The Intelligent Investor Summary - Benjamin Graham

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The Intelligent Investor

The Intelligent Investor Summary
Investments & Finance and Economics

This microbook is a summary/original review based on the book: The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel

Available for: Read online, read in our mobile apps for iPhone/Android and send in PDF/EPUB/MOBI to Amazon Kindle.

ISBN: 978-0060555665

Also available in audiobook

Summary

Author Benjamin Graham has taught and inspired countless people around the world with his book "The Intelligent Investor." It introduces several concepts and helps investors avoid mistakes and to have well developed long-term strategies. This microbook is based on one of Warren Buffett's favorite works, which he calls the best investment book ever written. The author teaches you how to use the right analytical tools and maximize your chances of having good returns. Want to learn to make good investment decisions and follow the principles developed by Graham? Come with us!

The Difference Between Speculation And Investment

The first step in becoming a smart investor is to understand the difference between speculation and investment. Investment ensures that your startup money, that is, the amount of money on which the interest is charged, is saved and it generates adequate returns. Anything other than this is speculation. The experienced investor must be willing to take home adequate and fair returns and never pursue excessive profits.

An experienced investor, besides being satisfied with the appropriate returns, considers the safety of their money to be advantageous and seeks to ensure that their investments are sound. These characteristics differentiate the experienced investor from the speculator, who risks losing all his investments at once.

Projections Are Not 100% Reliable

Many investors make mistakes by choosing their investments based on stock market history. They presume, in the wrong way, that what happened in the past will be repeated in the future. For example, they see that share A plummeted and hit its lowest price in the year 2000 and a year later rose to the number one market position. However, this fall and the subsequent increase may have happened for many reasons - there is no basis for an investor to assume that it is a smart move to buy large quantities of this share when its price is falling. There is no guarantee that the same scenario will repeat itself.

The eternal truth about investments is that every investor should always keep in mind that projections are fallible. In fact, in many cases, surprising actions have seen phenomenal market growth. Equally, countless "safe" stocks disappeared without clues after market gurus predicted highs. Basing your investments on just projections can be disastrous.

The Final Decision Must Be The Investor's Himself

One of the key points the smart investor should keep in mind is that no action replaces doing their homework. Accepting advice from savvy investors, listening to market experts and reading blogs and books about great investment ideas are all necessary actions and offer good tips on the market, but should not become the basis of your final decisions. And you should not become dependent on investment tools such as projections or simply follow the market putting your money where everyone is putting it. You need to assess whether the experts' views apply to you since you are the only one who knows exactly what your risk appetite is or what your investment goals are.

To be able to weigh the advice offered or evaluate the opinions of the experts, it is important that you keep in mind the fundamental truth that the value of the investment should be a function of its price. That is, there must be some correlation between the price you pay for an investment and its real value regarding how much you can earn in the future.

The following example will clarify the meaning of this. A rare silver coin is sold for a certain amount, and you wonder if you should buy it. To determine if this amount makes sense, you need to consider the intrinsic value of the metal, any increase in the price and the demand of the collectors market.

You also need to make predictions as accurate as possible so that when you decide to sell the currency, the price is higher than the current price of it. Taking these issues into consideration will prevent you from buying the commodity at a high and inflated price, which can not generate enough value to justify your investment.

The Impact of Inflation On Investments

Despite the role that inflation plays in the success of investments, most investors tend to forget about it. There are several reasons to worry about the impact of inflation. For example, inflation is an ever-present reality, and the increase in share prices actually falls short of inflation about 20 percent of the time. As an investor, when you determine whether the expected return or the valuation of investments really is worth it, you need to consider that inflation will hurt your future profits.

To ensure the impact of inflation on your investments is minimized, you should consider investing in assets that keep pace with rising inflation or which outpace it. For example, real estate assets may be a good option as you can assume that prices will rise with inflation in the future.

It may also be a smart move to invest in inflation-protected assets, also called TIPS, Treasury Inflation Protected Securities. TIPS are investments with a predetermined maturity period. Upon reaching maturity, when the money is paid to the investor, adjustments are made to account for inflation or deflation during the investment period. That means that if inflation has risen during the period since the asset TIPS was bought, you will have your money back taking into account inflation. Inflation or deflation calculations for TIPS are based on the Consumer Price Index, so the adjustment reflects your purchasing power.

Graham identifies two types of investor: the defensive investor and the entrepreneurial investor. Worrying about the impact of inflation should be a critical first step for both types of investors for different reasons. The defensive investor is focused on avoiding big losses and is willing to invest and then stay quiet. For example, they want their investments to be uncomplicated and happy to earn enough returns while keeping the risk to a minimum. The entrepreneurial investor, on the other hand, is looking for the best returns and is willing to do many good deals to reach them.

