The intelligent investor, written by Benjamin Graham, is the book that has influenced me the most as an investor.
It fell into my hands in early 2019, when I realized that the best way to learn how to invest in the stock market was not on internet, but in books.
A Google search for “the best books to invest in stock market” led me to the intelligent investor, since the reviews about it were very positive.
When I finished this book I was convinced that making money investing in stocks was possible.
I must admit it wasn’t easy to read. It’s a very dense book. For me it was like going back to university 🙂
I was surprised because I had always been interested in the finance world, and recently I had been reading a lot about this topic on Internet, so I thought I already had the foundations.
Well, the intelligent investor showed I was wrong.
This book changed my view of the stock market forever.
Today I will guide you through this wonderful book and all the teachings I took from it.
You can buy the book on Amazon here, and start a wonderful journey of investing in the stock market.
- Introduction to the intelligent investor
- Who is Benjamin Graham?
- Book summary – Main ideas
- The importance of long term investing
- Investment vs speculation
- Enterprising investor vs defensive investor
- Focus on safe and steady returns
- Margin of safety
- Reduce risk by diversifying your investments
- Do not pay attention to stock market volatility- Mr Market
- Invest periodically – Dollar Cost Averaging Strategy
- Balance your portfolio between stocks and bonds
- Buy companies where P/E * P/B < 22.5
- Investing in mutual funds
- The importance of inflation
- My review on the intelligent investor
Introduction to the intelligent investor
The book was first published in 1949. It is one of the most famous investment books in the world, and it is considered “the bible of value investing”.
There is a reason why Warren Buffett says it’s “the best investment book ever written”.
If Mr. Buffett, also known as “the greatest investor in history,” says it’s the best book on investing ever written, you realise it must be a good book 🙂
There has been several revised editions of this book, some were made by Warren Buffett himself, and the last ones have been made by Jason Zweig.
Jason Zweig is a financial journalist who writes in the Wall Street Journal.
I read the latest edition of Jason Zweig, and it’s the one I recommend. You can find it here.
This book has inspired many people worldwide, helping beginners to understand how to invest in stocks.
Who is Benjamin Graham?
Benjamin Graham was born in England in 1894, and he lived most of his life in the United States.
He was a university professor, economist and investor. Graham is known worldwide as “the father of value investing”.
He wrote two books, “Security Analysis” and “The Intelligent Investor”.
Security analysis is more focused on the interpretation of financial statements, while the intelligent investor focuses on investing in stock market.
His investment philosophy highlights the importance of investor psychology, investing in low-debt companies, fundamental analysis and more things we are about to see.
His investment approach has had a great influence, creating a value investing trend based on his principles that is currently followed by many mutual funds, companies and professional investors.
Book summary – Main ideas
Now let’s look at a summary of the main ideas of this book.
The importance of long term investing
Benjamin Graham stresses the great importance of thinking that you should always invest for the long term.
It’s easy to make money with the stock market, as long as you’re not looking for short-term results.
The intelligent investor is not the one looking for short-term profits, but the one who invests for the long run.
It is very important that the investment period is 5 years or more. As Warren Buffett says:
When we buy shares in a company we like, our favourite holding time is forever
Graham alerts investors of the dangers of trying to obtain short-term profits quickly. He believes that will most likely lead to loses.
He stresses the importance of not making too many trades, since this will mean paying more fees.
The aim should be to buy stocks and hold them for a long period of time.
When you invest in stocks, it’s important to always think about the long term.
Investment vs speculation
For Benjamin Graham, there’s a big difference between investment and speculation. He points out:
An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative
Any investment that does not meet the above requirement is called speculation.
Graham points out that very often people think they are investing but they are actually speculating.
The biggest risk of speculators is for them to believe they are investors.
Buying a stock because “you’ve been told it’s going to go up,” or an investment fund because “John has it and he’s doing well” is not investing, it’s speculating.
Speculating is dangerous and can lead you to lose your capital. Whenever you invest money you have to know why you’re making that investment.
The bottom line is: don’t invest without knowing what you’re buying
Enterprising investor vs defensive investor
Graham introduces the concept of the enterprising investor and the defensive investor, which he covers in several chapters.
The book describes the defensive investor as an investor who does not want to spend much time choosing his investment.
The defensive investor wants to have low volatility on his portfolio, and focuses on avoiding mistakes that can have a big impact on his net worth. He aims to achieve market-like results.
On the other hand, the enterprising investor is willing to spend a lot of time analysing the assets where he wants to make his investment.
This investor takes greater risks, since he wants to be able to beat the market.
Graham stresses the importance of the intelligent investor deciding what type of investor he wants to be, and to follow the corresponding strategy.
Focus on safe and steady returns
As we have mentioned, the intelligent investor should not seek to make a lot of money quickly.
His goal should be to find companies that have growth prospects. The company’s share price should be below the real value of the company.
The investor must analyse each company in detail, looking for business where the stock price is below the company’s book value.
Once he has invested in companies undervalued by the market, the intelligent investor should sit back and wait for the market to realise of the real value of the company, which would generate an increase in the share price.
One good way to identify companies with steady returns is to look for companies which have given dividends for many years in a row. This means it it more likely that the company will carry on generating and sharing the profits in the future.
Margin of safety
The margin of safety is a key part of the intelligent investor. These are the 3 most important words in the book, according to the author.
Graham defines the margin of safety as “the secret of sound investment” and “the central concept of investment”.
The margin of safety is the difference between the share price and the actual value of that stock. The goal for the investor is to pay less than the real value.
