If you are interested in investing, you have probably heard of Benjamin Graham, the father of value investing and the author of The Intelligent Investor. This book, first published in 1949 and revised several times by Graham and later by Jason Zweig, is widely considered as one of the most influential books on investing ever written. But what makes this book so special? And what can you learn from it today?
In this blog post, I will try to answer these questions by giving a brief overview of Graham’s main ideas and principles, as well as some examples and insights from his book. I will also share my personal opinion on why this book is still relevant and useful for investors of all levels.
# What is value investing?
Value investing is an investment approach that focuses on finding undervalued stocks that trade below their intrinsic value. Intrinsic value is the true worth of a company based on its assets, earnings, dividends, growth potential and other factors. Value investors aim to buy these stocks at a discount and hold them until they reach their fair value or even higher.
Graham’s method advises investors to concentrate on the real-life performance of their companies and the dividends they receive, rather than paying attention to the changing sentiments of the market. He also advocated for an investing approach that provides a margin of safety—or room for human error—for the investor. Most importantly, investors should look for price-value discrepancies—when the market price of a stock is less than its intrinsic value.
# Who is Benjamin Graham?
Benjamin Graham was born in 1894 in London and moved to New York with his family when he was one year old. He graduated from Columbia University at age 20 and started working on Wall Street as a financial analyst. He soon became a successful investor and fund manager, but lost most of his fortune during the Great Depression.
This experience taught him valuable lessons about risk management and diversification. He developed his own system of analyzing securities based on fundamental analysis and quantitative criteria. He also became a professor at Columbia Business School and taught many students who later became famous investors themselves, such as Warren Buffett.
Graham wrote several books on investing, including Security Analysis (1934) with David Dodd and The Intelligent Investor (1949), which are considered classics in the field. He died in 1976 at age 82.
# What are some key concepts from The Intelligent Investor?
The Intelligent Investor covers many topics related to investing, such as portfolio management, dividend policy, inflation, market cycles, bond investing, and more. However, some of the most important concepts that Graham introduced or emphasized are:
– The distinction between an investor and a speculator: An investor is someone who bases their decisions on thorough analysis and long-term prospects of a company, while a speculator is someone who bets on short-term price movements based on emotions or rumors. Graham warned against speculation and advised investors to adopt a disciplined and rational attitude towards investing.
– The margin of safety: This is one of Graham’s core principles and refers to buying stocks at a significant discount to their intrinsic value. This way, investors can protect themselves from errors in calculation or unforeseen events that may affect the company or the market. Graham recommended buying stocks with at least 50% margin of safety, although he acknowledged that this may not always be possible.
– The Mr. Market analogy: This is one of Graham’s most famous illustrations and helps explain how investors should deal with market fluctuations. He compared the market to an emotional partner who offers to buy or sell shares every day at different prices, sometimes reasonable, sometimes absurd. He advised investors to ignore Mr. Market’s moods and only take advantage of his offers when they are favorable. He also cautioned against being influenced by Mr. Market’s opinions or expectations, as they may not reflect reality.
– The defensive vs aggressive investor: Graham divides investors into two types: defensive (or passive) investors and aggressive (or active) investors. Defensive investors are those who want to minimize their risk and effort while achieving satisfactory returns. They prefer a simple portfolio of high-quality stocks or bonds that require little maintenance or analysis. Aggressive investors are those who want to maximize their returns by taking more risk and effort. They seek out undervalued or overlooked stocks that have higher potential for growth or appreciation. Graham provides detailed guidelines for both types of investors on how to select, diversify, monitor, and rebalance their portfolios according to their goals and preferences. He also emphasizes that both types of investors need discipline, patience, rationality, and independence to succeed in investing.
# Here are some of the key lessons from The Intelligent Investor:
The Intelligent Investor is a classic book on value investing by Benjamin Graham, who was Warren Buffett’s mentor and teacher. The book offers timeless wisdom and practical advice for investors who want to avoid costly mistakes and achieve long-term success in the stock market. Here are some of the key lessons from The Intelligent Investor:
– Be an intelligent investor, not a speculator. An intelligent investor is one who analyzes the intrinsic value of a company based on its earnings, assets, dividends and growth prospects, and buys its shares at a price below that value. A speculator is one who bets on price movements based on emotions, rumors or trends, without regard for the underlying business fundamentals. An intelligent investor aims to profit from the market’s irrationality and volatility, while a speculator exposes himself to unnecessary risks and losses.
