'The Intelligent Investor' was written in 1949 by Benjamin Graham and intended as a sequel for the 'hard-to-read' tome 'Security Analysis'
Benjamin Graham, assisted by David Dodd wrote a tome entitled "Security Analysis." At the time (1934), it brought to a market a kind of order what was otherwise some kind of a shambles.
That tome is still available but a real hard read for just about anyone other than the most keen of bean counters.
Graham realised that Security Analysis was written just for the financially educated person and set about writing a shorter version. He called this: "The Intelligent Investor."
This 'abridged' version of his original book was still a stodgy, and long read but more understandable for amateur investors - like ourselves.
The main intent of 'The Intelligent Investor' is to explain how ordinary investors can succeed by following sound and sensible business principles.
Benjamin Graham laid out his 6 principles and we summarise them all right here:
Principle #1: Know the Business You Are Investing In
Before you even contemplate investing in a company, get to know that company inside-out and back-to-front. What do they sell? How do they operate? What is its competition? What are its strengths? What are its weaknesses?
If you cannot answer any of these questions and more - you have no right to be investing your hard-earned in that business.
Do your due diligence.
Principle #2: Know who runs the Business
Always be on the look-out for companies that have competent, efficient, and honest managers. Find the answers to such questions as:
Principle #3: Invest For Profits Over Time, Not For Quick Buy-and Sell Transactions
Only buy stock in companies that have a 'Durable Competitive Advantage'.
Do not buy in the hope you will make a quick turn. Leave that sort of action to the professional speculators. You will surely get your pinkies burned if you try to trade like that. Sure, you may get lucky, but consistently lucky? We don't think so.
Stick to long-term trading as per Warren Buffett and this website. Retirement Investing is all about the long term. The longer the better i.e. decades.
Principle #4: Have Confidence in Your Own Reasoning
Do not listen to the crowd. Do not listen to "tips". Do not give tips. Keep your own council.
The crowd do listen to tips. The crowd (a.k.a. the herd) talk among themselves. We can't imagine what garbage is going around. Stay well away.
You've done your own homework. Be confident in your own convictions. If you select good solid companies as described herein, you will be fine.
Principle #5: Choose Investments for Their Fundamental Value, Not For Their Popularity.
Always remember - the Market is always right. Not some of the time. But always.
The value of a company's shares is what you have done your homework on. It's fixed. But the price you can buy or sell those shares will fluctuate (i.e. the Market Price).
Say your valuation of a particular share is £2.00 (the Intrinsic Value) and the Market Makers are selling in the Market for £2.30 you will notice immediately that they are over-priced.
Conversely, if they are selling for £1.80 they are under-priced.
You have to make a decision at what price point you want to buy (or sell). You need to excercise patience and wait for the right price to manifest itself. In the above case you would want to buy at £1.80. Anybody would. But you would be different to the crowd because you would know, for sure, that the stock was a snip at that price.
At this point, we would consult our technical charts to see what activity is going on. Without getting into too much detail here, we would decide if all the selling has dried up and now is the time to buy.
Principle #6: Always Invest With a Margin of Safety
We touched on this briefly in Principle #5 above.
Knowing the Intrinsic Value of a share is a BIG, big advantage. Observing your chrts at this point is a big advantage (because you will know what you are looking for).
It is likely that you will be able to acquire this share at somewhat below Intrinsic Value. Because the crowd think it is going to fall a lot further and they panic.
You will never get the lowest price. Nor should you try. But you will know what Margin of Safety you can apply. Only by experiencing these situations will you become confident. But buying at, or just below Intrinsic Value, would be a good strategy.
N.B. It's interesting to note that Warren Buffett follows very similar Principles!!
Graham conceived his original idea and attempted to put it into words.
That's what "The Intelligent Investor" tried to do.
This big idea was to buy a company for less than its true value. His interpretation of 'true' value was the per share net asset value.
Better explained with a simple example: if a share has a book value of $1 and a market price of 40c, then Graham was of the opinion that eventually, that share price would adjust upwards to its true value, thereby creating an opportunity to sell at a profit.
Graham had a poor up-bringing. But at a early age got involved as an analyst and had first hand experience of the 1929 crash and after it, the depression.
Graham dis-believed company accounting at the time and for that reason he applied a "margin of safety" to his true value/market value theory.
In his book, Graham made separate rules depending on whether the reader is a 'defensive investor' or an 'enterprising investor.'
For a defensive type of investor he recommended that the investor mirror the Dow Jones Industrial Average by buying an equal weighting of all 30 constituents, or that they follow his rules laid out below.
Benjamin Graham's rules for a Defensive type of Investor:
1. Choose only industrial companies with more than $100m in annual sales and utility companies with more than $50m in annual sales
2. Industrials should have their current assets worth at least twice their current liabilities. Long-term debt should not exceed working capital. And a Utility company's current liabilities should not exceed twice the book value
3. The company should have some earnings from common stock in each of he previous ten years
4. The company should have a 20-year record of dividend payments
5. The company should have a minimum increase of at least on third in per share earnings in the past 10 years using three year averages at the beginning and the end
6. The present share price should be not more than 15 times the last three years' average earnings
7. The share price should be more than 1.5 times the last reported book value
8. Don't keep fewer than 10 or more than 30 stocks in your portfolio
Graham made his rules for Enterprising Investors a little more simple:
1. Draw up a list of stocks with low P/E ratios - for example, under 9
2. Select companies with current assets at least 1.5 times current liabilities, and for industrials, debt not more than 100 per cent of net current assets
3. Of the above, choose companies that are currently paying dividends
4. Of the above, choose companies with higher earnings last year than they had three years ago
5. Narrow the list down to companies with a share price less than 120 per cent of their net tangible assets
This is the tome that Benjamin Graham produced in 1949 proclaiming his 'Value Investing' philosophy.
It is regarded by many investors as the Stock Market Bible.
Warren Buffett, who we regard as an investing "god" gushed about this book. Being honest, it is a hard read, but every page has words of wisdom.
It is a volume that should grace everyones investment bookshelf.
Click on the link below to go straight to Amazon:
For all of this, Benjamin Graham became known as the 'Father of Value Investing.'
But in 'The Intelligent Investor', Graham tried to portray that 'Value Investing' was an easy game to play.
It's just a way of scanning the markets looking for "cheap" shares and holding them until they get to your target.
The book is however, over 600 pages. It took us quite a while to get through it. We kept reading bits and putting it down, reading another book, then coming back to it.
It did not entertain me, that's for sure, but it does indeed contain over 600 pages of wisdom.
Here again is a link to purchase the book: