About the Book
This book contains the following chapters and this book has been recommended by many investors who have been investing and this book teaches about how somebody should know the basics of investments in their life. it was authored by great economist Benjamin Graham,
Table of Contents
About Benjamin Graham
Introduction
: The History of the Stock Market
: The Issue of Inflation
: Stocks Can’t Reliable Overcome Inflation
: REIT s Can Overcome Inflation
: Don’t Let Age Influence Your Investing
: Defensive Investing
: Enterprising Investing
: How to Invest in Stocks
: Adopt an Evidence-Based Approach to Investing
: You Can Make Lots of Money Off Market Volatility
: Be Careful About Using Financial Advisers
: Security Analysis
: The Margin of Safety
About Benjamin Graham
Benjamin Graham is called the ‘father of worth investing. He wrote two of the great texts in classical investing: the First is "Security Analysis" (1934) and the other is "The Intelligent Investor" (1949). Graham went to Columbia University before starting his career on Wall Street. Then he founded the Graham-Newman partnering and employed Warren Buffet. Warren Buffet gained profit from Graham’s approaches and later on, went on to write his books about investment. Graham followed investment philosophies of investors psychology, minimal debt, buy-and-hold investing, concentrated diversification, and buying within the margin of safety.
Introduction
The Intelligent Investor book teaches people to invest in the stock market while taking minimum economical risks. It centers on longer-term and more risk-reducing approaches. Graham focuses on investments (based on research) rather than hypothetical predictions (based on predictions). The Intelligent Investor provides guidance on how to get into value investing and how you can avoid Mr. Market from dictating your financial decisions.
The History of the Stock Market
Many new investing firms will use historical data for the prediction of the future of the stocks. But the value of any investment is its function of the price you will pay for it. Graham shares many examples of the most basic reasons that people mistakenly add value and extrapolate previous stock prices
- Buying the over-hyped stocks of strong Bullish markets
- Not doing your own research about the current stocks
- Believing and fully relying on experts and their comments who aren’t necessarily experts
- Not keeping patience and being humble when the stocks are doing good.
The Issue of Inflation
Cash becomes less valuable as time passes. For eg, A dollar's value ten years back is more valuable than a dollar today. Therefore, instead of keeping cash, we should be investing cash so we can beat the inflation. Despite not taking in account this, the major group of the investors do not take inflation into account. Psychologists tell this as the money illusion. A two percent raise in salary is so effectively a ‘cut’ in our stake of money if the inflation has raised at the rate of 4%. In spite this, many people normally prefer the scenario than taking a one percent pay cut in the year when inflation becomes to zero. So, count your investing success by the amount of how much you keep after inflation instead of how much you are making from your investments.
Stocks Can’t Reliable Overcome Inflation
The area which is more riskier but has got the potential of the returns is investing in stocks. Benjamin Graham explains that how stocks can outpace inflation eighty percent of the time. It is said that, most stocks do not do well to high levels of inflations. For eg, the stock market lost money in eight of the fourteen years that the inflation has exceeded by six percent. Small inflation is sometimes good for the stock prices, as it allows the companies and firms to raise their prices. But very high inflation makes consumers to stop purchasing. So, stock investment is a very good option when inflation is not that much overwhelmingly high.
REITs Can Overcome Inflation
The investment which is safe irrespective of how much the high inflation goes is REITs. They are Real Estate Investment Trusts. REITs are the companies that own and rent out the buildings. Many examples of REITs exist which are, medical or commercial properties. The types don't matter too much, Although All the REITs are relatively very good at fighting inflation.
Don’t Let Age Influence Your Investing
Benjamin Graham believed that choosing which kind of investor you want to totally depend upon your willingness to put your time and efforts in your profile and your circumstances. It shouldn't be more dependent on your appetite of risk or your lifespan or your age. Benjamin Graham provided these eg. to show how the age should not be impacting on your investments:
- An Eighty Nine-year-old with three million dollars, and an adequate pension, and many children would be foolish moving most of the money into bonds. This person already has enough amount of money, and their children would easily inherit the family stocks.
