The Intelligent Investor is the definitive book on value investing, a philosophy popularised by Warren Buffett, which advocates a long term approach to investing in the stock market characterised by contrarianism, dollar cost averaging, fundamentals analysis and a preference for stable consistent earnings over speculative growth.
The Intelligent Investor by Benjamin Graham
The Intelligent Investor is perhaps the most widely read yet oft ignored book on investment.
First published in 1949, the intelligent investor lays down a series of defensive investment principles aiming to generate stable and consistent earnings by holding sensible long term investments and avoiding the perils of speculation.
The book has become world famous due to its association with Warren Buffett, widely considered the greatest investor of all time, who has consistently followed defensive investment principles at Berkshire Hathaway and in doing so has become one of the richest men in the world.
Below are some of the key insights I took from this book:
- Investment is a long term process focussed on avoiding losses and securing consistent gains from the stock market.
- Speculative prospects in trendy growth industries rarely square with long term profits as the market tends to overvalue P/E ratios.
- To invest properly you should always [i] research fundamentals [ii] protect the downside [iii] aspire to adequate not supernormal returns
- Investors should always be on guard against inflationary measures
- Never forecast the future based on past performance.
- Your portfolio should always reflect your personal appetite for risk with a 75-25 maximum ratio between stocks and bonds.
- A defensive approach is typically always proven better in the long term.
- IPOs and daytrading rarely yield consistent returns and are best avoided.
- Time in the market is better than timing the market.
- It is typically better to do your own analysis than follow the market.
- Passive funds always outperform active funds over the long run due to lower costs and dodging systemic problems with active investing.
- Beware of financial advisors and seek out those that manage your instincts.
- Five elements are decisive for stocks [i] long term prospects [ii] management [iii] financial strength [iv] dividend record [v] current dividend
- Assume financial reports are out to game the numbers. Read all reports backwards and study the citations in depth.
- When comparing companies look for P/E 15, financial strength, dividends and a growing market for the next 10 years.
- Over the long run steady eddies typically outperform speculative boom/bust stocks that rise and fall with greater volatility.
- Warren Buffett expands this logic looking to pick up stakes in ‘franchise companies’ suffering a price drop where the brand or intangible assets are key [e.g. New Coke]
- Steer clear of most special situations, market fads and speculation even if the short term picture suggests the potential for significant growth [e.g. .com Boom]
- Share ownership should ideally have a societal value and afford you the right to bring corporate governance to account.
- Put ‘margin of safety’ at the forefront of all investments as the cost of an upfront loss is almost impossible to claw back over a longer period.