The Intelligent Investor Summary In English

The Intelligent Investor

About Book

The Intelligent Investor 

The Intelligent Investor 

Benjamin Graham

The Intelligent Investor
The Intelligent Investor Summary 
The Intelligent Investor summary in English

Introduction

What does it mean to be an Intelligent Investor? Do you need a high IQ to make returns? Benjamin Graham says no. An intelligent investor has discipline, patience, and eagerness to learn. It means being able to control your emotions and think independently. Graham emphasized that this kind of intelligence focuses more on character than the brain.

Did you know that Sir Isaac Newton once invested in stocks? It was in South Sea Company which was the hottest stock in the UK at the time. Newton felt that there is panic in the stock market. That is why he sold all his stocks. He gained 100% profit at 7,000 Euros.

However, a few months later, Newton was driven by the enthusiasm of the people. He invested again in South Sea Company at a much higher amount. The result is that Newton lost 20,000 euros.

Later, he remarked that he is good at calculating heavenly bodies but never on the impulses of the people. Newton asked his friends not to mention the words “South Sea” to him ever again.

Was Newton disciplined, patient, and eager to learn? He is certainly at physics but not with investments. He was not able to control his emotions and he was influenced by the opinions of others. That makes Newton an intelligent scientist but not an intelligent investor.

The world of stock trading used to be like a medieval guild. Investors workaround in guesswork and superstition. It was Benjamin Graham who changed all that. Through his books, he set structure and clarity into investing that it became a modern profession. 

How Benjamin Graham did become an authority in investments? How did he gain so much wisdom in stock markets? Benjamin was born to a rich family in London year 1894. His father was a dealer of Chinese porcelain. When Benjamin was one year old, his family migrated to New York.

They had a huge house and several servants on Fifth Avenue. However, Benjamin’s father died a few years later. They lost the porcelain business and became poor. What Benjamin’s mother did was accept some boarders into their house. She also invested some of their money in stocks. Unfortunately, she lost everything in a stock market crash.

Benjamin had one embarrassing memory of going to the bank to cash out a check for his mother. He heard the bank teller confirm if Benjamin’s mother is good for $5. This event motivated him to work hard and improve their situation.

He gained a college scholarship. Benjamin graduated at the top of his class. He was only 20 years old at the time but he was already offered to teach by three different departments. However, Benjamin had to decline. He had his eyes focused on Wall Street. 

He began his financial career as a clerk. Then he became an analyst and after that a partner. Soon, Benjamin built his own investment company. It was called Graham-Newman Corp. 

For 20 years, his investment firm gained 14.7% returns annually. There became a Great Crash in 1929-1932 but Graham endured and even prospered afterward. His firm is one of the most successful on Wall Street. 

How did he do it? How did Graham thrive in his long investment career? In this book, you will learn practical tips on how to be an intelligent investor. You will learn how to minimize risks and choose your stocks among others.

The Intelligent Investor is first published in 1973. But Benjamin Graham’s teachings are so essential and insightful that the book remains very relevant today. The business magnate Warren Buffet says that the Intelligent Investor is the best book on investing ever written. 

Investment versus Speculation

Do you know why brokers in the New York Stock Exchange always cheer when the bell rings at the end of the day? That is because regardless if you win or lose, they will make money. You should know the difference between an investor and a speculator. 

There are many speculators in the stock market. You shouldn’t make the mistake of being one of them. Speculators are just like gamblers in a sense. Gamblers bet huge amounts of money on high risks. They win sometimes but lose most of the time. All the while, it is the casino that is benefitting.

How do you know if you are investing and not speculating? First, it is when you study the company first when you weigh its pros and cons before buying stocks. Second, it is when you avoid taking high risks. And third, it is when you expect adequate and not overly high returns. 

If you keep in mind these three rules, you will avoid losing money on your investments. You will gain money for yourself and not for the brokers. Speculators are prone to making wrong decisions. Investors, meanwhile, are always cautious. The result is that they have long-term sustainable success. You will become one if you follow Graham’s guidelines.

Now, more and more people are getting into day trading and online trading. It became more like playing a financial video game. Information about investments is pouring out in bars, kitchens, cafes, and restaurants. Financial advertisements are all over TV and the Internet. 

The problem is that people are misinformed. They are getting plenty of data but not enough intelligence. They just see stocks as blips on a screen. Most of them are speculators. They don’t bother to learn about the companies they invest in. What’s important for them is to know the ticker symbol so that they could buy the stocks.

In 1998, the stock price of a small building-maintenance company tripled in just a matter of minutes. The company’s name is Temco Services. The reason why its price shot up is that people confused its ticker symbol TMCO with TMCS. Ticket Master Online is a popular website that just had its IPO.