- A twenty-five years old saving for the wedding and has a house should never put all his money into stocks.
Both the case scenario challenges the very general advice of moving money from stocks to bonds as they age. Other factors are very more important. Instead of that, the type of investing person you are should be totally dependent based on your work’s characteristics, like the total number of people who depend on you, etc. Before choosing where to invest and how you invest, you should consider the following factors:
- Are you single or married? Is your partner a working person, and how much amount of money do they earn?
- Do you have children? If not, then, do you want to have kids? When will high costs, such as college education, kick start in?
- Will you inherit money at some point? Or, will you have to spend money while keeping a parent in a old-age care home?
- Is your job secure?
- If you are a self-employed person, how long does similar companies normally survive?
- Do you need your investments to multiply your cash income for your survival? If yes, you should have more money as bonds.
- How much amount of money can you afford to lose on investments?
Defensive Investing
Graham believed that defensive investors should have a minimum of twenty-five percent of their savings in bonds. Then, A maximum amount of seventy-five percent of their savings is in stocks. Graham also gives advice against buying lots of stocks in small increments over many years period. Even though diversification is important, buying so many stocks in such small value amounts will make tax returns so much challenging. So, if you are not able to keep an in-depth record of all your investments, you should not be investing as a person in stocks. Try investing in ten to thirty stocks at the beginning and make sure you invest in multiple types of industries.
While selecting stocks, as a defensive investing person, Benjamin Graham recommends considering a few important things about each company which is:
- How large is the company? Choose larger and less volatile firms.
- Assets should be at least two times liabilities, and long-term debt shouldn't be much and should be less than net current assets.
- Positive earnings should be kept for the last ten years.
- Dividends should have been paid without interruption for the last twenty years.
- The per-share earnings should be a minimum increase of at least one-third over the last ten years.
- The price-to-earnings ratio should be more than fifteen times the average earnings of the last three years.
- The ratio of price to assets should not be more than one-half times the book value last reported. And, the PE ratio x PB Ratio shouldn't be more than that of 22.5.
Enterprising Investing
Benjamin Graham recommended different methods of considerations for enterprising investors looking into companies:
- The company’s current asset value should be at least one and half times current liabilities. They should not have debt, which is more than 110% of net current assets.
- There should be no earning debt in the last five years.
- There should be a dividend.
- Last year’s earnings should be more than that of the year before.
- The price of the stock should be less than 120% of net tangible assets.
How to Invest in Stocks
Benjamin Graham provided many tips for investing in stocks:
- Avoid day trading as it is much riskier.
- IPOs are not a very good investment as they are often much-hyped and overpriced.
- Treat cheap and normal valuable bonds with suspicion.
- Only buy foreign bonds if you are very much confident.
- A great company is not an excellent choice of investment if you are overpaying for the stocks.
- Big enterprises grow a little slower; therefore, avoid these companies with price/earnings ratios over twenty-five to thirty.
- Look out for temporarily unpopular stocks. The stocks which the market quickly forgets, and this stock will probably rebound if you get it at a very reasonable price.
Adopt an Evidence-Based Approach to Investing
Benjamin Graham described the investment as evidence-based. Speculation doesn't have the matching level of study as an effective investment should be. So, Graham described investing requires thorough analysis, a principle of safety, and an ample return. If your investment doesn't meet these requirements, then you are playing with the market rather than investing.
Benjamin Graham shadows two approaches that you can take advantage with genuine investment. Firstly, you can become a defensive investment person. This kind of investor is mainly focuses on safety and freedom. To be a defensive investment person, you must be able to deal with the emotions, such as making yourself detached yourself from market panic. Comparatively, an enterprising investment person places a huge amount of their efforts and time into the investments. So, as a enterprising investors they have to be physically and intellectually capable.
Benjamin Graham didn't say you can never ‘postulate’ economically. Instead, Benjamin recommended allocating not more than that of ten percent of your investment funds to what he called a ‘Mad Money Account’. You should never let all these speculated funds leak into your investment value funds.
