Disclaimer #1: I am not a financial. You are trading at your own risk and should consult a financial advisor and/or tax advisor for any investment decisions. Do your own due diligence when considering investing, and this information is for education/informational purposes only. The article “The Remarkably Helpful Key Takeaways From The Intelligent Investor” serves as educational content, not investing or tax advice.
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The Intelligent Investor might be the staple of all value investing. You can learn what metrics to use to analyze companies and their stock to understand undervalued within the marketplace. Who doesn’t love to purchase a bargain?
Benjamin Graham, the legendary investor, wrote the book itself. Benjamin Graham was the mentor for many investors. Famous ones include Warren Buffett and Charlie Munger. Reasonably two of the most well-known investors of all time.
Yet, I must state that this book is no easy read. It’s jam-packed with more than 550+ pages full of detailed content that either excites you or bores you. Over the past while, I’ve had the luxury of reading this book to learn from the wisdom of Mr. Graham.
That’s why today, I present you with some of the takeaways I have garnered from this book itself in hopes they can share something new with you and help your decision-making in whether or not to purchase the book itself.
Key Takeaways from the Intelligent Investor:
Most People are Speculating:
Benjamin Graham provides us his definition of investing. Investing is:
- Taking necessary steps to minimize risk
- Reviewing and analyze a company for its operations, management, financial statements, and more
- Expecting adequate, not exceptional returns
Most people do not fall under this category specifically because they don’t perform the first two steps. Think about it, how many people you know who invest has thoroughly reviewed a company? Not too many, I would expect, and rightfully so in a way because it’s much time to do that.
Therefore, most people speculate, especially regarding investments like crypto, where we can’t find a true value for coins and tokens.
Speculating to Benjamin Graham is a lot like gambling. People are placing their money into something with the hopes that it will increase in price and give them a good return. Of course, it does work out for some people. Yet, Mr. Graham suggests that it usually does not work out that well in the long term.
Additionally, those who are speculating are making money for their brokers, not for themselves. This is because anyone with a brokerage or bank that charges a specific commission fee to trade stocks can profit the most, given that the investor has lost money on their investment or trade.
His idea of speculation is not unreasonable. Many people do this because if they invest in a particular stock or coin, it will generate a surmountable gain to make them rich. Unfortunately, often, this isn’t the case, and they only make the brokerage, advisor, or bank richer.
We Should Invest in an Inflation-Protected Security:
The idea behind this theory is that when inflation goes up, we should have some fixed-income investment that can hopefully offset this amount. Of course, even a tiny investment in gold or other precious metals could suffice, especially if most of your investment portfolio is down and the precious metal has a large enough gain for the portfolio to match or beat out inflation.
REITs can help combat the effects of inflation with money coming in regardless of the inflation factor. REITs are real estate investments trusts where large companies hold various commercial properties or even rental properties, then collect all the rental income or income from such property holdings and distribute it to the fund holders.
TIPS or Treasury inflation-protected securities are U.S. government bonds that automatically go up whenever inflation increases. This is a sure-fire way for an investor to protect their money whenever inflation hits their portfolio.
There may be some other investments, such as any bond, that can provide a fixed amount of income regardless of the rise in inflation. It was recommended that investors allocate 10% of their portfolio to TIPS, but I’m sure that could be assigned to 10% in any inflation-protected security.
As for other inflation-protected securities, this will require more research and understanding of where investors can invest their money.
Stocks don’t always provide exceptional returns during years of high inflation, as suggested in the book. Hence why they recommended investing in bonds or REITs.
What Our Portfolios Should Look Like:
This is one of the sections that I clearly remember the most because I found it very important for myself and creating my portfolio.
Generally, Mr. Graham recommends having a portfolio that consists of stocks and bonds. In that portfolio, the least amount you should allocate to one is 25%. The maximum amount is therefore 75%.
Maybe you’re a huge fan of stocks, so you’ll allocate 75% of your portfolio to stocks and 25% to bonds.
Then again, maybe the stock market is about to crash, so you allocated 75% into bonds, leaving 25% into stocks.
Or, if you’re indecisive, you’ll decide to allocate an even 50-50 split.
The options are up to you, but I do like this investment rule. Either way, the portfolio will generate consistent investment income that can be allocated to purchase more shares or bonds. Meaning, we increase our stakes and, therefore, can earn a greater return and income on our investments over time.
The author did suggest that you could allocate 100% fully into stocks if you wish if you are confident in the stock positions of particular companies and would remain calm in the face of sudden declines within the stock market. Therefore, that option is entirely up to you.
However, 75% allocated into stocks or equities seems to be a very reasonable amount, and any gains from these stocks will likely drive your overall portfolio’s performance upwards.
Criteria for Stocks:
There were some criteria that Benjamin Graham provided that investors look for when investing in common stocks, especially those that may be purchase at a good value.
- Adequate Size Of the Company
The company should not have less than $100 million in sales and not less than $50 million in total assets.
- A Sufficiently Strong Financial Condition:
Ensure that the company has a 2 to 1 current ratio, a sign that it can pay off its current obligations if needed.
Additionally, ensure that the long-term debt of the company does not exceed current assets or working capital. If it does, it could signal big financial trouble laying ahead.
For public utilities, the debt should not exceed the stock equity (at book value).
- Earnings Stability
Make sure that there have been some earnings for the company in each of the past ten years. A company that has consistently generated negative earnings for multiple years may need to seek additional debt, leading to trouble.
- Dividend Record
Uninterrupted payments for the past 20 years.
- Earnings Growth:
The minimum increase of at least 1/3 in per-share earnings in the last ten years uses three-year averages at the beginning and end.
- Moderate P/E Ratio
No more than 15 times the average earnings of the past three years.
- Moderate Ratio of Prices to Assets
The current price should not be more than one and a half times the book value last reported. The product of the multiplies times this ratio of price to book value should not exceed 22.5.
Now the question here is, will you find any stocks that fit all of these criteria? The answer could be a year, but it may not be a lot. That is why you will need to rely on your judgment, and the criteria set out in the book.
You’ll also want to understand the company and its operations, financials, management, etc., to help you with the judgment call.
Common Stock Portfolios for the Defensive and Enterprising Investors:
Benjamin offers us some advice on what each portfolio should look like. For the defensive investor:
- Be diversified, just not too diversified. This means that you should hold 10-30 stocks in your portfolio.
- Purchase stocks of large and well-financed companies. This will help you manage the risk of their potential earnings in the future, which will hopefully reflect growth in share price.
- Have a long record of continuous dividend payments, at least since 1956. While this book was written around the 1970s, there’s no doubt Graham might recommend ensuring companies have a constant dividend payment for numerous amount of years.
- Impose a limit on the set price per share.
Now for the enterprising investor:
Their ideal portfolio consists of:
- High-grade bonds and
- High-grade stocks
There were also some talks about IPOs and different investing strategies for common stocks, which will be further discussed below.
Of course, the question of whether bonds should be included in a portfolio today or not remains to be questioned. I never recall anyone suggesting that we should hold bonds into our portfolio when I was doing my initial research into investing a while back. At least, investing 25% that Mr. Graham is suggesting.
I like the idea of having some fixed income into a portfolio regardless of the investing type an individual is, but this requires more research on my end to evaluate whether it’s worthwhile.
Here is a cycle that Benjamin Graham had suggested happens with private companies looking to become public.
In the middle of a bull market, new companies decide to list at reasonable prices.
It continues to rise during this bull market, and other companies decide to join in and list as an IPO.
Often, the prices for these small companies are listed much more expensive than medium-sized businesses with a long-market history.
It’s usually a sign of a bear market that is incoming.
Everyone sells, and usually, the IPO loses 75% of its value and more of its offering price.
Then, maybe in a few years or just when some time has passed, they can become undervalued and are lovely buys at a fraction of their worth.
This theory itself is exciting, and sometimes you will see that newly listed companies are overvalued. To myself, this is because as a new company onto the market, there is not enough time to evaluate what it could be worth as further information is being presented. It’s a popular stock because of the news and coverage of its listing.
It was suggested throughout this book that investors avoid IPO’s because of this cycle, and I probably will take this advice to heart. Eventually, they seem to lose their price as this theory suggests, and either way, before investing in the company, one needs to do research. If the information is not presented at its listing clearly, then one should not invest in it.
Strategies for Enterprising Investors for investing in Common Stocks:
- Buying low and selling when high
- Growth Stocks
- Purchasing bargain issues of companies
- Buying into special situations
So, some of these strategies are going to require you to perform some additional research.
However, a piece of advice that was shared was not necessarily focusing on the market as a whole. Sure, it can be good to pay attention to what’s happening in the market, but focus on the companies and when the stock goes up or down drastically and other aspects.
Buying at a low market price and selling high is a common strategy you may hear thrown at you through the financial gurus on Tik Tok or through anywhere else. The strategy is sound. You buy something at a low price and sell it higher. Yet, as I’m sure you know, research needs to be done to determine when something is at a “low price.”
Growth stocks with the potential to grow significantly over time can be a difficult one. Primarily since you rely on your judgment to predict what industries or companies will excel and beat the market over the long term.
Buying bargain issues of companies could be based on shares worth much more than what they are selling for. Again, a thorough analysis of the company’s intrinsic value is needed to indicate this.
