Lauded by Warren Buffet as “by far the best book on investing ever written,” “The Intelligent Investor” by Benjamin Graham is, arguably, the most influential book on value investing ever written. Revised and updated several times – and annotated in its latest edition by Jason Zweig – “The Intelligent Investor” advises against trying to predict market fluctuations and advocates for researching, realism, and reason.
In “The Intelligent Investor”, you’ll learn:
- Why you shouldn’t trust Mr. Market.
- What the difference between an investor and a speculator is.
- What kind of investor you are – defensive or aggressive.
Watch the full episode of The Intelligent Investor by Benjamin Graham
The Intelligent Investor by Benjamin Graham
Benjamin Graham’s Biography
Benjamin Graham was a British-born American economist and investor. Widely revered as the “father of value investing”, Graham is the author of the two founding texts of neoclassical investing, “Security Analysis”(with David Dodd) and “The Intelligent Investor.” Arguably, he is even better known today for being the mentor of several legendary investors, including Irving Kahn, Sir John Templeton, and Warren Buffet.
The Intelligent Investor Book Reading
Let’s look deeper into The Intelligent Investor classic book by Benjamin Graham.
Benjamin Graham was an American investor and author who wrote The Intelligent Investor. He was also a professor at Columbia Business School. His book laid the foundation for value investment. He believed that investors should invest in companies whose shares were undervalued. He also believed that investors should avoid
Benjamin Graham was an American investor and author. He wrote several books about investing, including The Intelligent Investor, Security Analysis, and Margin of Safety. His book The Intelligent Investor: The Classic Text on Value Investing is regarded as one of the most influential books on the subject. Graham believed that investors should focus on finding undervalued stocks, and he advocated buying them when they were cheap. He also believed that investors should avoid companies that were highly leveraged, had high debt levels, or were in industries that were cyclical.
Graham’s key contribution was to point out the inherent irrationality and group-thinking that was often rampant in financial markets. Thus, he argued, investors should always aim not to profit from the whims and fancies of the market, but instead to participate in it. His ideas about safe and successful investing continue to influence investors today, and his principles of investing safely and effectively continue to influence investors today as well.
This article will examine the early career work of Benjamin Graham, some key concepts related the value investing principles of The Intelligent Investor, and the way these ideas influenced later investors, including Warren Buffett.
Key Takeaways
- Benjamin Graham was an American economist who wrote the classic book The Intelligent Investor. He is regarded as one of the most important financial thinkers of the 20th century.
- Benjamin Graham was known as the father of value investment. His book, The Intelligent Investor: A Complete Guide to Value Investing, is considered one of the best books on the subject.
- Graham’s method advises people who invest in stocks to focus on the real-life performances of their companies and the dividend payments they receive, rather than focusing on the changing sentiments of the stock market.
- Graham also advocated for a investing approach that provides a buffer for investors against human error.
- Investors should look for price-to-value discrepancies when the share price of a company is lower than its intrinsic value.
The Intelligent Investor’s Beginnings
Graham worked at Goldman Sachs for 15 years before becoming a full-time writer. He wrote several books including “The Intelligent Investor” and “Security Analysis”. His book “The Art of Stock Market Investing” became a bestseller in 1934. By the time he retired in 1956, Graham had amassed a fortune of $1 million.
Graham’s philosophy of investing was to buy stocks that were trading at a price lower than their liquidation value. He believed that buying stocks at a discount could help investors minimize downside risk. His method was to analyze the market and identify stocks that were selling at a low price relative to their liquidation value. By purchasing these stocks, he hoped to profit from the fear surrounding them.
Security Analysis is about helping investors understand what they own. It is about making sure that investments are protected and that returns are adequate. It is about ensuring that the investor is not speculating. Speculation is when you buy something because you think its price will go up. If you buy something because you expect it to go down, then you are investing. Graham believed that the stock market acted like a voting machine in the short term, and like a weighing machine in the long term. He thought that the true value of a company would eventually be reflected in its share price.
Graham’s approach to security analysis focuses on determining the value of an operating company behind a stock, not just its price. He also introduced the concept of “margin of safety” which means that if you buy a stock at $100, you should expect it to go down to $90 before you sell it. If you buy a stock at 10 times earnings, you should expect it will go down to 8 times earnings before you sell it. This helps you avoid buying stocks that are overpriced.
What You Can Learn From The Intelligent Investor
In 1929, Benjamin Graham and David Dodd started teaching value investing at Columbia Business School. Their first book, The Intelligent Investor, was published in 1949. Here are some of their key concepts.
Mr. Market
Graham’s favourite allegory was that of the market maker. This imaginary person, “the market maker,” turns up every day at Graham’s office offering to buy and sell his shares at a certain price. Sometimes the proposed price makes sense, but other times the proposed price is off the mark, given the current economic realities.
Mr. Market is a fictional character in the financial markets. He is not a real person, but a symbol of the market itself. Investors should focus on the real-life performances of their companies and the dividend payments they receive, rather than listening to what Mr. Market says about the stock prices. If you follow his advice, you will never lose money. You may even make money, but you won’t get rich.
Value Investing
Value investing means finding stocks that are undervalued in the market. By analyzing a company’s assets, earning, and dividends, an investor can determine if the stock is worth buying. If the intrinsic value of the stock is higher than the current market price, the investor should buy and wait for the market price to catch up. Over time, the market price will reflect the true value of the stock.
