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A Review Of Key Take Aways From "The Intelligent Investor", By Ben Graham

The purpose of the intelligent investor is clear from the first sentence. The book is not intended to make people, "get rich quick," achieve Warren Buffet style returns, or even as the very first sentence of the introduction plainly states, to help investors (necessarily) beat the market. The book attempts to teach everyday people lessons that Graham believed to be crucial to being a successful investor. The overarching theme of the book is, of course, based in the fundamentals of value investing. Graham clearly believes that investing using value methodology is the best method for any investor avoid making mistakes that tend to lead to self defeating behavior and avoiding significant losses.

Graham begins by defining what it means to be an investor, which he distinguishes from being a speculator. He makes the point that there is nothing inherently or morally wrong with being a speculator, that it is sometimes necessary, and that it can be done intelligently. He also makes the equally, if not more important point, that most people do not speculate in an intelligent manner. Graham believes that the intelligent investor should generally leave speculation to the professionals. He suggests that those interested in speculating can try putting a small amount of money aside in a separate account for speculating. The investor, according to Graham, should never be concerned with market volatility. If anything volatility creates opportunity. This means, by extension, that individuals purchasing on margin are inherently not investors, since those who purchase stocks or bonds on margin must be concerned with volatility. Graham stresses investors should be interesting in buying the business, not the stock. The investor should feel confident enough about the business not the be concerned with the price on any given day, and aspire only adequate performance. The investor achieves this by purchasing assets which promise and adequate return and a margin of safety.

Graham recognizes that people have different abilities, and intelligence and willingness to dedicate time with respect to investment research. He generalizes into two different types of investors, the defensive investor and the enterprising investor. According to Graham, the defensive investor is less willing to put time and effort into his or her portfolio. Conversely the enterprising investor is willing to spend a substantial amount of time researching his or her investments. For the defensive investor Graham illustrates a few key points for the defensive investor, such as encouraging always looking at the fundamental value of investments and not necessarily "buying what you know," using advisors or investing in mutual funds, and taking advantage of dollar average costing. Graham talks about the impact of inflation and different ways it can be hedged, as well as bond allocations as part of a portfolio before evaluating common stock for the defensive investor.

Graham believes the defensive investor should hold between ten and thirty common stocks. He emphasizes the defensive investor's stocks selections be made up of companies which are large prominent and conservatively financed with a long history of a continuous dividend, and that they should never pay more than 25X earning TTM or 20X average earnings. This eliminates most growth stocks. He comments that risk should not be views as volatility, and make a strong argument for a dollar average costing investment strategy. Ironically the dollar average costing method serves in many ways to eliminate the ups and downs of the market. Graham also comments that bonds sometimes outperform stocks and vice versa. Graham recommends any stock for defensive investor should be relatively large with stable earnings, a long dividend history, a minimum of 33 percent earnings growth over ten years, a moderate PE ratio and moderate price to assets ratio.

After discussing the defensive investor, Graham evaluates portfolio selection for the enterprising or aggressive investor. Like the defensive investor, the aggressive investor should begin with a portfolio divided between high grade stocks and high grade bonds. The enterprising investor should only be interested in purchasing "inferior" bonds or preferred stocks if they trade at a significant discount. Graham recommends the aggressive investor stay clear of foreign government bonds, and be very wary of new issues or IPOs of any kind. He also recommends against growth stock. Graham believes professionals have better research to pick top performing growth stocks. He also points out that they are inherently expensive with respect to assets and earnings, making them extremely risky. Instead he recommends searching for companies and industries which have fallen out of favor with investors. He recommends large companies over small companies because they are more likely to rebound quickly when things begin to change in their favor. Graham also advises investors to consider going against the popular belief that one should not buy into a law suit. This special situation can create bargain purchase prices. Graham later recommends carefully reading the notes in the financial statements.

Graham devotes some time to discussing investment funds. Investment funds have tended to outperform individuals, but underperform the market, particularly after funds. He recommends index funds instead. If he were alive today, he would probably be in strong support of ETFs. ETFs like index fund have very low expense ratios and typically provide the same investment opportunity, but with a tax advantage over mutual funds. Graham makes a few general ways to identify a good mutual fund. According to Graham good funds shut the door on new investors, don't advertise, and have low fees. Graham recommends selling a fund when the fund changes strategy, increases expenses, or starts trading excessively.

Finally, Graham finishes the book by talking about margin of safety. He describes margin of safety as the thread which runs through the pages of the book. The concepts is essentially to avoid overpaying. By refusing to pay too much for stocks investors are better protected against market downturn. Additionally, purchasing stocks with a margin of safety with respect to assets or working capital makes investment asymmetrical. In other words, it is more likely the stock will increase in price than decrease in price. Graham finishes the book with a simple statement, that it is easier than most people realize to achieve acceptable returns, but more difficult than most realize to achieve spectacular returns.