Originally published at: https://blog.12min.com/the-intelligent-investor-summary/
MicroSummary: Lauded by Warren Buffet as “by far the best book on investing ever written,” “The Intelligent Investor” by Benjamin Graham is the book which introduced the world to value and formula investing. The book explains in detail how the market is unpredictable and how investing is all about playing it safe and smart.
The definitive book on value investingDo you want to learn the investment basics, as well as how to "play" the market? Do you want to learn from the best? The Intelligent Investor is all about that.
In this summary, we are giving you a look into Benjamin Graham’s notion of intelligent investing, which will help you survive and thrive in today’s market.
Who Should Read "The Intelligent Investor"? and Why?If now, we have the opportunity to ask Mr.Graham about what motivated him to write this book- He would probably say that the main reason for writing “The Intelligent Investor” was the bad financial decisions that he saw again and again from investors.
Depending on the reader’s openness and intelligence, it may yet face a financial change for the better by reading “The Intelligent Investor,” or if a person’s heart and mind remain ignorant Graham’s words would have no meaning.
Even ancient philosophers said that you could not teach an ignorant and stubborn person, so Graham’s book is for those investors capable of change and adjustment to different financial environments.
About Benjamin Graham
Benjamin Graham was born on May 9, 1894, in London, England and eight decades later the well renowned British-born economist, financial advisor, writer, and a professor passed away at 82 years of age in Aix-en-Province, France.
Right after his graduation at the age of 20 from Columbia University, Graham started working on Wall Street.
He was considered the father of value investing and an eminent author who wrote several financial books including the “The Intelligent Investor” and Security Analysis.
"The Intelligent Investor Summary"“The Intelligent Investor” has the legitimate right to find itself on the bookshelf among the books that every investor deserves to have.
The norms and principles that come out of Benjamin Graham’s assumptions are those that guided well-known and renowned investors like Warren Buffett, and other fund innovators and eminent personalities like John Bogle- known as the Vanguard Group founder and the author of this edition’s foreword.
The first edition was published back in 1949, and even back then certain financial experts saw the text wasn’t showing any signs of age, especially in complexed debates of interest rates, long-term investments, investment in vehicles-leasing or cash and other time-sensitive subjects.
However, these secondary financial difficulties didn’t seem like they’ve troubled Graham at all.
You should be aware that he doesn’t write about any irrelevant categories. Instead, Graham is analyzing security issues, how should an investor behave on the market and other elementary investment subjects with an eternal nature.
If you are familiar with the term- risk aversion than you probably realize that Investors fall into two major categories: the “defensive ones (higher risk-aversion mentality)” and the "enterprising ones” (risk takers) for both groups there is only one rule: Speculation is not equal to investing.
THE DIFFERENCE BETWEEN SPECULATION AND INVESTMENTThe first step in becoming a smart investor is to understand the difference between speculation and investment.
Investment ensures that your startup money, that is, the amount of money on which the interest is charged, is saved and it generates adequate returns.
Anything other than this is speculation.
The experienced investor must be willing to take home adequate and fair returns and never pursue excessive profits.
An experienced investor, besides being satisfied with the appropriate returns, considers the safety of their money to be advantageous and seeks to ensure that their investments are sound.
PROJECTIONS ARE NOT 100% RELIABLEMany investors make mistakes by choosing their investments based on stock market history. They presume, in the wrong way, that what happened in the past will be repeated in the future.
For example, they see that share A plummeted and hit its lowest price in the year 2000 and a year later rose to the number one market position.
However, this fall and the subsequent increase may have happened for many reasons - there is no basis for an investor to assume that it is a smart move to buy large quantities of this share when its price is falling.
There is no guarantee that the same scenario will repeat itself.
The eternal truth about investments is that every investor should always keep in mind that projections are fallible.
In fact, in many cases, surprising actions have seen phenomenal market growth.
Equally, countless “safe” stocks disappeared without clues aftermarket gurus predicted highs. Basing your investments on just projections can be disastrous.
THE FINAL DECISION MUST BE THE INVESTOR’S HIMSELFOne of the key points the smart investor should keep in mind is that no action replaces doing their homework.
Accepting advice from savvy investors, listening to market experts and reading blogs and books about great investment ideas are all necessary actions and offer good tips on the market, but should not become the basis of your final decisions.
And you should not become dependent on investment tools such as projections or simply follow the market putting your money where everyone is putting it.
You need to assess whether the experts’ views apply to you since you are the only one who knows exactly what your risk appetite is or what your investment goals are.
