The Intelligent Investor by Benjamin Graham, Commentary by Jason Zweig July 23, 2007
This is the book that first laid down the fundamentals of what many called value investing. The book paid great attention to investment principles and investors attitudes. Every part of this book is essential and of which my investment philosophy are built upon. I simply cannot begin to summarize this collection of wisdoms, to do that would be like retyping the book itself. Instead, I would list several important points, some in author original phrase, which should be grasped. Also, especially in this edition, Jason Zweig did a great job in commenting Graham teaching at end of each chapter. I definitely think this is the best imprint edition of the book.
Investment vs. Speculation
Investment is one which upon thorough analysis promises safety of principal and an adequate return. Other operation are speculations.
There is intelligent speculation.
These Are Not intelligent speculation: 1. speculating when you think you are investing; 2. speculating when lack proper knowledge; 3. Risk more money than you can afford.
Future of security prices is never predictable.
IPO, new offerings, are in favor of selling, not buyer or the investors.
Technical Approaches are speculating
Intelligent Investors principles should not alter through time, but the application must be adapted.
Recommendation of 50-50 division between bond and stock, to max of 25-75.
Defensive Investors vs Enterprise Investors
Defensive emphasis on avoidance of serious mistakes, but gain freedom from effort.
Defensive investor should purchase well established funds rather than common stock.
Enterprise devote his time and can expect extra reward.
Prevalent view of first choice of the growing industries, then identifying the lead companies, is not an easy method. It has pitfalls.
Experts do not have dependable ways of selecting company base on previous point.
Prospect for physical growth in business do not translate to profit for investors. Sometime realized growth already formulated into the price. See EMT.
Investor biggest problem is himself.
Intelligent investor is matter of character than brain.
When price rise, stock become more risky. Vice verse. It is wise to keep cash in hand and be prepared for bear markets.
To obtain better than average 1. follow policies which are inherently sound and promising 2 not popular on wall street.
Short selling is not easy to master.
Own stocks only if you would be conformable not knowing its daily prices.
Before dump stock, ask if value of company underlying the business has changed
Public utility enterprises have been chief victim of inflations.
Stock carry more protection against inflation than bonds.
REITs and TIPs are good solutions to inflations.
There is cycle in stock but should be viewed at greater than 10r time periods.
Never forecast the future exclusively by extrapolating the past.
Stock performance = real growth + Inflation Growth + Speculative Growth
Two way to be intelligent investor; 1. continually research and monitor. 2. Create permanent portfolio.
Inflation is one of worst enemies.
Preferred stocks are worst of bond and common stocks.
Dividend are the greatest force in stock investing.
Defensive portfolio 4 rules; 1. diversification between 10 and 30. 2. Each company are large, prominent and conservatively financed. 3. Long record of continuous dividend payments. 4. Some limit on PE ratio, around 25 to 20.
Company is said conservative when book value is at least half of total cap.
Considered large at over 10 billion cap.
Use dollar cost average method, invest a set amount each month. May create tax headache in long run.
High Yield Bond, Foreign Bonds, day trading BAD. Day trading make broker rich, not you.
Must hold stocks at least for a few month.
Enterprise investor activities; 1. buy in low market, sell in high. 2. buy chosen growth stocks. 3. buy bargains, 50% less than price. 4. buy special situation, like arbitrage.
Check bargains using method of appraisal, estimating future earnings. And test value of business.
Use PE ratio based on multiple years.
Do not buy companies with stock growing faster than companies.
Buy big growth stock not when they are popular but when something goes wrong.
Nearly all richest people in America have wealth concentrated.
Concentration > diversification but require time.
Way of timing vs way of pricing.
Characteristic of Bull; 1. high prices. 2.high PE. 3. low div yield against bond yields. 4. speculation on margins. 5. many IPOs
You must be able to live with 50% gain from lowest price, and 33% fall from highest price. Else go buy index fund, ok he did not say this but true.
