Summary
Graham begins by stating the purpose of this book: to provide guidance in terms of solid principles and attitudes in investing. The focus of the book is not security analysis. He stresses that much attention will be paid to the history of financial markets as an intelligent investor needs to know how stocks and bonds have behaved in the past. Some of those conditions are bound to repeat themselves and an investor who is equipped with this historical knowledge will have an advantage.
“Those who do not remember the past are condemned to repeat it” - Santayana
Graham also intends to emphasize the difference between an investor and a speculator. He touches on the fact that many speculators are traders and use a technical approach (i.e. charts) to determine when to buy and sell. He points out that buying when the market is going up and selling when it goes down is a fundamental mistake. Using sound business principles, the idea is to buy low and sell high. You cannot make money following the market.
Regardless of the current market conditions, investors must be prepared to experience significant losses (as well as rises) in their portfolio. Graham notes that he historically recommends at least 25% of an investor’s portfolio be in equities. He leans more towards a 50-50 split between stocks and bonds.
Graham explains the two types of investors he is going to covering in this book.
- Defensive Investor
- Avoids serious mistakes and losses
- Has more freedom from effort, annoyance, and decision making
- Enterprising Investor
- Devotes time and care to the selection of investments that are fundamentally sound and more likely to generate better returns
Graham points out two fundamental principles an intelligent investor must be aware of:
- Obvious prospects for growth does not necessarily mean obvious profits for investors
- There is no thoroughly dependable way to select the most promising companies in the most promising industries
Intelligent investors should develop a habit of quantifying the price of an investment and to be able to distinguish if it is cheap enough to buy or expensive enough to sell. One of requirement he recommends is that investors limit themselves to securities that are not priced above their tangible-asset value. While there are some opportunities in growth stocks that trade well above this value, they are very sensitive to market fluctuations.
Graham finishes the introduction by reiterating that investing is hard work. By bringing just a little extra knowledge may cause you to perform under the market. Even the so-called expert fund managers have extreme difficulties in beating the market. The key is to build a simple and diversified portfolio that does not require expert assistance and based on the margin-of-safety principle.
“There are no sure and easy paths to riches on Wall Street or anywhere else”. - Graham, from the Introduction
Commentary by Zweig
This book will not teach you how to beat the market. Instead it will teach you:
- How you can minimize unrecoverable losses
- How you can maximize gains
- How you can control the self-defeating behavior that ruins most investors
Once you lose 95% of your money, you have to gain 1900% just to get back where you started. How often can you buy a stock at $30 and sell at $600?
Intelligent investing requires patience, discipline, and an eagerness to learn. You must be able to control your emotions and think independently. Intelligent investing owes more to character than brain power.
The most significant losses in investing come when the buyer forgot to ask the important question: how much?
Stocks become more risky as their prices rise and vice versa. An intelligent investor dreads a bull market and welcomes a bear market because that is when stocks are on sale.
Other Notes
Dollar-Cost Averaging: regular monthly purchases of stock regardless of the market conditions
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