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Book review: The Intelligent Investor: The Classic Text on Value Investing

The Intelligent Investor: The Classic Text on Value Investing The Intelligent Investor: The Classic Text on Value Investing by Benjamin Graham


My rating: 3 of 5 stars
If you read investing books or magazines, you've undoubtedly heard of Benjamin Graham. He's considered the father of value investing, and Warren Buffett is one of his disciples. In fact, The Oracle of Omaha called this book "the best book about investing ever written."

I have to disagree with Buffett on this one, but that's because I'm a very different type of investor than Buffett. I'm a Boglehead (follower of Vanguard founder John Bogle), so I invest through broadly diversified, passive index funds instead of individual stocks and bonds. I read this book to learn Graham's general investing advice and opinion of the market, not to learn his formulas for analyzing the values of stocks and bonds.

Much of the book's data is understandably stale, since it was first published in 1949. You can definitely tell it was written in the pre-Internet era of investing, before people had easy access to mutual funds, ETFs, 401(k)s, IRAs, and day trading.

Although the financial world has changed much since his time, Graham's fundamentals remain solid. For most investors, he recommends a diverse portfolio of bonds and stocks held for the long-term. He strongly advises against trying to time the market, and says to never invest in something you don't understand. Graham warns against being an emotional investor; he says to invest based on arithmetic, not optimism.

"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks."

"The real money in investing will have to be made - as most of it has been in the past - not out of buying and selling, but out of owning and holding securities, receiving interest and dividends, and benefiting from their long-term increase in value."


Notes

Graham divides investors into 2 camps: defensive and enterprising. The defensive investor is risk-averse, seeking to preserve capital and obtain a reasonable return. The enterprising investor is more risk-tolerant, willing and able to analyze stocks and bonds to find higher returns.

Defensive portfolio
• 25-75% US bonds, depending on investor's risk tolerance and situation
• common stocks of "leading" or "prominent" US companies (blue chips), purchased at a reasonable price based on historical data

Enterprising portfolio
• buy low, sell high
• growth stocks
• value stocks
• take advantage of "special situations" like mergers and acquisitions, business reorganizations, etc.

You can't forecast or time the market.
Unless you're forced to sell your shares, you shouldn't care about share prices. Ignore the daily ups and downs of the market.
Use dollar cost averaging or formula timing plans to remove the psychological factors of investing.

Risk vs safety
Risky investments are those that have a chance of declining in price, but a history of positive returns. You don't care about temporary declines as long as you hold the investment, because it's not until you sell that the decline would be realized.
Unsafe investments are those with history of poor returns over many years; these are not wise investments.

Prices sometimes reflect the present, and sometimes reflect the future; because you can't tell which, it's hard to determine if stocks are fairly priced.

Margin of safety
Margin of safety is the secret to sound investing.
This is a business' value over its debt (its ability to earn more than it needs to cover its expenses), or the difference between price and value.
Guarantees a better chance of profit than loss (not a guaranteed profit).
Diversification across several stocks increases the certainty of profit.
The margin is based on statistical data, not speculation.

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