The Intelligent Investor

     Warren Buffet, largely regarded as the greatest investor of all time, said of Ben Graham "I attended Colombia University’s business school in 1950-51 not because I cared about the degree, but because I wanted to study under Ben Graham." 

     Ben Graham's family immigrated from London in 1894. Graham grew up poor because of the death of his father, and an economic crisis in 1907.  He displayed brilliance in academia and was offered a teaching position at Columbia University. He probably would have preferred studying and teaching there but due to the lingering pain of the economic need to support his mother and family, he instead applied his brilliant mind to investing. He was almost wiped out by the crash of 1929 but survived and brought with him the lesson he learned from those experiences. His writing combines a serious sober perspective with mental agility. The work that he did in business has benefited countless investors and added soberness and stability to the financial world ever since

       According to Buffet there are three important lessons that were established reading Graham's most popular and fundamental work  The Intelligent Investor. Basic number one: Stocks are tiny pieces of businesses. This may seem obvious but people often don't look at the underlying business when they are investing in stocks. They aren't just ticker symbols! They are real live companies that have people have put their blood, sweat and tears into building and maintaining. If they are truly growing, it's because smart, dedicated, hard working people are going in day after day and making things happen. To understand stocks you must understand the people and numbers behind them. There are other ways to invest, you can invest in real estate or land, but when you are buying stocks you are buying businesses. If you wouldn't buy a business maybe you should think twice about buying stocks.

      Two: Mr Market.  Ben Graham came up with the metaphor Mr. Market. He's this crazy bipolar guy who generally feels optimistic and occasionally gets very depressed. You can't predict what he'll do next and you DO NOT want to get sucked into his mania!  What this means is in the stock market it's impossible to predict short term changes because the people buying and selling them are un-predictable. Predictions are difficult and timing things perfectly might as well be impossible. Instead of trying to  time your purchases, you should look at the price you are paying. As with anything you buy, look for bargains and keep your own costs down. To determine price Graham suggested looking at Price to Earnings Ratio and Book Value which are still a decent place to start. He said not pay more than 15 Price to Earnings Ratio but look for between 5 and 10, for book value don't pay more than 1.5 times book value but look for less than 1. The companies should also be large, about 1.5 billion and have paid a consistent dividend for 10+ years.  

     Three:Only purchase if you have a large safety cushion. Graham called this cushion a margin of safety. I think many people (myself previously included)  have the false notion that to make more money investing  you have to take more risks, which is completely the opposite with value investing. As with many things, to do better at it you have to put more time and effort into it and know your limitations, not take more risk. This cushion also includes reducing your risk in other ways, like not using money you will need any time soon. Graham also recommends holding 10 to 30 companies, essentially not putting all your eggs in one basket. He also recommends having bonds be make up 25-50 percent of your stocks partly for the emotional stability that it will add to your investments.

      Warren Buffet, who I'll talk about him more in later posts, has since refined much of Graham's thinking, but I think we still owe a lot to this guy.

                                  

some financial sites I have found useful:
http://seekingalpha.com/
http://www.multpl.com/shiller-pe/table
http://www.libertyinvesting.com/blog/
http://www.shillerfeeds.com/
berkshirehathaway.com/letters/letters.html
http://warrenbuffettresource.wordpress.com/

Some other quotes I thought were important from the book: 

“One fairly dependable sign of the approaching end of a bull swing is the fact that new common stocks of small and nondescript companies are offered at prices somewhat higher than the current level for many medium sized companies with a long market history.” P. 143

“An enterprising investor is not one who takes more risks than average or who buys ‘aggressive growth’ stocks; an enterprising investor is simply one who is willing to put in extra time and effort in researching their portfolio.” p.159

“Concentrate on the larger companies that are going through a period of unpopularity…First they have resources in capital and brain power to carry them through. Second, the market is likely to respond with reasonable speed to any improvement shown.” p.163 

“The aggressive investor must have a considerable knowledge of security values, enough to warrant viewing his security operations as equivalent to a business enterprise. There is no room for middle ground between passive and aggressive status… The majority of investors should be defensive.” p. 176

The longer the bull market lasts the more severely investors will be affected with amnesia; after five years or so, many people no longer believe that bear markets are possible. p.190

“The true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stock had no market quotations at all for he would then be spared the mental anguish caused him by other persons mistakes of judgment.” p 203

Price fluctuations have only one signal to the true investor: they provide him an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. “The speculator’s primary interest lies in anticipating and profiting from market fluctuations. The investor’s primary interest lies in acquiring and holding suitable securities at suitable prices.” p 205