Determining whether you use a defensive or entrepreneurial approach influences how much you are willing to work to manage your investments and not how much risk you are willing to take.

The Defensive Investor

If you are a defensive investor, you should choose your stocks to give you an adequate return, without risking your most important investment. The central objective of the defensive investor is to protect their investments and not maximize their gains. To keep the risk at a reasonable level, you must diversify your investments so that the risk is spread across your stocks and other assets.

Diversification allows you to separate the loss of one share from the gain of another so that the overall performance of your investment portfolio remains positive. So, how do you diversify? Choose to invest in around 10 to 30 different stocks, which are among the most sold and conservative stocks in the market and have a consistent dividend payment history.

Booming stocks should be avoided as they are high risk and you should also focus on investing low sums and earning proportionate returns. The course may be slow with this strategy but, as a defensive investor, this fits into your risk profile and ensures that in the long term you have good returns. To ensure that stock risk is kept at an acceptable level, invest 25% of your total equity investments.

The Entrepreneurial Investor

The advantage of being an entrepreneurial investor is that you are willing to invest more time and energy in the process, which means you will have more opportunities to make good investments. It is very important that you understand your goals by investing in a stock that a defensive investor would not. To achieve his goal of having better returns than the defensive investor, buy when the market is falling, and prices are low and sell in the opposite scenario.

Another tactic is to buy growth stocks of companies that are falling in the market. However, you should be sure that the stock price is still lower than its intrinsic value.

Check the historical stock price and the average P / G (price/gain) ratio for many years to make sure you have a good buy at your fingertips.

One of the opportunities you should explore as an entrepreneur investor is to seek out and identify startups who have the right characteristics that make them attractive to large corporations.

A similar opportunity is presented by foreign stocks. They are not so popular in the market just because they are unknown. Before investing in these stocks, do your job and be assured that the fundamentals of the company are sound. Be wary if you are paying too much for a stock that you believe will still grow. That includes overpriced IPOs and stocks of well-established companies.

Understand Convertible Securities

Convertible securities and collateral should be dealt with caution or entirely avoided. These are securities issued by a company that is seeking to increase its capital for some reason. The special feature of convertible bonds is that they can come with a set amount that you earn when the title period expires, or they can be converted into a specific number of shares of the company at a pre-established price. If the shares of the company are up, then you will want to convert the title. Otherwise, you will want to receive the amount set by it.

It is critical to check if the issue price of the convertible makes sense in the face of the company's share price, growth expectations, and general economic conditions. For example, you do not want to invest in a convertible bond from a company that provides dial-up access to the internet, no matter how low the price is because you know that growth expectations are zero. Using the same logic, you can decide to invest in convertible bonds offered by a technology company that makes cloud systems for mobile technology, even if its issuance price is relatively high because there is a stable expectation of growth.

Jason Zweig advises that when buying convertibles, you should think of them as very stable stocks and not as securities. The truth is that convertibles provide smaller gains and greater risks than other types of bonds. Zweig notes that, between 1998 and 2002, convertible securities offered an average annual return of 4.8%, which was substantially better than the average annual loss of 0.6% of the shares. However, long-term corporate bonds yielded an average annual gain of 8.3% over the same period.

Why Is It Important To Have a Margin Of Safety

According to Benjamin Graham, "the secret of good investment" is to build a "margin of safety". The margin of safety denotes the difference between the share price and its fundamental value. If you can buy the stock for less than its fundamental value, you will have made a great investment. When you get a good margin of safety, you can afford to relax even if share price predictions are wrong. The trick is to identify when the stock is being sold at a correct price that allows an adequate margin of safety.

If within your portfolio you ensure that you have incorporated the principles of the margin of safety, you can see how diversification prevents your stocks from suffering from market variations. The margin of safety ensures that while there are some losses within the portfolio, the net result of all your investments will always be positive. But never forget that having a good safety margin does not guarantee that your investments will make a profit: it only limits the risk of loss.

The Mutual Funds

Investing in mutual funds is a great way to take advantage of the benefits of diversification while letting the experts choose the best stocks for you to invest. If mutual funds are your preference, then keep in mind the following tips. The best funds are those that have a limited number of clients, who do not promote themselves exaggeratedly and who have managers who also make personal investments in the fund. Before deciding to invest in a fund, consider the risk factors and costs involved and investigate the managers' credentials.