The particular situations strategy is an interesting one. A special situation could be where a large research company suffers some unfortunate results from an experiment they were performing, causing the share price to dwindle 20%, for example. You’ll easily determine what would count as a unique situation whenever you hear some news of particular companies.
There were some interesting, shall I say, insights into mutual funds given in a dedicated chapter. Here are some of the facts that I found:
– The higher a fund’s expenses, the lower the returns
– Highly volatile funds are likely to stay volatile
– Funds with high past returns are unlikely to stay that way for long
How mutual funds succeed:
Managers are typically the most significant shareholders. They are cheap to hold, tend to be different from others, shut the door to new investors and don’t advertise or hype themselves up.
There are some also essential metrics to consider for mutual funds and even ETFs:
– It’s essential to look at the fees to hold the fund
– Look at its worst loss in the past and understand if you can stomach it
– View the past performance as an idea, not an expectation
When to sell funds:
– When there’s an unexpected change to the fund manager’s strategy
– There’s an increase in expenses
– Sudden erratic returns
– If you can’t hold it for at least three years, it may be a sign for you to sell or not buy the fund in the first place
When you may need an advisor and what to look for in an advisor:
There are a couple of situations where you may want to look for a financial advisor:
– Chaotic portfolios may mean that there’s no diversification
– Major changes in life
– Big losses
Therefore, maybe an investor falls under these special situations. So what should one look for in an advisor themselves?
– Whether the advisor is helping their clients consistently
– If the advisor understands the fundamental principles of investing
– And if they are sufficiently educated, trained, and experienced to help you
These are some important metrics to consider, as suggested by Jason Zweig, who was the contributor who provided commentary throughout the book.
Even there is no shame in wanting to hire an advisor despite what many people may say. I’m not a financial advisor myself, and that’s why for any investment decisions, you should consult one. After all, they are trained to provide expertise and assistance to you in your monetary needs.
After all, when you’re investing in a stock, you’re investing behind the company and then investing in the management! So there were some questions and points that The Intelligent Investor suggests you take into consideration:
– If they admit failures and take responsibility for them
– Are they looking out for number 1?
– If a company replaces or reissues its stock options for investors, runaway by Kanye West (I had to add it)
– Have they issued new shares? How much or by what percentage?
– Have executives been consistently buying or selling shares? Why?
– Do they boast about the company and its share price? Or instead, are they silent?
You always hope that the management is looking out for their investors and focusing on growing the company to earn adequate returns for those who trust in them. However, and I’m sure you know, they are not always so kind-hearted.
Management will focus on themselves and may sell their shares when they immediately receive or convert their options. Of course, there’s a method to their madness, but what is it? Hopefully, investors will be able to determine that before it could be too late.
Overall Review and Would I Recommend It?
I did enjoy reading The Intelligent Investor, written by Benjamin Graham and with commentary provided by Jason Zweig.
This book has provided countless pages of knowledge and advice for investors to help them learn more about value investing and provide solid strategies and standards to follow.
Yet, this book I have found was dry at times. While it sounds to be a fascinating read and is, it often gets a little boring. So if you’re looking for a great story that can gauge your interest, then well, you’ll probably turn away right now.
But instead, if you are looking for a solid book on investing, I would have to recommend this. It has provided excellent advice on investing itself rather than just value investing. It was very informative for me and my understanding of investing and the investment style I want to pursue.
Jason Zweig’s commentary, I found, was needed at times to explain some of the core concepts in each chapter. Let me state that this book is a bit technical and is no easy read. It may take a considerable amount of time to read through this thoroughly, yet it will be worthwhile if you are interested in learning more about investing.
While I haven’t read many books on investing as of yet, I can state that so far, this one is my favourite compared to A Beginner’s Guide to the Stock Market written by Matthew Krater. It certainly provides much more detail than that book has provided.
Additionally, this book is focused on investing in the long-term rather than the short term, while providing information on some of company metrics like P/E ratio, net current assets, current ratio, and much more.
Let me know though, have you read this book? Write down below in the comments if you have any books you want to recommend me to leave a suggestion below or reach out to me on Instagram.
I hope you found some value from my summaries of the key lessons I’ve grasped, and it may have influenced you and your purchase of the book itself. Hell, maybe you’ll call a short The Intelligent Investor summary. The link to the product on Amazon can be found up top, and as a reminder, it is an affiliate link, meaning I will get a % of the sale at no additional cost to you if you choose to purchase it with my link.
Thanks for reading, as always. Look out for more content regularly.
Note: I am not a financial. You are trading at your own risk and should consult a financial advisor and/or tax advisor for any investment decisions. Do your own due diligence when considering investing, and this information is for education/informational purposes only. The article “The Remarkably Helpful Key Takeaways From The Intelligent Investor” serves as educational content, not investing or tax advice.