Would you allow a lunatic come by at least 5 times a week to tell you that you should feel exactly the way he feels? Yet millions of people let Mr. Market tell them how to feel and what to do despite the fact that from time to time he gets nuttier than a fruitcake. The cheaper stocks got, the less eager people become to buy them because they are imitating Mr. Market instead of thinking for themselves. By refusing to let Mr. Market be your master, you transform him into your servant. After all when he seems to be destroying value, he is creating them elsewhere.   p 215

4      “For anyone who will be investing for years to come, falling stock prices are good news, not bad since they enable you to buy more for less money. The longer and further stocks fall, and the more steadily you keep buying as they drop, the more money you will make in the end-if you remain steadfast until the end. Instead of fearing the bear market you should embrace it. You should be perfectly comfortable if the market stopped supplying prices for 10 years. ”

“You will be much more in control, if you realize how much you are not in control.” p 223

"Buying funds based purely on their past performance is one of the stupidest things an investor can do.” 

Fund Drawbacks Conclusions p. 243

1.       The average fund does not pick stocks well enough to overcome the costs of researching and picking them

2.       The higher a funds expenses, the lower its returns

3.       The more frequently a fund trades its stocks, the less it tends to earn

4.       Volatile funds stay volatile

5.       Funds with high past returns are unlikely to remain winners for long

“Sector funds are the investor’s nemesis.”

The higher the growth rate you project and the longer the future period over which you project it, the more sensitive your forecast becomes to the slightest error. P 282

“It is undoubtedly better to concentrate on one stock that you know is going to prove highly profitable, rather than dilute your results to a mediocre figure, merely for diversification's sake. But this is not done because it cannot be done dependably.” P 290

“Corporate accounting is often tricky; security analysis can be complicated; stock valuations are really dependable only in exceptional cases.” P 318

“Today’s investor is so concerned with anticipating the future that he is already paying handsomely for it in advance. Thus what he has projected with so much study and care may actually happen and still not bring him any profit. If it should fail to materialize to the degree expected he may in fact be faced with serious temporary and perhaps even permanent loss.” P 345

“Surely, then, by the exercise of even a moderate degree of skill- derived from study, experience and native ability- it should be possible to obtain substantially better results than the DIJA.” P 376

“It is true that a fairly large segment of the stock market is often discriminated against or entirely neglected in the standard, than the intelligent investor may be in a position to profit from the resultant under-valuations.”   P 380

The vast majority of people who try to pick stocks learn that they are not as good at it as they thought; the luckiest ones discover this early on, while the less fortunate take years to learn it.” p 396

“The speculative public is incorrigible. In financial terms it cannot count beyond 3. It will buy anything, at any price, if there seems to be some ‘action’ in progress. It will fall for any company identified with ‘franchising,’ computers, electronics, science, technology when the particular fashion is raging. Sensible investors are above such foolishness.” P 437

“Just as the Surgeon General’s warning on the side of a cigarette pack does not stop everyone from smoking; no regulatory reform will ever prevent investors from overdosing on their own greed. The circle can only be broken one investor and one financial advisor at a time. Mastering Graham’s principles is the best way to start.” P 437

Just as a coin does not become more likely to turn up heads after landing on tails nine times in a row, so an overvalued stock (or market) can stay overvalued for a surprisingly long time. p. 466

“It is well established that people often assign a mental value to stocks based largely on the emotional imagery that companies evoke. The intelligent investor always digs deeper.” P 474

“The market scoffs at Graham’s principles in the short run, but they are always revalidated in the end. If you buy a stock purely because its price has been going up –instead of asking whether the underlying company value is increasing-then sooner or later you will be extremely sorry.” P. 486

"Never dig so deep into the numbers that you check your common sense at the door..." p.508

"..chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions…the margins of safety is always dependent on the price paid.” P 516

“A sufficiently low price can turn a security of mediocre quality into a sound investment opportunity.” P 521

Have the courage of your knowledge and experience. If you have formed a conclusion from the facts and if you know your judgment is sound, act on it- even though others may hesitate or differ…In the world of securities, courage becomes the supreme virtue after adequate knowledge and tested judgment are at hand.”

“Limit your ambition to your capacity and confine you activities within the safe and narrow path of standard, defensive investment. To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.”  P 524

“Simply keeping your holdings permanently diversified, and refusing to fling money at Mr. Market’s latest, craziest fashions, you can ensure that the consequences of your mistakes will never be catastrophic.” P 531

“One lucky break, or one shrewd decision-can count for more than a lifetime of journeyman efforts. But behind the luck, or the crucial decision, there must usually exist a background of preparation and disciplined capacity. Interesting possibilities abound on the financial scene, and the intelligent and enterprising investor should be able to find both enjoyment and profit in this three ring circus. Excitement is guaranteed.” P534

“Without a saving faith in the future, no one would ever invest at all.” P 535