Many investors have the impression that there is something wrong with the mutual fund they plan to invest but simply ignore the signals. By doing so, they put their money at risk. To avoid running the risk of losing your investment, be clear of the four worst scenarios: the giant unstable company that has extremely overpriced stocks; The conglomerate that wants to build an empire; The small firm that takes control of a much larger firm; And the Initial Public Offering (IPO) that has an intrinsic value close to zero.

Jason Zweig advises prospective investors to study the financial history of companies that have suffered from known disasters, such as telecommunications giant Lucent, which sank after the acquisition of Chromatis. The fact that Chromatis did not have customers or revenue should have been an indicator to Lucent's investors that the company was making a big mistake.

Market Fluctuations

Benjamin Graham uses a simple parable to explain how an intelligent investor should never define the market in time or depend on projections. It is impossible to say what will happen with complete precision. He asks you to imagine that Mr. Market is your business partner and that you own a company together. Now Mr. Market wants to buy his share in the business and every day he offers you a price. As he is a sentimental guy, his price may be well above or far below the fundamental value of the company's stock. It's up to you to wait until the price is right to be able to sell.

Another investment tip that this parable makes clear is that sentimentally responding to market changes or making decisions based on emotions is the recipe for disaster.

What you should do is expect the stock price to stay below its intrinsic value, giving you enough safety margin. Keep your emotions away from this and develop a disciplined approach to investing. That will help you lessen your willingness to sell or buy when the market is teetering. The market should not dictate your investment decisions. You should take advantage of the fluctuations of the market to make money through the good opportunities created.

Many start-up investors depend on financial advisors, even though their fees exceed 1% of invested assets. Some of these advisors display their knowledge, boasting about how they use technical reviews to achieve excellent annual returns that exceed 10%. You should be aware of this. If you decide to hire the service of a financial advisor, you need to familiarize yourself with the type of assets you invest in, whether or not you have an investment plan, and how you can find out if your investments are in line with your plans.

Aspects To Consider When Investing In A Stock

Blindly following the market, an expert or a financial advisor can lead to disastrous results with your investment. However, as a novice investor, you may not know for sure what factors to take into consideration when evaluating a stock. Here are six aspects that can help you decide whether or not to invest in it:

  • The Company's long-term outlook

  • Solid finances

  • Good management

  • Strong capital structure

  • Good dividend payment history

  • The dividend rate currently offered

To properly evaluate a stock, you must begin by determining your past performance. You can then make future estimates for the stock and adjust the value so that it reflects the new price. It is essential to base your analysis on long-term results because evaluations based on short-term results do not offer the same degree of accuracy.

Evaluation Of The Stock's Intrinsic Value

Emery Air Freight began in 1958 with a net profit of $ 570,000 and, in some surprising way, not only survived the worst time of domestic passenger aviation services in the 1970s but also continued to grow in profit, as well as regarding stock price.

However, does this success story mean that investing in stocks in the expectation that the same pattern of growth continues is a smart move? Probably not, because you need to consider other issues: increased competition in the industry, rising fuel prices, and other factors have the potential to slow Emery's fast-growing growth. An intelligent investor will consider these possibilities in their assessment of the intrinsic value of stocks and growth prospects, and then determine if the current price is justifiable.

They also consider that taking the ratings emotionally, taking into account that the stock has shown a meteoric rate of growth in the past, is the formula for a disaster.

Another point to consider is that being influenced by experts, market gurus or by the market's own behavior can mess up results. The smart investor takes into account both market activities and expert opinion, but these do not form the basis of their decisions.

Final Notes:

Benjamin Graham's book gives the novice investor a differentiated view on the factors that must be observed to decide whether or not to invest. The author makes it very clear that for the smart investor risk and return do not go hand in hand.

The intelligent investor is satisfied with adequate returns and keeps their risks under control so that their investment capital does not end. They seek the assurance that they are buying at a price that has the potential for returns. They also know they need to maintain the margin of safety, which will control their investments despite the variation in market prices. The author also explains how exactly the smart investor evaluates stocks to verify their intrinsic value and determine if the price they must pay allows an adequate margin of safety.

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Who wrote the book?

Benjamin Graham was an influential American economist. He is considered the forerunner of the stock buy-and-hold strategy adopted by his billionaire follower Warren Buffett. The focus of this strategy is to buy stocks of solid companies with good prospects of cash generation and keep them in the portfolio of investments for a long period, to maximize profits, eliminating excessive transaction costs and income tax. That is why the name buy and hold, meaning "buy and hold" (literal translation). Graham's known disciples include Jean-Marie Eveillard, Warren Buffett, William J. Ruane, Irving Kahn, Walter J. Schloss, among others. Graham, who was of Jewish descent, and whose original surname was Grossbaum, was bor... (Read more)