The Intelligent Investor – The Ultimate Book Summary

Did you know that sir Isaac Newton was a stock investor?

Back in 1720, Isaac newton invested in one of the hottest companies in England, Southsea company and as his money doubled in value he sold his shares but just a few months late swept up in the wild enthusiasm of the market newton jumped back in at a much higher price and lost an equivalent of 3 million dollars today.

Which begs the question what does it mean to be the intelligent investor?

According to Benjamin Graham (Author of the book ) being an intelligent investor is not about having a high IQ or sat scores Isaac newton was one of the smartest people to ever live yet by gram standards newton was far from an intelligent investor.

In the book the intelligent investor “an intelligent investor” as graham describes–

It means being patient disciplined and eager to learn.

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We have seen a lot more money made and kept by ordinary people who were emotionally suited for the investment world than even those with extensive knowledge of financial accounting and stock market lore.

So today let’s go over the main ideas and summary of the intelligent investor from one of the greatest books about investing ever created at least according to Warren Buffett, the intelligent investor, and also What Type of Book Is The Intelligent Investor?

Idea number one

1.Meet Mr. Market

Imagine having a neighbor called Mr market every day he gives you his opinion on what he thinks your stocks are worth and he offers you to buy your stock or sell you additional shares.

The problem is Mr. market isn’t always right and often he is very wrong for example one day Mr. market comes out in a panic he says oh my god your stock is worth ten percent of what it was worth two years ago you were losing the money, you get concerned but then you realize that the company you own stock in grew its customer base by 30%, sales grew over 59%,  and gross profit grew by 126 percent all in a single year.

So should you let this crazy neighbor decide what your stock should be worth? well no this example, by the way, was Amazon in the early 2000s when lost 90 percent of its value.

One of graham’s biggest principles is that a stock isn’t just a paper with a symbol and a price tag a stock is a piece of ownership in an actual business and since the market isn’t always right the price of a share doesn’t always equal the value of the business.

Graham says that the market is like a pendulum that is perpetually swinging between optimism when prices go up and pessimism when prices go down, this is where the strength of your emotional endurance is tested by the markets.

Graham says to invest if you are comfortable holding your stocks without worrying about Mr. market’s crazy mood swings now my market doesn’t force you to buy or sell at any particular time it just presents you with the opportunity for you to do business with him this allows you to take advantage of MR market’s mood swings if you choose to you could sell the stock if you think Mr. market is getting too optimistic and prices are getting too high or you could buy a stock if Mr. market is becoming too pessimistic and prices are getting low.

As graham says I like to buy from the pessimist and sell to the optimist or you can just hold your stock and let Mr market has his moment.

idea number two

2. Becoming A Defensive Investor

There are two types of investors graham mentions in the book 

1. The enterprising or active investor 
2. The defensive or passive investor

The enterprising investor continuously searches selects and monitors a mix of stocks bonds and mutual funds He might have the opportunity but not the guarantee of a higher than average return but with a much higher risk of loss.

The defensive investor doesn’t want to deal with the nuances of the market so instead of carefully and consistently monitoring financial securities he creates a permanent portfolio that runs on autopilot and requires little to no effort to run, although this option isn’t the most exciting since it has small but steady returns.

Graham advises that the majority of people are best suited to be defensive investors since most people have limited time to closely study the market. The defensive investor according to graham must have a combination of high-grade bonds and a diversified list of leading stocks this will allow the investor to profit from the growth of the market while creating a defense system against the mood swings of Mr. Market.

For example, let’s say that we have a simple 60-40 splits in our portfolio made out of 60% stocks and 40% bonds all we would have to do is rebalance your portfolio once or twice per year if, at the end of the year, our stocks grew in value this means that our ratio also changed and now we have 70% stocks and 30% bonds so we sell a stock, and use the money to buy bonds to get back to our 60-40 split.

This allows us to safeguard our profits by putting them in safer bonds.

Similarly, if the stock market didn’t do well and put our portfolio in a 50-50 split, we can sell bonds to buy undervalued stock to get us back to our 60-40 splits.

This allows us to take advantage of an undervalued market by moving money from bonds to better-priced stock. Of course, your ratios might be different depending on your goals and the return of both stocks and bonds.  Although Graham recommends never allocating more than 75 of your money in stocks but also never going under 25 with a reminder of your portfolio and high-grade bonds.

Investing a fixed amount of money at regular intervals like right after you get your paycheck is what is called dollar cost averaging.

This will help you get a fair price on stocks and bonds regardless of what Mr market is doing this will help you ensure that you don’t invest all your money at the wrong time which can be costly in this way you can take advantage of both bull markets and bear markets.

idea number three

3. Finding The Right Companies

Benjamin Graham has a few guidelines for defensive investors for “How to find the right companies” to invest in.

1. Diversification of the companies you invest in-

 Graham says investing in 10 to 30 companies should be enough to make sure you are not overexposed to one industry so invest in stocks in a variety of industries to reduce risk.

2. Invest in large companies-

Graham considers companies to be large if they have over 100 million dollars in revenue yearly, adjusted for inflation that would be around 700 million dollars per year.

3. Find conservatively financed companies-

In other words, you don’t want a company with too much debt, graham suggests that you should aim for companies that have twice as many assets as they do debt.

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4.  Four no-earnings deficits in the last 10 years.