The bigger the margin of safety, the more room you have for negative events before you lose money.
On the other hand, if the economic conditions are as you expected, profits are exponentially higher the greater the margin of safety is.
Reduce risk by diversifying your investments
Benjamin Graham advice is not to invest all our money in a single company, even if it looks very good.
No matter how good analysis we’ve done, there’s always a possibility of missing something. Or, even if our analysis is perfect, an external factor can impact the company.
That’s why it’s very important to diversify your investments to reduce risk. You must invest in several companies and/or investment funds.
I recommend investing in index funds, since it reduces risk and offers very high returns.
Do not pay attention to stock market volatility- Mr Market
The stock market is erratic, irrational and often does not follow fundamental analysis. You must ignore their movements.
This is for me the most important lesson in the book. Benjamin introduces us to Mr. Market.
Graham describes Mr Market as a person who comes to your door every day and tells you different quotes for the same stocks.
Mr. Market is not very intelligent, it is irrational, unpredictable, and his mood suddenly changes.
Benjamin Graham recommends that we completely ignore Mr. Market, focusing on following our strategy and doing our own research.
As you may have noticed, Mr. Market represents the stock market, whose sudden and inexplicable swings must be ignored.
The bottom line is that you should ignore the stock market movements in the short term.
Invest periodically – Dollar Cost Averaging Strategy
Benjamin introduces us to one of the most famous investment strategies in the world, the Dollar Cost Averaging strategy, also known as DCA.
DCA strategy consists of investing the same amount of money periodically, regardless of whether the price goes up or down.
The great advantage of this strategy is that it takes the pressure off the investor trying to buy at the “best price”.
This is known as “market timing”, and Benjamin Graham recommends us to avoid it at all costs.
“Many investors have lost money trying trying to time the market.”
By following Dollar Cost Averaging strategy you eliminate the risk of investing a large amount of money just before the stock market crashes.
Benjamin Graham stresses the importance of discipline in order to avoid making mistakes with your investing strategy.
Balance your portfolio between stocks and bonds
Graham sets out the idea that a portfolio should have 25% – 75% of stocks, and the remaining 25% – 75% of bonds.
He recommends that the size of the stock portfolio should be higher when the Price to Earnings (P/E) of the S&P500 is below its historical average, and vice versa.
Graham points out that when there is a bullish period on the stock market and the price is inflated, we must balance our portfolio more towards bonds, holding 75% of bonds and 25% of shares.
On the other hand, when the S&P500 is undervalued, the portfolio must be balanced towards the shares, with 75% of shares and 25% of bonds.
This is the only idea in the book that doesn’t convince me, since I prefer to have a 100% stock portfolio.
This is because the historical return on stocks doubles the bond yields.
A portfolio with bonds has lower volatility, making it a good option for a more conservative investor.
Buy companies where P/E * P/B < 22.5
Benjamin Graham tells us that when we buy a company it is very important to review the value of the P/E * P/B product.
The P/E ratio is obtained by dividing the price of a share by its earnings per share.
The P/B ratio is obtained by dividing the price of a stock by the company’s book value.
By multiplying the P/E * P/B we can know if the share price is expensive or cheap.
Graham recommends that we buy stocks below 22.5, as they are considered to be undervalued.
He also indicates that we should not buy companies above this 22.5.
I think it’s a good way to analyze companies and be able to classify them. This is a great way of getting started on fundamental analysis.
Investing in mutual funds
Benjamin Graham tells the readers that investment funds are more suitable for the defensive investor.
A well-chosen mutual fund can prevent the investor from making serious mistakes.
It is important to choose mutual funds with low fees, that don’t perform excessive trading, and that have performed well in the last 5 years.
Graham points out that some people might benefit from hiring an investment advisor who can do the investing management.
He explains that it depends on the type of investor and the amount of time and effort he wants to put.
The importance of inflation
Inflation is the increase in the price of goods and services over a period of time. It is usually measured annually.
Benjamin Graham highlights that investors don’t normally pay attention to the inflation. If we get a 2% salary raise but inflation is up 4%, it means our salary has reduced.
Inflation is gradually reducing the value of our portfolio.
The best way to fight inflation is to invest in assets that give higher return than inflation.
To do this Graham recommends investing in stocks. And he’s right 🙂
The S&P500 has an annual return of 10% over the past 100 years, while inflation has been 3%.
Just investing in the S&P500 index would have made your savings grow 7% more than inflation.
My review on the intelligent investor
This is a classic book about stock investing, whose wisdom is still valid after 70 years, and I believe it will be valid for many centuries.
Customer reviews are very good, 4.6 out of 5 stars on Amazon.
In my opinion the book is a must read for anyone who wants to start investing in stocks.
The intelligent investor will teach you more than any course or blog, including mine 🙂
Once you finish this book you will have an idea of how the stock market works, how to invest to make money and what mistakes to avoid.
Moreover, Benjamin Graham’s teachings do not apply only to the field of investment, they go much further.
His ideas on discipline, reducing risks, and performing a good analysis before making a decision can be applied to any situation.
If in this 2020 you want to improve your personal finances and start your journey to financial freedom, I recommend you to buy the book and read it.
It changed my life, it could change yours too!
Other financial books that taught me a lot are:
- Rich Dad, Poor Dad – Robert Kiyosaki
- One up on Wall Street – Peter Lynch
I am working on publishing a guide of those books, it should be out soon!
I hope you liked my summary about the intelligent investor. If you have any questions or need more information, feel free to use the comments section below.
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