The Intelligent Investor

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💡 Key Takeaways

• The intelligent investor differentiates between investment and speculation, focusing on safety and returns.
• Defensive investors prefer a balanced stock/bond portfolio, while enterprising investors may actively manage or adopt a passive approach.
• Inflation protection involves avoiding gold and real estate, favoring REITs and the Vanguard REIT Index Fund.
• Stock selection for defensive investors emphasizes diversified, dividend-paying stocks and index funds.
• Enterprising investors limit individual stocks to 10%, explore undervalued opportunities, and focus on transparent management.
• The central concept of investment is the “margin of safety,” avoiding substantial losses through diversification and prudent decision-making.

✏ Top Quotes

Being an Intelligent Investor means being patient, disciplined, and eager to learn; you must also be able to harness your emotions and think for yourself.

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

By speculating instead of investing, you lower your own odds of building wealth and raise someone else’s.

The term “long-term investor” is redundant. A long-term investor is the only kind of investor there is.

Don’t take a single year’s earnings seriously.

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📝 Summary + Notes

1. Investment versus Speculation: Results to Be Expected by the Intelligent Investor

• An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.
• The defensive investor:
  • Can have a portfolio of stock/bonds of 25-75% ratio.
  • Should purchase shares of well-established investment funds and not create his own common-stock portfolio.
  • Should DCA (dollar cost average).
  • Does not trade, but invests for the long run.
• Investing, consists equally of three elements:
  • You must thoroughly analyze a company, and the soundness of its underlying businesses, before you buy its stock.
  • You must deliberately protect yourself against serious losses.
  • You must aspire to “adequate,” not extraordinary, performance.

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2. The Investor and Inflation

• Gold is not a good investment to protect from inflation. Nor is real estate.
• Expect a 3% yearly inflation.
• REITs can combat inflation. Buy Vanguard REIT Index Fund.

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3. A Century of Stock-Market History: The Level of Stock Prices in Early 1972

• The intelligent investor must never forecast the future exclusively by extrapolating the past.

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4. General Portfolio Policy: The Defensive Investor

• A balanced portfolio of 50-50 stocks-bonds is recommended.
• There are two ways to be an intelligent investor:
  • **The enterprising approach**: continually researching, selecting, and monitoring a dynamic mix of stocks, bonds, or mutual funds.
  • **The defensive approach**: by creating a permanent portfolio that runs on autopilot and requires no further effort (but generates very little excitement).
• The enterprising approach is physically and intellectually taxing, while the defensive approach is emotionally demanding.
• Is putting all your money into the stock market inadvisable for everyone? For a tiny minority of investors, a 100%-stock portfolio may make sense. You are one of them if you:
  • have set aside enough cash to support your family for at least one year.
  • will be investing steadily for at least 20 years to come.
  • survived the bear market that began in 2000.
  • did not sell stocks during the bear market that began in 2000.
  • bought more stocks during the bear market that began in 2000.
  • implemented a formal plan to control your own investing behavior.

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5. The Defensive Investor and Common Stocks

• Rules for the Common-Stock Component:
  • Have 10-30 diversified stocks.
  • Each company selected should be large, prominent, and conservatively financed.
  • Each company should have a long record of continuous dividend payments.
• Growth stocks as a whole are too uncertain and risky for the defensive investor.
• DCA is recommended.

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6. Portfolio Policy for the Enterprising Investor: Negative Approach

• Avoid High-yield bonds or junk-bonds like they are also said.
• No sane investor would put more than 10% of a total bond portfolio into foreign emerging market bonds.
• Day trading is one of the best weapons ever invented for committing financial suicide.

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7. Portfolio Policy for the Enterprising Investor: The Positive Side

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• Market timing is a practical and emotional impossibility.
• Growth stocks are worth buying when their prices are reasonable, but when their price/earnings ratios go much above 25 or 30 the odds get ugly.