Both defensive and enterprising investment person have to be very intelligent investors. A intelligent investor never dumps a stock based on the share price. Instead, they consider the value of the company and then they decide based on that.
You Can Make Lots of Money Off Market Volatility
Market volatility can become very scary, but it also becomes an opportunity to make huge amount of money. First, you have to understand and limit the risk of losing money through volatility by making authentic evidence-based investment decisions. You shouldn’t sell your stocks in a hurry of panic. Benjamin Graham also explained that a paradox exists where the more successful a company is(firm), the greater its fluctuations will be in share prices. So, you should be aim to buy stocks of successful companies’ stocks when they go down. You even want to avoid successful companies, as they are more hypothetical than investments.
Graham used the Mr. Market lessons to explain how we should not be frightened when stocks dip down and instead we should make our own decisions. Suppose we own a small shares in a business that costs us 1,000 dollar. Our partner, named Mr. Market, tells us every day what he thinks about our shares how much they worth. Sometimes he valued these stocks at a justified level based on business development and their prospects. It is said that, sometimes Mr. Market gets a bit too enthusiastic (positive) and values his stocks at reasonable prices. If you are an intelligent investor or want to be the same, then you will not let Mr. Market determine your stocks’ worth. Instead, you should make your own decisions based on your own research and analysis. You can then decide to either sell the stocks when they are ridiculously high and buy more stocks when the price is low.
Be Careful About Using Financial Advisers
Financial advisors who give advice are not for everyone. You will have to provide at least 100,000 dollar for investment to obtain a good financial advisor. So, low-cost index funds are the best choice for individuals who has less money.
For those who have some amount of money, you have to decide that whether an advisor will be useful for you. Many investors are more comfortable having a second opinion while investing. Especially in the case for the people who struggle to calculate the rate of return they need to earn on their investments.
Following are some of the telltale signs that you should be seeking help while making your investments:
- You have suffered a significant loss of more than 40% for your portfolio.
- You struggle to make ends meet.
- Your portfolio is disordered and not well thought out.
- You just had a significant change in your life, such as retiring or becoming a self-employed person.
Benjamin Graham stated that some of the advisors are fake. They try to prevent you from researching the results further and will ultimately make you lose your money. So, According to Graham looking out for these sayings that a fake investor will use:
- This is the opportunity of a lifetime.
- Don’t you want to be rich like me?
- It would be better if you focus on the performance instead of my fee.
- You can’t lose with my method.
- You have to make huge amounts of money by investing.
- This is the trick that only I know and how to use it.
- You don’t even need to doubt or question the legitimacy of the method.
Security Analysis
Benjamin Graham describes tool something called security analysis. This is the kind of analysis that should be followed and conducted while estimating the value of a given stock. You should then compare this value of the stock’s actual price and decide whether or not the stock is very good buy. Security analyses should not be much complicated, though. They should only require basic algebra and some calculations. So, if there is any other form of security analysis is most likely to be flawed.
As well as while conducting a security analysis, you should consider the following factors to ensure you are not overpaying for a company’s stocks:
- The company’s long-term prospects
- The quality of the company’s management
- Financial strength and capital structure
- Dividend record
- Current dividend rate
For bonds, Benjamin Graham suggested that you should take note that the number of times that available earnings have covered the total interest charges. The covering of the charges should have occurred for at least 7 years.
The Margin of Safety
Benjamin Graham focused on the Margin of Safety as the most important part of your investment strategy. You should buy a company’s stock at least fifty percent below its true value. This practice will minimize your downside as much as possible and will maximize your opportunities of making money.
Final Review and Rating
The Intelligent Investor is focused on making authentic and evidence-based investment decisions.By understanding your financial position and future goals you can make effective decisions about how you can manage your money and investment. For some people, investing in index funds and REITs (Real Estate Investment Trusts) is the way forward. For other people, financial advisors are the key to financial success in investment trading. But choosing the correct and riight financial advisor is crucial, too. For each and every financial decision, you must consider the evidence.
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