People invested in Temco Services because they thought it is Ticket Master Online. They didn’t bother to take 2 minutes to check the ticker symbols on the internet. They just bought stocks and ended up buying TMCO instead of the TMCS they wanted.  

Would you be comfortable not checking stock prices every day? According to Graham, that is one criterion to be an investor. You should be looking at the long-term, at the values of the company you invested in, and not the everyday fluctuation. Doing so will prevent you from being influenced by others.

There was one analyst in CIBC who pegged the price target of Amazon.com to grow from $150 to $400. The result is that Amazon stocks increased 14% on that day. That was in 1998. The analyst Henry Bold get explained that his price target is pegged on a span of one year. Nevertheless, Amazon stocks continued to increase. It even exceeded $400 in the next few weeks. 

A Century of Stock-Market History

In the 1990s, a group of stock market forecasters said that since 1802, stocks had an average of 7% returns every year. It means that investors in the 1990s can rely on at least 7% annual returns. The forecasters based their future predictions with full trust in the past. 

However, for Graham, this is just beyond logic and reason. The author is always equipped with practicality and common sense. He argued that the past behavior of the stock market can never be the same in the future. Indeed, the forecasters were proven wrong. 

Kevin Landis, a manager of firsthand mutual funds, interviewed for CNN in 1999. He was asked if stocks in wireless telecommunication are overvalued. Landis replied that it was not. The industry is growing and it will continue to do so in the following years. 

Robert  Froelich, a strategist at Kemper funds, appeared in the Wall Street Journal in 2000. He implied that people should not be scared to invest in companies with high stock prices. According to Froelich, these companies have the right vision and the right people. It should be worth it to invest highly in them.

Jeffrey Applegate, a strategist at Lehman Brothers, was featured on Business Week in 2000. He said that just because the stock market prices are higher doesn’t mean that investing is riskier. 

But the truth is that it is indeed riskier. Investing in stocks is always risky whether in the past, in the present, or the future. These 3 forecasters who believed that there were guaranteed high returns in the late 1990s were ultimately crushed. 

Landis lost 67% of his stocks on Nokia and 99% on Winstar Communications. Froelich lost 70% on both Cisco and Motorola. In total, Cisco investors lost $400 billion. When Applegate made his assumption in 2000, Dow Jones Index was around 11,000 while NASDAQ was at 4,400. After two years though, the situation changed completely. Dow Jones went down to 8,000 and NASDAQ fell to 1,300.

The lesson is that the higher you assume on returns, the harder you will fall. The intelligent investor will not invest in high-priced stocks even if forecasters are optimistic. There is a limit to the profit that companies can gain. And so there must be a limit to the amount that investors are willing to put in.

High-priced stocks can be compared to Michael Jordan who is an all-time basketball superstar. When the Chicago Bulls drafted him, the team acquired so many supporters and admirers. The Chicago Bulls paid Michael Jordan $34 million each year that he played with the team. 

No matter how great Michael Jordan is, it would not have been sensible for the Bulls to pay him $340 million every year or $3.4 billion or even $34 billion. That is just ridiculous. Likewise, investors should not be so carefree about putting in money. Remember that the past cannot predict the future of the stock market and there is a limit to the returns that you can get. 

Graham suggests a simple rule to any investor. “Buy low and sell high.” The problem is that the majority of people do the opposite. They end up buying high and selling low. The next time you hear an “expert” gives a very optimistic forecast, remember the rule of opposites. The more optimistic an investor is for the long-term, the more likely he will be proven wrong in the short term.

General Portfolio Policy

There are two approaches to becoming an intelligent investor. The first one is the active approach. If you are an avid competitive sports fan then this would work for you. Active investing means to be always on the watch, always studying and selecting your set of stocks and bonds.

The second one is the passive approach. If you are more laid back, if you don’t want to feel much pressure and if you want to keep things simple, this is for you. Passive investing is to have permanent investments which you don’t need to check from time to time. 

Both active and passive approaches are intelligent. The key is to find the right one for you. Are you always craving excitement or are you more attracted to calmness?  After this step, you should decide how much you are willing to put in bonds and how much you are willing to put in stocks. Generally, bonds have low risk but low returns. Stocks have higher risks and higher returns.

Some experts say that people should decide based on age. They say that younger people can handle more risks and older people should engage in lower risks. For example, a 28-year-old professional should put 72% of his money in stocks. An 81-year-old woman should only put 19%.

Graham dumps this idea though. It doesn’t matter what age you are. What matters is how intelligent you are as an investor. Graham advises that any investor should keep at least 25% in bonds. That will protect you from the unpredictable stock market. 

Let’s take a look at two scenarios. Mrs. Smith is an 85-year-old widow. She has a monthly pension. She has several grandchildren to whom she wants to give an inheritance. Mrs. Smith has $3 million in her bank. 

