The Intelligent Investor

This is the first book I read when I started investing. I’ve always considered it a bit dry and outdated; however, going through my notes I’ve clearly underestimated it’s value.

Quotes from Ben Graham’s revised book with commentary from Jason Zweig

Are you an "Intelligent Investor"?

It means being patient, disciplined, & eager to learn; you must also be able to harness your emotions & think for yourself

Enthusiasm:

while enthusiasm may be necessary for great accomplishments elsewhere, on Wall Street it almost invariably leads to disaster

Strategy:

An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return

Defensive investing:

The defensive investor must confine himself to the shares of important companies with a long record of profitable operations and in strong financial condition

Operations not meeting these requirements are speculative

stocks do well or poorly in the future because the businesses behind them do well or poorly—nothing more, & nothing less

Mr Market:

The investor scarcely ever is forced to sell his shares & at all other times is free to disregard the current price. He need pay attention to it & act upon it only to the extent [the price is favourable to justify a sell]

The investor who permits himself to be worried by unjustified market declines is perversely transforming his basic advantage into a basic disadvantage

That man would be better off if his stocks had no market quotation, for he would then be spared the mental anguish**

**sums up Graham's lifetime of experience. You cannot read these words too often; they are like Kryptonite for bear markets. If you keep them close at hand & let them guide you throughout your investing life, you will survive whatever the markets throw at you

The intelligent individual investor has the full freedom to choose whether or not to follow Mr. Market

You have the luxury of being able to think for yourself

The primary cause of failure is that they pay too much attention to what the stock market is doing currently

Why don't more winning funds stay winners?

Migrating managers
Asset elephantiasis - impossible to invest micro/small caps
No more fancy footwork - can't take same risks
Rising expenses
Sheepish behaviour - once a fund becomes successful managers tend to become timid & imitative

What should the intelligent investor do?

Invest in index funds

Cost advantage of indexing will keep accruing relentlessly. Hold an index for 20yrs or more, adding money every month, & you are all but certain to outperform the vast majority of professional & individual investors

^Index funds have only one significant flaw: They are boring

To succeed, the individual investor must either avoid shopping form the same list of favourite stocks that have already been picked over by the giant institutions, or own them far more patiently

Management:

A manager can’t legitimately be your partner if he keeps selling while you’re buying

Executives should spend most of their time managing their company in private, not promoting it to the investing public

Avoid the "hype-o-chondriacs"

[Good management] communicate candidly about problems, have clear plans for allocating current & future cash flow, & own sizable stakes in the company’s stock (preferably through cash purchases rather than through grants of options)

Growth Stocks:

The market is unkindest to rapidly growing companies that suddenly report a fall in earnings

More moderate & stable growers... tend to suffer somewhat milder stock declines

Great expectations lead to great disappointment if not met; a failure to meet moderate expectations leads to a much milder reaction

biggest risks in owning growth stocks is not that their growth will stop but that it will slow down & in the long run that is a virtual certainty

Reports/Accounting:

Read backwards
Read the notes

Do not be put off by the stupefyingly boring verbiage of accounting footnotes. They are designed expressly to deter normal people from actually reading them—which is why you must persevere.

Learning:

If you are an enterprising investor willing to put plenty of time & energy into your portfolio, then you owe it to yourself to learn more about financial reporting. That’s the only way to minimize your odds of being misled by a shifty earnings statement

See which leading professional money managers own the same stocks you do

By seeing which other stocks these investors own, you can learn more about what qualities they have in common; by reading the managers’ commentary, you may get ideas on how to improve your own approach

No matter which techniques they use in picking stocks, successful investing professionals have two things in common:

1 Disciplined & consistent

2 Focus on their process & pay little attention to what the market is doing

The simplest & probably the best method of allowing for the existence of warrants is to add the equivalent of their market value to the common-share capitalization, thus increasing the “true” market price per share

Its managers & CEO, work for you. Its board of directors must answer to you. Its cash belongs to you. Its businesses are your property. If you don’t like how your company is being managed, you have the right to demand the managers be fired, directors be changed, or property sold

Diversification:

The intelligent investor should seek to maximize the number of holdings that offer “a better chance for profit than for loss.”

For most investors, diversification is the simplest & cheapest way to widen your margin of safety

there is no such thing as a good or bad stock; there are only cheap stocks & expensive stocks. Even the best company becomes a “sell” when its stock price goes too high, while the worst company is worth buying if its stock goes low enough

Continued

If you have formed a conclusion from the facts & if you know your judgment is sound, act on it— even though others may hesitate or differ.” (You are neither right nor wrong because the crowd disagrees with you. You are right because your data & reasoning are right.)

^Have the courage of your knowledge & experience

Losing some money is an inevitable part of investing, & there’s nothing you can do to prevent it

But, to be an intelligent investor, you must take responsibility for ensuring that you never lose most or all of your money

If you want to know what risk really is, go to the nearest bathroom & step up to the mirror.

That’s risk, gazing back at you from the glass.

2 factors characterise good decisions:

Well calibrated confidence: do I understand this investment as well as I think I do?

Correctly anticipated regret: how will I react if my analysis is wrong?

The probability of making at least one mistake at some point in your investing lifetime is virtually 100%, & those odds are entirely out of your control

However, you do have control over the consequences of being wrong

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

Successful investing is about managing risk, not avoiding it