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8. The Investor and Market Fluctuations

• The most realistic distinction between the investor and the speculator is found in their attitude toward stock-market movements.
• The speculator’s primary interest lies in anticipating and profiting from market fluctuations. The investor’s primary interest lies in acquiring and holding suitable securities at suitable prices.
• Market movements are important to him in a practical sense, because they alternately create low price levels at which he would be wise to buy and high price levels at which he certainly should refrain from buying and probably would be wise to sell.
• It is far from certain that the typical investor should regularly hold off buying until low market levels appear, because this may involve a long wait, very likely the loss of income, and the possible missing of investment opportunities.
• On the whole it may be better for the investor to do his stock buying whenever he has money to put in stocks, except when the general market level is much higher than can be justified by well-established standards of value.
• The investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances.
• He should always remember that market quotations are there for his convenience, either to be taken advantage of or to be ignored. He should never buy a stock because it has gone up or sell one because it has gone down.

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9. Investing in Investment Funds

• Most funds underperform the market, overcharge their investors, create tax headaches, and suffer erratic swings in performance.
• Late in his life, Graham praised index funds as the best choice for individual investors, as does Warren Buffett.

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10. The Investor and His Advisers

• Signs you may need an advisor: big losses, financial chaos, chaotic portfolios, major life changes.

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11. Security Analysis for the Lay Investor: General Approach

Which factors determine how much you should be willing to pay for a stock?

• The company’s “general long-term prospects”. The intelligent investor should begin by downloading at least five years’ worth of annual reports (Form 10-K) from the company’s website or from the EDGAR database at www.sec.gov.
• The quality of its management. Read the past annual reports to see what forecasts the managers made and if they fulfilled them or fell short. Managers should forthrightly admit their failures and take responsibility for them.
• Its financial strength and capital structure. Start by reading the statement of cash flows in the company’s annual report. See whether cash from operations has grown steadily throughout the past 10 years.
• Its dividend record.
• Its current dividend rate.

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12. Things to Consider About Per-Share Earnings

• When you research a company’s financial reports, start reading on the last page and slowly work your way toward the front. Anything that the company doesn’t want you to find is buried in the back—which is precisely why you should look there first.
• Never buy a stock without reading the footnotes to the financial statements in the annual report.

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13. A Comparison of Four Listed Companies

• 4 practical examples.

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14. Stock Selection for the Defensive Investor

• Buy a total stock-market index fund. A low-cost index fund is the best tool ever created for low-maintenance stock investing.
• Or keep 90% of your stock money in an index fund, leaving 10% with which to try picking your own stocks.

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15. Stock Selection for the Enterprising Investor

• If choosing individual stocks, keep them to a maximum of 10% of your portfolio; the rest should be in index funds.
• Explore companies on the new 52-week lows list for potential undervalued opportunities.
• Evaluate a company's Return on Invested Capital (ROIC) for a true measure of its efficiency in generating returns.
• Assess a company's value by comparing it to similar businesses that have been acquired.
• Look for companies led by management that thinks like owners and communicates transparently.
• Consider companies with sustainable earnings growth and a focus on long-term value over short-term market fluctuations.
• Analyze stocks owned by leading professional money managers to gain insights into successful investment strategies.

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16. Convertible Issues and Warrants

• Convertible Bonds:
  • Act like stocks with the option to convert to common stock.
  • Lower interest rates but potential for higher returns if the stock price rises.
  • Highly correlated with stock market performance.
  • Offers stock-like returns with less risk for conservative investors.
  • Described as a “best of both worlds” investment.
  • Less income and more risk compared to traditional bonds.

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17. Four Extremely Instructive Case Histories

• Scrutinize financial reports for red flags. Examine assets, liabilities, and unusual accounting practices.
• High market capitalization doesn’t always reflect the true value of a company.
• Companies focusing on growth through buying should raise concerns.

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18. A Comparison of Eight Pairs of Companies

• Companies with solid earnings and reasonable valuations tend to fare better in the long run.
• Stocks driven by hype and speculation can experience drastic declines.
• Market panics can create opportunities to invest in good companies at discounted prices.
• Stocks with high valuations based on speculation or unrealistic growth expectations are prone to significant losses.

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19. Shareholders and Managements: Dividend Policy

• Vigilantly monitor corporate behavior for accountability.
• Demand efficient management and align with shareholder interests.
• Read proxy materials, prioritize dividends, and scrutinize executive pay.

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20. “Margin of Safety” as the Central Concept of Investment

• Avoid substantial losses; losing big requires riskier bets to recover.
• Assess internal risks—overconfidence and emotional reactions.
• Embrace a margin of safety; protect against consequences of being wrong by staying diversified and avoiding market fads.