5. The company has consistently distributed dividends for at least the last 20 years

6.  At least 33 growth in the last 10 years-

 which is around 2.9 per year although the current version of the book recommends at least four percent yearly or 50 over 10 years.

7.  Don’t overpay for earnings-

 the p e ratio should not be more than 15 times the average earnings of the last three years.

8. Don’t overpay for this stock-

the price of the stock should not be more than 1.5 times the net asset value of the company, this can be calculated by taking their assets and subtracting their liabilities like debt and preferred stock.

Graham emphasizes that money is made on the buy so never overpay for a stock. It is important to understand what makes a company a good investment but today the defensive investor does not need to analyze and pick individual stocks anymore it isn’t even advisable.

With the creation of index funds, investors can own the entirety of the stock market with one investment.

Picking stocks is like trying to find a needle in a haystack but defensive investors can avoid looking for the needle and instead on the whole haystack

idea number four

4.  Protect Yourself Against Inflation

Something that investors tend to overlook is inflation one of the reasons is what psychologists call the money illusion, for example, if you receive a two percent raise in a year when inflation runs at four percent you might feel better than taking a two percent pay cut in a year when inflation is zero, yet both scenarios leave you in an identical position since both leave you with two percent less value.

Similarly, the intelligent investor must take into account not just their absolute return on investment but their real return after inflation looking at historical data stocks have outpaced inflation a good 78% of the time making it a pretty good investment for inflation, but it isn’t perfect.

When inflation is fairly low businesses can pass down their rising cost to consumers fairly easily but once inflation gets high and runs over six percent per year historically, stocks no longer do well since high inflation forces consumers to cut costs and spend less, causing the entire economy to underperform.

The book recommends two main assets to protect yourself against inflation-

1. REITs or real estate investment trusts-

these are companies that are owned and collect rents from commercial and residential real estate and become real estate mutual funds for investors to buy.

and 

2.  TIPS or treasury inflation-protected securities-

 these are u.s government bonds that automatically go up in value when inflation increases now the value increase of these assets is technically considered to be taxable income so tips are best suited for the tax advantage retirement accounts like a 401k or an Ira.

Now, if you’re looking to be a passive investor these main four points will get you there but if you’re looking for more

then

idea number five

5.  Becoming An Enterprising Investor

Why do you think brokers on the floor of the New York stock exchange always cheer at the sound of the closing bell, no matter what the stock market did that day whenever you trade they make money whether you do or not.

Being an active investor does not mean being a trader.  As graham says being a stock trader is the fastest way to a financial disaster traders make their money based on speculation.

The difference between an investor and a speculator is found in their attitude towards stock market movements. The speculator tries to anticipate and profit from market fluctuations while an investor focuses on using these fluctuations to acquire securities at good prices.

To an enterprising investor, market fluctuations are only important in a practical sense. When prices get too low compared to their company’s earnings it might provide an opportunity to buy and hold additional shares, when prices go too high it could be an opportunity to either hold and expect prices to come down or sell and buy back once prices become suitable again.

In other words, a speculator prioritizes price over value and the intelligent investor prioritizes value over price.

Since active investing inherently carry more risk graham recommends enterprising investors to start with a defensive foundation just like passive investors would protect against the added risk.

Also read– 4 Best Passive Income Investment Strategies and Investments

Graham also warns that enterprising investors must have a vast knowledge of market analysis before embracing this journey and that being an active investor requires a higher level of emotional endurance to do it successfully. Since even professional investors get it wrong more often than not, this is why graham insists that enterprising investors apply what is called margins of safety.

This means acquiring assets that are priced at two-thirds of the intrinsic value of the business after doing thorough research on the business, this allows for a 33 margin of error.

Meaning the investor gives himself a chance to be wrong and still be profitable. Establishing a margin of safety does not guarantee profits, but it allows for a higher chance for profit than for the loss. These undervalued assets are not easy to find and are most common in market crashes and recessions when stocks tend to be undervalued.

Graham talks about strong businesses that fell out of popularity as good opportunities to find undervalued businesses.

Graham’s most successful student Warren Buffett has used graham’s teachings from the intelligent investor to build one of the biggest and most successful investment track records in history. Buffett looks for strong brands with healthy financials that are becoming unpopular either after a scandal or a loss or a market crash once companies become attractively priced.

For example, warren Buffett made billions of dollars due to a solid oil scandal in 1963 American express was in the midst of a scandal with a company, overseas AMEX had loaned this company a large amount of money and had salad oil as collateral after realizing that this collateral didn’t exist. American Express stock fell over 50 percent overnight, warren Buffett said that the underlying business was still sound and he used this opportunity to buy five percent of this company for 20 million dollars.

Since the underlying business was still great the company recovered Warren Buffett sold some of the stock a few years later to allow for diversification, but to this day he still holds much of this original purchase from the 1960s worth billions of dollars. 

6. Conclusion

In the end, investing is not about beating the market or finding that one stock that will go to the moon instead, the whole point of investing is to generate enough money to meet your needs and creates financial freedom.

Like the book says being the intelligent investor is not about beating other people to the finish line but rather crossing the finish line yourself.

Now this book (the intelligent investor first edition was published in 1951) is packed with information so I highly recommend you give it a read let me know in the comments which one idea from this video resonated with you the most and why.

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