If you have ever imagined a book, which could teach you investing, handhold you through the maze of stock markets, warn you of all the pitfalls and suggest you the solutions of the problem you might encounter, then you should look no further. The Intelligent Investor written by Benjamin Graham is the book for you.
Ever since Benjamin Graham wrote The Intelligent Investor in 1949, it has helped millions of investors, amateur & professionals learn and master stock market investing. His teachings have become legends as philosophies of value investing. Scores of investors all around the world follow Graham’s criteria diligently. One of Graham’s students, Warren Buffett, outperformed even Graham and is currently one of the richest persons on the planet.
The Intelligent Investor is a guide that helps a normal investor mature into an intelligent investor who does not speculate, does not try to time the market and has reasonable expectations of returns. An intelligent investor controls her emotions, stays away from IPOs, is not swayed by market fluctuations and has a long-term perspective. She realizes that some of her decisions are going to be proved wrong, therefore, she always keeps a margin of safety and never overpays for a stock, however attractive the opportunity may seem.
Graham believes that an investment operation is one, which upon thorough analysis promises safety of principal and an adequate return. He says operations not meeting these requirements are speculative and an investor must not mix investment and speculation in either her portfolio or her mind.
Graham believes that expecting rate of return in proportion to the risk undertaken is a myth. The return depends on the intelligent effort an investor is willing to put. Similarly, Graham believes that age does not decide the share of stocks in one’s portfolio, her hard work does.
Defensive and Enterprising Investors
Graham classifies investors into defensive & enterprising investors and suggests different stock selection criteria for each of them.
Graham says that the aim of defensive investor should be the safety plus freedom from bothering. She should have both debt and equity in her portfolio and should re-balance whenever the proportion changes by more than 5%. A defensive investor should purchase shares of only well-established companies or index funds. She should have a portfolio of 10-30 companies of large, prominent and conservatively financed companies, which have a long history of continuous dividend payments. Graham advises the defensive investor against buying growth stocks as they are usually overpriced and carry high risk. Risk in growth stocks arises not from the fear that such companies would degrow in future, but from the risk that they might not grow as expected by markets. The book gives an example of companies where profits grew 5% but the share price declined >20% because the market had expected 10% growth.
Graham says that enterprising or aggressive investor, who is willing to put in more hard work than a defensive investor, can think of achieving higher returns. She should consider investing in other stock strategies like carefully chosen growth stocks, bargain issues and special situations arising out of mergers & acquisitions. She should focus on relatively unpopular large companies, which can be found in stocks hitting 52-week low in the markets. Graham says that stocks selling at less than their net working capital per share can prove to be a good opportunity for the enterprising investor. She may also consider investing in companies which are not large ones but operating in important industries.
Graham provides the reader with excellent tools to analyse stocks e.g. price to equity ratio (P/E ratio), Price to assets ratio (P/B ratio), current ratio, debt to equity ratio, total asset & sales size of the company, earnings stability and growth rates etc. The book provides an elaborate analysis of many companies demonstrating these tools. Graham elaborates these concepts in a very simple and understandable manner. He also provides indicative values for each of the parameters, which should be used by defensive and enterprising investor. The reader of the book is easily able to decide her investing style (defensive or enterprising) while reading the book. Moreover, she can have the indicative set of stock investment parameters tailor-made for her by the investing genius of all times.
Graham warns the investor from falling prey to the most common pitfalls of stock markets like trying to time the markets and investing in initial public offers (IPOs). Graham advises the reader to consider the stock market as her business partner Mr Market, who every day tells her what he thinks her stake, is worth and offers either to buy her out or to sell her an additional stake. She should consider selling out when Mr Market quotes a ridiculously high price and buying when his price is low. However, the rest of the time she should form her own ideas of the value of her stake, based on the company’s operations & financial position and ignore Mr Market altogether.
Graham says that an investor should always avoid IPOs. IPOs have the salesmanship of the underwriter behind them. They are sold in favourable market conditions, which are favourable for the seller and not for the buyer. Graham says that some of the IPOs will show an excellent rise on the day of listing. Intelligent investors who do not invest in IPOs might feel that they have lost an opportunity. However, for every dollar people make in IPOs they will be lucky if they end up by losing only two.
Graham has explained stock investing very lucidly in a simple language in the book. The reader does not need to have prior finance knowledge to understand and benefit from The Intelligent Investor as the book explains various financial terms as and where they are mentioned.
The Intelligent Investor has helped me a lot in understanding stock markets. It provided me with the foundation on which I could dream to achieve my financial independence. Graham’s arguments about value investing are very convincing and are backed by good analysis and his personal experience of many decades in stock markets. After reading The Intelligent Investor, I left technical analysis after started following value investing.
Have you read The Intelligent Investor? How has your experience been, after reading the book? Did you benefit from the teachings in the book? Do you recommend any other book, which can help investors understand stock markets and investing? You may write your inputs in the comments below.
Disclosure: The article contains affiliate links to the book.