Meanwhile, there is John a 25-year-old bank employee. He is looking forward to starting his own family. John saves money for the wedding and a down payment for a dream house. 

Of the two of them, who should invest more in stocks? Who can afford to take more risks? According to the age assumption, it should be the older woman, Mrs. Smith, to be less risky. But she has more financial security than John. 

Graham suggests that all investors, young and old, should prepare for the unexpected. The stock market is unpredictable and so is life. Are you single? Do you expect to have children anytime soon? Do you have a stable income?

If your financial situation is more like Mrs. Smith’s, then you can afford 75% stocks and 25% bonds or cash. If you’re more like John, then you should maintain your 75% in bonds or cash. An intelligent investor will not buy more stocks just because stock prices went up. An intelligent investor has patience and discipline. 

Look instead at your needs rather than the stock prices. Are your investments adequate for your needs? Graham advises assessing your portfolio every 6 months. This will prevent you from taking any impulsive decisions and losing money. 

The Defensive Investor and Common Stocks

The defensive investor is someone who knows how risky stock markets can be and knows how he can defend himself against them. Bonds are often low-yielding so it’s logical to own stocks at a price and amount that works for you. 

It is practical to keep a “permanent autopilot portfolio” which is a set of stocks that you always keep. Make sure that you have studied the companies before picking them. Once you have that permanent portfolio, it will prevent you from always shopping for stocks. 

The number one rule of being a defensive investor and an intelligent investor is to do your homework. Be familiar with the company you’re investing in and check its financial statements. Peter Lynch who owned Fidelity Magellan advises people to use common knowledge. The crowd piling for a new restaurant, toothpaste, or brand of jeans indicates that it’s good business. 

Finding that promising company though is just half of the job. The next thing you should do is to study its financial statements. The actress Barbra Streisand is also popular for day trading. She represents how the majority of investors think. In 1999, she said that she drinks Starbucks every day so she invests in Starbucks stock.

Buying stocks from a business that’s familiar to you isn’t enough. Another example is the many people who invested on Amazon.com just because they love the website or the people who bought e-Trade stocks because it’s their online broker. Some people invest in a mutual fund company because its office building is around the town. 

Don’t make the mistake of exaggerating what you already know. If you are over-familiar with the company, it may be that you do not see its flaws. Don’t be a lazy investor.

Now, if you are a defensive investor who always does homework, this is a good time to buy stocks. You can take advantage of these tips which would make investing easier and cheaper for you. The first is to check online broker websites. Some examples are sharebuilder.com and foliofn.com

These broker websites only charge $4 per transaction. There’s no minimum account balance required to invest. You can arrange it so that you can put in money from your online bank account or reinvest your dividends. Some companies offer their stocks on their website. The advantage is that you would not need a broker.

Another useful tip is to invest in mutual funds. They are generally low-cost and low-risk. Mutual funds require little maintenance or monitoring. They are less likely to cause you any surprises or problems. As opposed to high-priced stocks, mutual funds are the safer and smarter choice. 

Portfolio Policy for the Enterprising Investor: Negative Approach

What does day trading mean? It refers to the tendency to hold stocks for a very short time. Many people are into it but day trading is the quickest way to financial suicide. When you day trade, you may win some but lose most of your money. The one who will benefit the most is your broker.

Day traders are always excited to buy or sell their stocks. The result is that they tend to buy at a higher price and sell at a lower price. Remember that each time you trade your stocks; you need to pay your broker. The more you day trade, the lower your returns are. 

The extra cost you pay is called market impact. It doesn’t show up on your broker’s statement but it’s there. For example, you want to buy 1,000 shares at the soonest time. Because of your eagerness, you pay the stocks 5 cents higher than the normal price. That will already cost you $50.

The same thing goes when you want to sell. Because you are desperate, you agree to part with your shares at a lower price. Imagine that your stock is a chunk of wood. Every time you buy or sell, you swipe sandpaper on it. You become eager to buy and you pay 4% more. You want to sell fast and you pay another 4%. That’s already 8% “sandpapered” away on your chunk of wood.

There’s a popular saying that goes, “Don’t just stand there, do something.” but that doesn’t apply to investing. An intelligent investor will do the exact opposite. “Don’t do something, just stand there.” you will get more returns if you keep your stocks for the long-term. 

Portfolio Policy for the Enterprising Investor: The Positive Side

How exactly do you follow Graham’s golden rule of buying low and selling high? Everybody wants to invest in top companies. These corporate giants are less likely to go bankrupt and more likely to give desirable returns. But the problem is that the bigger they grow, the faster their stock prices shoot up.