To be able to weigh the advice offered or evaluate the opinions of the experts, it is important that you keep in mind the fundamental truth that the value of the investment should be a function of its price.
That is, there must be some correlation between the price you pay for an investment and its real value regarding how much you can earn in the future.
The following example will clarify the meaning of this.
A rare silver coin is sold for a certain amount, and you wonder if you should buy it.
To determine if this amount makes sense, you need to consider the intrinsic value of the metal, any increase in the price and the demand of the collectors market.
You also need to make predictions as accurate as possible so that when you decide to sell the currency, the price is higher than the current price of it.
Taking these issues into consideration will prevent you from buying the commodity at a high and inflated price, which can not generate enough value to justify your investment.
THE IMPACT OF INFLATION ON INVESTMENTSDespite the role that inflation plays in the success of investments, most investors tend to forget about it.
There are several reasons to worry about the impact of inflation. For example, inflation is an ever-present reality, and the increase in share prices actually falls short of inflation about 20 percent of the time.
As an investor, when you determine whether the expected return or the valuation of investments really is worth it, you need to consider that inflation will hurt your future profits.
To ensure the impact of inflation on your investments is minimized, you should consider investing in assets that keep pace with rising inflation or which outpace it.
For example, real estate assets may be a good option as you can assume that prices will rise with inflation in the future.
It may also be a smart move to invest in inflation-protected assets, also called TIPS, Treasury Inflation Protected Securities.
TIPS are investments with a predetermined maturity period. Upon reaching maturity, when the money is paid to the investor, adjustments are made to account for inflation or deflation during the investment period.
That means that if inflation has risen during the period since the asset TIPS was bought, you will have your money back taking into account inflation.
Inflation or deflation calculations for TIPS are based on the Consumer Price Index, so the adjustment reflects your purchasing power.
Graham identifies two types of investor: the defensive investor and the entrepreneurial investor.
Worrying about the impact of inflation should be a critical first step for both types of investors for different reasons. The defensive investor is focused on avoiding big losses and is willing to invest and then stay quiet.
For example, they want their investments to be uncomplicated and happy to earn enough returns while keeping the risk to a minimum.
The entrepreneurial investor, on the other hand, is looking for the best returns and is willing to do many good deals to reach them.
Determining whether you use a defensive or entrepreneurial approach influences how much you are willing to work to manage your investments and not how much risk you are willing to take.
THE DEFENSIVE INVESTORIf you are a defensive investor, you should choose your stocks to give you an adequate return, without risking your most important investment. The central objective of the defensive investor is to protect their investments and not maximize their gains.
To keep the risk at a reasonable level, you must diversify your investments so that the risk is spread across your stocks and other assets.
Diversification allows you to separate the loss of one share from the gain of another so that the overall performance of your investment portfolio remains positive. So, how do you diversify?
Choose to invest in around 10 to 30 different stocks, which are among the most sold and conservative stocks in the market and have a consistent dividend payment history.
Booming stocks should be avoided as they are high risk and you should also focus on investing low sums and earning proportionate returns.
The course may be slow with this strategy but, as a defensive investor, this fits into your risk profile and ensures that in the long term you have good returns.
To ensure that stock risk is kept at an acceptable level, invest 25% of your total equity investments.
THE ENTREPRENEURIAL INVESTORThe advantage of being an entrepreneurial investor is that you are willing to invest more time and energy in the process, which means you will have more opportunities to make good investments.
It is very important that you understand your goals by investing in a stock that a defensive investor would not.
To achieve his goal of having better returns than the defensive investor, buy when the market is falling, and prices are low and sell in the opposite scenario.
Another tactic is to buy growth stocks of companies that are falling in the market. However, you should be sure that the stock price is still lower than its intrinsic value.
Check the historical stock price and the average P / G (price/gain) ratio for many years to make sure you have a good buy at your fingertips.
One of the opportunities you should explore as an entrepreneur investor is to seek out and identify startups who have the right characteristics that make them attractive to large corporations.
A similar opportunity is presented by foreign stocks.
They are not so popular in the market just because they are unknown.
Before investing in these stocks, do your job and be assured that the fundamentals of the company are sound. Be wary if you are paying too much for a stock that you believe will still grow.
That includes overpriced IPOs and stocks of well-established companies.
MARKET FLUCTUATIONSBenjamin Graham uses a simple parable to explain how an intelligent investor should never define the market in time or depend on projections. It is impossible to say what will happen with complete precision.
He asks you to imagine that Mr. Market is your business partner and that you own a company together.