Sell at price well above book price
True investor scarcely ever is forced to sell and all other time can disregard the current price quotation.
Good management produce above average returns are sound attitude toward its owners.
Bond price inversely proportional to yields.
Can make predication for stock, even more so for bonds.
Mr. Market, this is one of the most important concepts. Do not be affect by market movement, instead take advantage of it.
Stock movements, determined by decision of investment advisers and insured commercial banks.
open-end fund vs close end funds
Index funds, index fund as best choice for individuals. Stressed by him and buffet.
Yesterday losers almost never become tomorrow winner.
what analyst do? Describe business, operating results, financial position, identify strong and weak points, estimate future earning, comparison of companies, and express opinions.
value = current earnings * ( 8.5 + 2 * growth)
5 decision elements. 1. general long term prospects. 2. quality of management. 3. financial strength. 4. dividend record. 5. current dividend rate.
Average of two or three acquisition is sign of potential trouble.
OPM, cash from financing activities are bad.
Moat, competitive advantage like brand identity, unique intangible asset are good.
Marathoner better than sprinter
Must have R&D funds for growth
Split shares have no advantage to its investors
Companies should buy back share when they are cheap.
Do not take single year earning seriously and be cautious when looking at per share figures. Booby trap beware.
Dilution means floated shared and stock options available.
Ignore Pro Forma earnings.
Should understand what and why a company capitalizes.
On guard for nonrecurring costs.
Defensive stock selection: 1. adequate size. No less than $100millin in annual sale, no less than $50 million of total asset for public utility. 2. at least 2 to 1 current asset to current liabilities ratio. 3. positive earnings for past ten years. 4. uninterrupted dividend for past 20 years. 5. increase one-third in per-share earning in past ten years. 6. less than 15 times PE for past three years. 7. moderate ratio of price to assets. No more than one and one half times book value.
No compelling reason for investor to own railroad shares.
Protection or quantitative better than prediction or qualitative approach.
If you do not read annual report, get out investing.
Special invest opportunities 1. arbitrages, 2. liquidations. 3.realted hedges. 4. bargains issues. Net current assets.
Guides 1. Financial, current asset-liab ratio at least 1.5. debt > 110% net current asset. 2. positive earning in past five years. 3. some dividend records. 4. last year growth more than those of 1966. 5. price less than 120% of net tangible assets.
Low PE has smaller decline during bear than high PE
ROIC and owner earnings.
Business should grow from within rather than from acquire.
The irony of stronger the company the less likely it was to pay dividend.
According to statistic, when current dividend are low, future earning also turns to be low.
A management that is heavily compensated with stock options has a vest self interest in favoring stock buybacks over dividends. Bad.
Management that sell stock they receive immediately after exercising their options. Bad.
Executive compensation grants Stock option greater than 3% of share outstanding. Bad.
Read Proxy statements.
Margin of Safety, which is the difference between the percentage rate of the earnings on the stock at the price you pay for it and the rate of interest on bonds, and the margin of safety is the difference which would absorb unsatisfactory developments. Quote.
Margin of Safety is always dependent on the price paid.
Chief losses to investors come from purchase low-quality stock at times of favorable business conditions.
Recap to sound investment: 1. Know what you are doing, know your business. 2. Do not let anyone else run your business, unless you supervise his performance or have strong reason for placing such confidence. 3. Do not enter an operation unless reliable calculation that shows a fair chance for gain. 4. Have courage of your knowledge and experience.
Investor simply should follow two variables, price and value. Buffet.
NYSE lists most respectable companies.
Spending cash on hand, either too much or too little. Bad
Utilities forecasts interest rate ?
High debt ratio bad. Due to 1. Effect by interest rate. 2.Bankrupcy. 3. Freedom for company to invest.
During deflation, but bonds. Inflation buy stocks, REIT or TIP
IPO most offer are overpriced.
Bigger they get, slower they grow.