From 1995 to 1999, the companies Home Depot, General Electric, and Sun Microsystems grew bigger every year. The revenues of Sun and Home Depot doubled. Both companies tripled their earnings per share. GE’s revenue went up by 29%. Its earnings per share rose to 65%.

And so because these are the hottest stocks at the time, they became very expensive to acquire. The problem is that the growth of stocks eventually exceeds that of the growth of the company. The investors who paid for high-priced stocks often don’t get the returns they expected.

Here are a couple more lessons. A top company is not such a good investment anymore if you pay an extremely high price for it. There is such a thing called financial physics. The bigger a company becomes, the slower it grows. 

For example, there is a hot new company that is worth $1 billion. It can easily double its sales in the following year. But if the company’s stock grows up to $50 billion, where is it going to get $50 billion more in sales? 

Now, how can you buy shares of a top company for a quality price? Here is the trick that every intelligent investor should know. Every once in a while the big company gets into problems and controversies. They become unpopular and their prices get lower. 

In 2002, Johnson & Johnson was investigated for false record-keeping at one of its factories. J&J stocks decreased 16% in just one day. The price of each share decreased significantly. This is a great opportunity for intelligent investors. 

While most people doubt J&J, you can seize this big company’s stocks for a lower price. When the “unpopular large company” resolves the issue, you will find yourself on the upper hand. 

The Investor and Market Fluctuations

What does market fluctuation mean? It refers to the increase and decrease of stock prices. It’s the day-to-day blipping on the stock exchange screen. Graham advises that it is best to ignore these reports on a fluctuation. By doing so, you will not be influenced by the moods of other investors and by the market as a whole.

Inktomi Corp was a top software company. After hitting the market in June 1998, its shares increased to 1,900%. In December 1999, the share price even tripled and in March 2000, it set a high peak of $231.62. 

What caused Inktomi to increase in share value so fast? The reason is that the company is growing rapidly. Towards December 1999, Inktomi has $36 million in sales. If this rate of growth continues for the next five years, its revenues would increase from $36 million per quarter to $5 billion per month. 

But the truth is Inktomi was losing lots of money. Yes, the company made $36 million in sales but it also lost $6 million in that quarter. It lost $24 million 2 months before and another $24 million in the past year. Ever since Inktomi started, it has never made any profit. Yet investors put in a total of $25 billion in this new company. 

Two years after setting the high of $231.62, Inktomi’s share price dropped to a mere 25 cents. Its market value dived from $25 billion to just $40 million. That is amidst the fact that Inktomi made $113 million in revenue. What happened? What caused this extreme change?

It’s just another of the stock market’s mood swings. In early 2000, investors were raving about tech companies. Two years after, they became doubtful of the industry.

This is when Yahoo! stepped in. Yahoo was able to acquire Inktomi for $1.65 per share. Yahoo acted as an intelligent investor in this situation. The bigger company took advantage of Inktomi’s sun popularity. This is what Graham means by buying from pessimists and selling to optimists. 

Now that you know how bipolar the market is, will you let it affect your decisions? The job of the stock market is to set the prices, your job as an intelligent investor is to decide on your own. 

In 1999, the stock prices of tech companies were skyrocketing. Most investors want to get their hands on them. Because people want what everybody wants, they came to ignore that the share of “Old Economy” companies are getting cheaper. Examples of these are Gillette, Coca-Cola, and the Washington Post. Their prices have dropped to 24.9%

If you are an intelligent investor, you would not buy tech companies’ stocks at a high price like everybody else. You would take advantage of the situation and buy stocks of the unpopular large companies. Why invest highly in tech start-ups when you can have Coca-Cola shares at a bargain price?

The lesson is not to let the stock market control you. Instead, take control of your own decisions. You cannot control the stock prices but you can control 5 practical things.

First, you can control your expectations. Be realistic about estimating your returns. 

The second is your risk. You can control where, when and how much you will invest. Third, your brokerage costs. You can control this cost by trading cheaply, patiently, and rarely. Fourth, your tax bills. If you keep your stocks for one year to five years, it will lessen your tax liability. 

The most important thing that you have control over is your behavior. Do not buy when everyone else buys and do not sell when everyone else sells. An intelligent investor buys periodically when he can from his permanent portfolio or list of companies. An intelligent investor sells only when he needs cash like for serious illnesses, house down payment, or college tuition.  

An intelligent investor can live without checking the stock market fluctuations. He can rely on his judgments. An intelligent investor can hold his stocks for a minimum of 10 years. 

Conclusion

You learned how to be an Intelligent Investor. You learned about speculations and failed forecasts. You learned how to build a permanent autopilot portfolio. You learned about day trading, unpopular large companies, and market fluctuations. 

Your financial outcome is in your hands. Do not let any outside factors affect you. The power to be rich and successful is within you. Choose to stand out from the crowd and become an intelligent investor now. 

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