Focus on companies that trade at less than half of their net-net valuation. Net-net is an investment strategy developed by Benjamin Graham in the 1920s. It is a value investing technique that focuses on companies whose stock price is based solely on their net current assets.
When an investment firm buys a company at a price lower than its intrinsic value, it is effectively buying it at a discount. When the company starts trading at its intrinsic value the investment firm should sell.
Margin of Safety
Graham also advocates for an investing approach that gives you a margin of safety or a buffer against loss. There are two main ways to accomplish this. Buying undervalued or out-off-favor stocks is one way to accomplish this. The irrationality of the investor, the inability to predict what will happen in the future, and the volatility of the stock market can give you a margin of safety. Diversification is another way to achieve a margin of safety. You can also get a margin of safety by purchasing stocks in companies with higher dividend yields and lower debt-to-equipment ratios. This margin of security is meant to protect you in the event that your investments go bad.
The Benjamin Graham Formula
Graham Buffett usually buys stocks when they are trading at less than half of their net-net valuation. He does this because he wants to establish a margin of safety. Net net value is another value investing strategy developed by Graham, where companies are valued based solely on their net current assets.
Later, Graham revised the formula to include both a 4.4% risk-free rate and the current yield of AAA corporate bonds represented by “Y”.
Dividend Stocks
Graham believed that the best way to invest was through index funds. He wrote that “the average investor should not try to beat the market”. Instead, he advised investors to buy low cost index funds and let the market do its job. He also said that investors should avoid actively managed mutual funds because they are expensive and often fail to beat the market.
The Intelligent Investor and Benjamin Graham
In the early 1980s, when Buffett first read The Intelligent Investor, he was just starting out as a stock picker. He had started his career working for a brokerage firm, and he was still a young man. But he quickly realized that there were many ways to invest, and he wanted to understand them all. So he began studying the works of Benjamin Graham, the father of value investing. Graham taught him about the concept of margin of safety, which is the idea that you should never put your money into something unless you think it will go up 10% or more. If you think it will go down, then you shouldn’t buy it.5
Buffett invests in businesses that he believes will outperform the market. He looks at the fundamentals of the company, including its financials, management, and industry. He also looks at the company’s history and how well it has performed in the past. He then compares the company to other similar companies to see if there are any trends that might affect future performance. Finally, he looks at the price of the stock compared to the overall market. If the price is too low, he buys the shares. If not, he doesn’t.
Warren Buffett’s investment philosophy is different from Benjamin Graham’s. He believes that a business should be judged by its quality, not its price. He also believes that a company’s success is determined by its ability to generate earnings, not by the short term fluctuations of the stock market. However, Warren Buffett does not seek capital gains. Instead, he seeks to own shares in companies that are extremely capable at generating earnings. He is not concerned about whether the stock market will recognize the value of those companies.
What Does The Intelligent Investor Teach You?
The Intelligent investor is a classic book about value investing. It tells you how to invest your money in a way that will give you the best return for your investment. It tells you not to worry about the market noise and focus on the fundamentals of the companies you are investing in.
Investors should look for price-to-earnings ratios that are below the company’s earnings growth rate. If the P/E ratio is lower than the company’s earnings growth, then the stock is undervalued. Investors should buy the stock at this time. Once the P/E ratio and the earnings growth rate are equal, investors should sell the stock.
The Intelligent Investor also suggests investors to hold a portfolio consisting of 50% stocks and bonds or cash, to avoid day trading, to take advantages of market fluctuations and market volatiliy, to avoid buying stocks just because they’re trendy, and to look out to see if companies are manipulating their accounting methods in an attempt to inflate their EPS values.
Is the Intelligent Investor Good for Beginners?
The Intelligent investor is a great book for beginning investors. It’s been continuously updated and revised since its first publication in 1949. It teaches you about investing in the long term, and gives you tips on how to avoid common mistakes. If you’re looking for something more trendy and potentially more profitable, this book might not be your best bet. It dispenses a ton of common sense advice, rather than how-to information on day trading or other frequent-trading strategies.
Is The Intelligent Investor Outdated?
Graham taught us that we should never invest our money unless we had a margin of safety. We should always buy something at a price that gives us room to grow if the stock market falls. If you buy a stock at a price that is too high, you may lose your investment. If you buy a share at a price that is low, you may not get any return on your investment.
Graham’s advice that people should always be prepared for market volatility is still very relevant.
It’s an investment book.
The Intelligent investor is a classic investment book written by Benjamin Graham. It teaches readers to apply Graham’s principles. These principles are designed to help investors avoid substantial losses and achieve superior returns.
How Do I Become an Intelligent Investor?
Benjamin Franklin said, “A penny saved is a penny earned.” He also said, “In this world nothing can be said to be certain except death and taxes.” Benjamin Graham says that if you want to invest successfully, you need to follow two simple rules: 1) Know what you’re buying, 2) Wait patiently for the right time to sell. If you only buy stocks that are trading below their intrinsic value, even when the business suffers, the investor will have a margin of safety. This is called a “margin of safety” and is the key to investment success.
The Bottom Line
Graham’s investment strategy is based on the premise that the stock market is a zero sum game. He believes that if you buy low-priced stocks, you will eventually sell them at a higher price. This means that you will always lose money when you invest in stocks, but you will also gain money when you sell your stocks.
While he is best remembered for his books on value investing, Graham was also instrumental in writing parts of the Securities Act of 1934, legislation requiring companies to disclose their financials to investors.
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