When it comes to investing, everyone’s first thoughts are geared toward fair value, or at least they should. The book “The Intelligent Investor” by Benjamin Investor will be an eye-opener for all those who yearn to be value investors.
Why this book?
The book has inspired people worldwide and is a stock market bible on investing. It has been acknowledged globally as the greatest investment advisor of the twentieth century.
Graham is clear about what the reader should expect from this book. He says this book is not for speculators but is for someone who wants to build a sound approach to wealth creation. It does not guarantee fancy overnight results but can help achieve creditable results with minimum effort.
Can You Beat the Market Averages?
Graham warns many people who claim to be investors are speculators in the real sense. You cannot simply buy a stock, hold it long-term, and expect it to beat market averages.
If someone does that, they are sadly mistaken. You need to thoroughly study what the company stands for rather than speculate and sit on hope.
According to the author, there are two types of investors. Here he is not referring to speculators who buy and sell stocks when there is expected volatility in secondary and minor trends of the market.
Enterprising investors aim to beat the markets by identifying and investing in highly undervalued stocks. Defensive investors opt for stable investing that match the market average by diversifying.
He cautions enterprising investors must be better informed. They must have the requisite skills and be smarter than the vast majority to beat the market averages.
“But investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”
Should you consider inflation while investing?
Graham stresses the need to project expected returns considering inflation levels. He says, backed by data, that stocks perform well when inflation is normal. Inflation, when normal is factored in, and the prospects of companies hold the key when it comes to investing.
He also cites that stocks perform poorly when inflation is low. Stocks perform erratically when inflation is quite high and does not show signs of a downward trajectory.
The book gives several facts on interest rates, bond yields, and stock performance. As a serious investor, one should not ignore such facts when looking to invest long-term or as per risk profile.
What Type of Investor am I?
There are several distinctions the author calls out of the two types of intelligent investors in the book. He gives insights into how each of them should be invested and in what proportion. These insights are time-tested and can bring outstanding results if followed to the T.
Below are some insights from the distinctions that stand out.
Defensive Investor
It is an old and sound principle, an investor who cannot afford to digest that extra bit of risk should be satisfied with moderate returns. These moderate returns match the market averages if you invest in them at the right time.
He suggests defensive investors should constantly work on the proportions of investment in stocks and bonds. This will vary when markets are at dangerously high or low levels. The idea is to have a larger portion of investment in stocks when markets are at lows and the least when markets are at the top.
Enterprising Investors
Graham says an Enterprising intelligent investor is constantly researching, selecting, and monitoring a dynamic mix of stocks, bonds, and mutual funds. It takes a lot of time and loads of energy.
He cautions that if you choose to be an active enterprising investor, you should be aware of certain crucial and critical aspects.
Active or Enterprising investing is physically and mentally taxing.
You cannot be detached from the hullabaloo of the markets.
You are a prudent investor and always look for value than the stock's actual price.
The Enterprising investor does not sell his stocks unless there is a fundamental reason or shift in the company. You are not bogged down by its price's daily or short-term volatility.
He is someone who does a thorough security analysis of companies that are probable investments before taking the call.
The author shares a comparison of security analysis of 4 listed companies on the New York stock exchange that you don’t want to miss.
“Financial risk does not lie where most of us look for, in the economy or our investments, but also within ourselves. Can you be brave or cave?”
How do I Pick My Stocks?
Graham shares extensive suggestions on how each type of investor should pick their stocks. He goes on to describe in detail the implementation of security analysis discussed in the book.
The in-depth knowledge shared on how a diversified portfolio of stocks can be picked. He gives unmatched insights on the DJIA type of portfolio or the quantitatively tested portfolio.
Graham lists quality and quantity criteria that help make better choices for the selection of common stocks.
Adequate size of the enterprise.
Sufficiently strong financial condition.
Earning stability.
Dividend record.
Earnings growth.
Moderate price-to-earnings ratio.
Moderate ratio of price to assets.
Margin of Safety
Graham’s philosophy in investment revolves around the concept of the “Margin of safety.” In the ordinary common stock bought for investment under normal conditions, the margin of safety lies in the expected earning power considerably above the going rate for bonds.
He unambiguously says the philosophy of investment in growth stocks parallels, imparts, and impart contravenes the principles of margin of safety. A growth investor relies on greater than average earnings of stock than in the past.
A deep study of past performance gives him the confidence to remain invested in such stocks. That’s the margin of safety he carries.
He clearly states, in investment theory, there is no reason why the estimated future earnings should be a less reliable guide than the bare record of the past. Security analysis is coming more and more preferred as a competent evaluation of the future. Provided the calculation of the future is conservatively made.
“No matter how careful you are; the one risk no investor can ever eliminate is the risk of being wrong.”
Conclusion
If you are a casual reader, then there is way too much information in this information that you can digest. For serious investors, this book calls for a second read.
This book has no dearth of knowledge shared with examples and calculations. You will need a second read for all this information to sink and have sound knowledge of investing.
It’s time to get your hands on this book and deep dive into the wealth of knowledge shared about value investing.
(Amazon paid link)
Guest Post - Written by Mr. Lal Bajaj, Bangalore
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