great deal of focus expanding the factors. Important to me was understanding how each of these factors connect to each other and also how some of the factors carry more weight than others. Many investors focus on just one of these areas, not all five. Also, now in the 21st century, dividend records carry much less weight than they once did. There are many companies that give no dividend and some investors do not invest in dividend-paying stocks at all.

3. The third main point for me was the emphasis on a portfolio of sound stocks. Graham writes, “the investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances.” It’s the long term vision that is essential to successful investing and one of the things that has made Warren Buffett one of the most successful investors of all time. We must always buy stocks based upon their true values, not just because of the increase or decrease of the price.

Pg. 42, Imagine that in some private business you own a small share which cost you $1,000. One of your partners, named Mr. Market, is very obliging indeed. Every day he tells you what he thinks your interest is worth and furthermore offers either to buy you out or sell you an additional interest on that basis. Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them. Often, on the other hand, Mr. Market lets his enthusiasm or his fears run away with him, and the value he proposes seems to you a little short of silly.

If you are a prudent investor or a sensible businessman will you let Mr. Market’s daily communication determine your view as the value of your $1,000 interest in the enterprise? Only in case you agree with him, or in case you want to trade with him. You may be happy to sell out to him when he quotes you a ridiculously high price, and equally happy to buy from him when his price is low. But the rest of the time you will be wiser to form your own ideas of the value of your holdings, based on full reports from the company about its operations and financial position.

The true investor is in that very position when he owns a listed common stock. He can take advantage of the daily market price or leave it alone, as dictated by his own judgment and inclination. He must take cognizance of important price movements, for otherwise his judgment will have nothing to work on.

Pg. 43, The investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances. He should always remember that market quotations are there for convenience, either to be taken advantage of or to be ignored. He should never buy a stock because it has gone up or sell one because it has gone down. He would not be far wrong if this motto read simply: “Never buy a stock immediately after a substantial rise or sell one immediately after a substantial drop.”

Pg. 93, The stock of a growing company, if purchasable at a suitable price, is obviously preferable to others. No matter how enthusiastic the investor may feel about the prospects of a particular company, however, he should set a limit upon the price that he is willing to pay for such prospects.

Pg. 128, The now standard procedure for estimating future earning power starts with average past data for physical volume, prices received, and operating margin. Future sales in dollars are then projected on the basis of assumptions as to the amount of increase in volume and price level over the pre-war base.

Pg. 130, Factors affecting the capitalization rate:

1. General Long-Term Prospects. No one really knows anything about what will happen in the distant future, but analysts and investors have strong views on the subject just the same. The pharmaceutical companies are currently supposed to have much better long-term prospects than coal mines, air transports better than railroads, crude oil producers better than oil refiners, and so on. In some cases these distinctions are founded on basic operating conditions and are entirely valid if not carried too far. In other cases they stem from a superficial projection of past trends into the distant future and are just as likely to be wrong as right.

2. Management. It is fair to assume that an outstandingly successful company has unusually good management. This will have shown itself already in the past record; it will show up again in the estimates for the next five years, and once more in the previously discussed factor of long-term prospects. The tendency to count it still another time as a separate bullish consideration can easily lead to expensive overvaluations.

3. Financial Strength and Capital Structure. Stock of a company with a lot of surplus cash and nothing ahead of the common is clearly a better purchase than another one with the same per-share earnings but large bank loans and senior securities.

4. Dividend Record. One of the most persuasive tests of high quality is an uninterrupted record of dividend payments going back over many years and including the period of deep depression in 1931–33.

5. Current Dividend Rate. This, our last additional factor, is the most difficult one to deal with in satisfactory fashion. Fortunately, the majority of companies have come to follow what may be called a standard dividend policy.

Pg. 134, In studying the report for a single year it is important to separate out non-recurrent profits and losses from the operating results proper. These non-recurrent items are of many different kinds, including the following:

1. Profit or loss on sale of fixed assets.

2. Profit or loss on sale of marketable securities.

3. Discount or premium on retirement of capital obligations.

4. Proceeds of life insurance policies.

5. Tax refunds and interest thereon.

6. Gain or loss as result of litigation.

7. Extraordinary write-downs of inventory.

8. Extraordinary write-downs of receivables.

9. Cost of maintaining non-operating properties.

Pg. 228, For what the market says over a long period of time has at least a strong presumption of being correct. Furthermore, the average market price is of primary importance to outside stockholders, because in large measure it determines the success or failure of their individual investments.

Pg. 249, Investment is most intelligent when it is most businesslike. It is amazing to see how many capable businessmen try to operate in Wall Street with complete disregard of all the sound principles through which they have gained success in their own undertakings. Yet every corporate security may best be viewed in the first instance, as an ownership interest in, or a claim against, a specific business enterprise. And, if a person sets out to make profits from security purchases and sales, he is embarking on a business venture of his own, which must be run in accordance with accepted business principles if it is to have a chance of success.

The first and most obvious of these principles is, “Know what you are doing — know your business.” For the investor this means: Do not try to make “business profits” out fo securities — that is, returns in excess of normal interest and dividend income — unless you know as much about your security values as you would need to know about the value of merchandise that you proposed to deal in or manufacture.

A second business principle: “Do not let anyone else run your business, unless (a) you can supervise his performance with adequate care and comprehension or (b) you have unusually strong reasons for placing implicit confidence in his integrity and ability.” For the investor this rule should determine the conditions under which he will permit someone else to decide what is done with his money.

A third business principle: “Do not enter upon an operation — that is, manufacturing or trading in an item — unless a reliable calculation shows that it has a fair chance to yield a reasonable profit. In particular, keep away from ventures in which you have little to gain and much to lose.” For the enterprising investor this means that his operations for profit should be based not on optimism but on arithmetic. For every investor it means that when he limits his return to a small figure — as in a conventional bond or preferred stock — he must demand convincing evidence that he is not risking a substantial part of his principal.

A fourth business rule is more positive: “Have the courage of your knowledge and experience. If you have formed a conclusion from t he facts and if you know your judgment is sound, act on it — even though others may hesitate or differ.” (You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.) Similarly, in the world of securities, courage becomes the supreme virtue after adequate knowledge and a tested judgment are at hand.

Fortunately for the typical investor it is by no means necessary for his success that he bring these qualities to bear upon his program — provided he limits his ambition to his capacity and confines his activities within the safe and narrow path of standard, defensive investment. To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.