– Diversify your portfolio. Graham recommends that an intelligent investor should have a balanced portfolio of stocks and bonds, with at least 25% and up to 75% allocated to each category depending on his risk tolerance and market conditions. He also advises that an investor should own at least 10 and preferably 30 different stocks from various industries and sectors, to reduce the impact of any single failure or disappointment.
– Focus on quality and safety. Graham emphasizes that an intelligent investor should look for companies that have strong financial positions, consistent earnings records, stable dividends and good growth prospects. He also suggests that an investor should avoid companies that are highly leveraged, have erratic earnings or dividends, or are involved in speculative or unproven businesses. He advocates buying stocks with low price-to-earnings ratios (P/E), high dividend yields and low debt-to-equity ratios.
– Be patient and disciplined. Graham warns that an intelligent investor should not expect to outperform the market every year or even every decade. He acknowledges that value investing requires patience and discipline to wait for attractive opportunities and to stick to sound principles regardless of market fluctuations or popular opinions. He advises that an investor should ignore short-term noise and focus on long-term results.
– Learn from your mistakes. Graham admits that he made many mistakes in his investing career, but he learned from them and improved his methods over time. He encourages an intelligent investor to keep a record of his investment decisions and outcomes, analyze his errors objectively and honestly, and correct them accordingly. He also urges an investor to seek feedback from others who are more knowledgeable or experienced than him.
These are some of the lessons from The Intelligent Investor that can help anyone become a better investor. The book is full of insights and examples that illustrate Graham’s philosophy of value investing in various situations and scenarios. It is a must-read for anyone who wants to learn how to invest wisely.
# Some reviews from financial experts and critics “The Intelligent Investor”?
The Intelligent Investor by Benjamin Graham is widely regarded as one of the best books on value investing ever written. The book, first published in 1949, has influenced generations of investors, including Warren Buffett, who called it “by far the best book on investing ever written”. But what do other financial experts and critics think about this classic work? Here are some excerpts from some reviews:
– “Graham’s original work itself is fantastic, if you take the time to absorb it and understand it. […] The practical advice offered is timeless. In particular I found Chapter 1 (the difference between speculation and investing), Chapter 8 (managing your emotions), Chapter 10 (discerning the advice from others) and Chapter 20 (having a margin of safety) to be enlightening, as those four chapters were probably the most useful to me personally.” – Scott W. McMurray II, Amazon.com customer review
– “In The Intelligent Investor, Graham lays out the foundation of value investing by three introducing key principles: the idea of ‘Mr. Market’, a value-oriented disciplined approach to investing, and the ‘margin of safety’ concept. ‘Mr. Market.’ The stock market on a daily basis resembles a casino, only without the comfort of free cocktails.” – Investopedia.com article
– “The Intelligent Investor should be read by all investors as a foundation to developing a sound investing plan. Graham’s principles certainly seem to have stood the test of the last 70 years, as well as the 50 years preceding the publication of his book. I think one of the biggest contributions of Graham’s work is his clear distinction between two types of investors: defensive and enterprising.” – Investor Junkie website
As you can see, The Intelligent Investor has received praise from various sources for its timeless wisdom and practical guidance on how to invest wisely and profitably in any market condition. If you are interested in learning more about value investing and how to apply it to your own portfolio, you might want to check out this book for yourself.
- 4.7 out of 5 stars based on over 37,500 customer ratings and reviews
- Many reviewers praised the book for its timeless investment principles, clear writing style, and practical advice. Some noted that the book is geared more towards experienced investors and may not be as accessible to beginners.
- 4.25 out of 5 stars based on over 118,000 ratings and over 3,000 reviews
- Many readers found the book to be a valuable resource for developing a sound investment strategy and praised its emphasis on value investing principles. Some reviewers noted that the book can be dense and may require multiple readings to fully grasp its concepts.
Overall, “The Intelligent Investor” is widely regarded as a classic and influential book on investing. It has received high ratings and positive reviews from both Amazon and Goodreads users, indicating that it continues to be a valuable resource for investors looking to develop a sound investment strategy based on value investing principles.
- ASIN : 0060555661
- Publisher : Harper Business; Subsequent edition (February 21, 2006)
- Language : English
- Paperback : 640 pages
- ISBN-10 : 9780060555665
- Reading age : 13+ years, from customers
- Item Weight : 1 pounds
- Dimensions : 5.31 x 1.6 x 8 inches
- Best Sellers Rank: #389 in Books (See Top 100 in Books)