Now Mr. Market wants to buy his share in the business and every day he offers you a price. As he is a sentimental guy, his price may be well above or far below the fundamental value of the company’s stock.
It’s up to you to wait until the price is right to be able to sell.
Another investment tip that this parable makes clear is that sentimentally responding to market changes or making decisions based on emotions is the recipe for disaster.
What you should do is expect the stock price to stay below its intrinsic value, giving you enough safety margin. Keep your emotions away from this and develop a disciplined approach to investing.
That will help you lessen your willingness to sell or buy when the market is teetering.
The market should not dictate your investment decisions. You should take advantage of the fluctuations of the market to make money through the good opportunities created.
Many start-up investors depend on financial advisors, even though their fees exceed 1% of invested assets. Some of these advisors display their knowledge, boasting about how they use technical reviews to achieve excellent annual returns that exceed 10%.
You should be aware of this. If you decide to hire the service of a financial advisor, you need to familiarize yourself with the type of assets you invest in, whether or not you have an investment plan, and how you can find out if your investments are in line with your plans.
Another point to consider is that being influenced by experts, market gurus or by the market’s own behavior can mess up results.
The smart investor takes into account both market activities and expert opinion, but these do not form the basis of their decisions.
What is the rule for success?
To reach long-term success, every active investor has to evaluate each investment very carefully and above all diversify its portfolio among the most profitable industries.
According to Benjamin, almost every investor doesn’t treat its investments properly, the time and effort invested are not sufficient; therefore, he advises a defensive strategic approach.
Now, let me tell you something. Although this gem of a book echoes for many decades, it is still relevant even today. Why?
Since today’s financial markets have some similarities to those that existed in the middle of the 20th century when “Benjamin Graham wrote the Intelligent Investor” book.
In the digital era, the stock valuations are in constant increase as such they are much higher than the ones praised by Graham in the late 50s.
You may find a metaphor used by him in his writings where Graham adopts the sarcastic term “Mr.Market” to express the dominant role that the market has in our economy, where investors meet and interact more profoundly.
Roughly speaking, Graham advised investors back then to disregard and ignore “Mr. Market’s” influence.
However, not even he knew that “Mr.Market” in the decades to come would be able to offer much more opportunities which would leave investors trapped between Graham’s advice and their urge for profits.
Key Lessons from “The Intelligent Investor”1. An average investor makes average market movements 2. Challenge each idea, be skeptical until you are 100% sure of it 3. Learn on who to rely upon
An average investor makes average market movementsSpeculators are intent to prosper by creating unique and risky market moves. Investors, for instance, by contrast, plan to purchase valuable stocks-wholesale at affordable prices and hold them until final sale.
According to Graham’s philosophy, any market movement is significant only because it offers reasonable cost for goods that an investor would find acceptable to purchase or sell afterward.
High-profile Investors know or sense when a particular market would collapse or experience a dropout. This sign has to be taken seriously. An investor waits for such an opportunity to drive them forward. However, that is not the case with an average investor.
Challenge each idea, be skeptical until you are 100% sure of itGraham challenges the idea’s truthfulness that many financial experts and economists are guided by- Investors try to single out rare goods and purchase them because they believe that these stocks would outperform in a short –run which would give them enough time earn some easy money by re-selling them.
According to Graham’s expertise and knowledge, this idea should be rejected and neglected for a greater good.
Learn on who to rely uponIn today’s world, there are a lot of wealthy people that own a lot of stuff.
These so-called wealthy individuals are influential opinion makers or celebrities, but the deal is that they don’t know what to do with the money and how to Invest them. Financial and investment advisors are helpful in some situation, but when it comes to profits, Graham advises you to stop relying on them.
“The Intelligent Investor” pinpoints the fact that investment professionals are much more helpful than advisors.
As well-known experts with expertise in long-term investments, they can be crucial for your financial stability.
Investing money is like playing dice for ignorant investors. Nevertheless, you should never underestimate low-risk investments because they carry an almost guaranteed income.
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"The Intelligent Investor" Quotes[bctt tweet="The intelligent investor is a realist who sells to optimists and buys from pessimists." username="getnuggetapp"]
[bctt tweet=“An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.” username=“getnuggetapp”]
[bctt tweet=“Those who do not remember the past are condemned to repeat it.” username=“getnuggetapp”]
[bctt tweet=“But investing isn’t about beating others at their game. It’s about controlling yourself at your own game.” username=“getnuggetapp”]
[bctt tweet=“People who invest make money for themselves; people who speculate make money for their brokers.” username=“getnuggetapp”]