Name: THE INTELLIGENT INVESTOR SUMMARY (BY BENJAMIN GRAHAM)
Uploaded: 2020-05-14T11:06:07.000Z
Duration: 13 min 28 s
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Successful investing does not require stratospheric IQ, insider information, or luck for that matte.r

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Instead what's needed is a sound intellectual framework for making decisions, combined with an ability to keep emotions from ruining it.

In "The Intelligent Investor", Benjamin Graham presents such a framework together with logic that will help to keep your emotions under control.

Arguably, he's investing strategy has been one of the most successful ones during the last hundred years. The impressive records,

but also of numerous of his disciples are impossible to ignore.

Among these, the brightest shining star is Warren Buffett, who, at the time of this video making, is the third wealthiest man in the world.

Warren Buffett refers to this book as "by far, the best book on investing ever written". In this video,

I will present the, in my opinion, greatest takeaways from the book.

Imagine that you own a part of a business that you paid $1000 for. Every day, a certain bipolar person called

Mr. Market comes to your home with an opinion about how much you're part of that business is worth. Furthermore,

he offers to buy your share or sell you an additional one on that basis. History has shown that

Mr. Market's opinion about how much your part of the business is worth, can be pure gibberish. For instance, back in March 2000,

he estimated the value of your share to be $2600. Only one year later, in March 2001,

Even though the income of the company increased with 50% and the profit increased by 20% during the same period.

Should you let this guy decide how much your $1000 of interest in that business is worth? Of course not!

One of Graham's core principles, is that a stock is not just a ticker symbol combined with a price tag,

it's an ownership interest in a business. And because

Mr. Market isn't always rational, the underlying value of the business can differ from the price he is willing to pay for it.

In fact, it frequently is over- or underpriced as Mr. Market easily becomes over optimistic, or conversely too pessimistic.

Graham advises you to invest only if you would feel comfortable to hold the stock in the future without seeing the fluctuating prices that

Mr. Market presents you with. But for the investor who can keep his head cool,

Mr. Market presents a great possibility of making money, for he doesn't force you to strike a deal with him,

he merely presents you with an opportunity of doing so! You should be happy to sell to him when he offers prices that are

ridiculously high, and similarly, you should be happy to buy from him when he presents you with bargains.

We must consider that, at the time when Graham wrote this book, people were far less bombarded with news,

forecasts, stock quotes, and so on than we are today. Back in the 1970s,

Mr. Market arrived maybe once a day, together with the morning newspaper.

every time we open our phone. Which, if you're anything like me, is more than 100 times every day, Just because

it doesn't mean that you must trade with him any more frequently than people had to in the

1970s. If he doesn't present you with an offer that meets your standards,

Takeaway number 2: How to invest as a defensive investor.

There are two types of investors according to Graham - the defensive (or passive) one and the enterprising (or active one).

Most people are better suited for the defensive strategy, as the time

they are willing to dedicate to investing is limited. The defensive investor should create a portfolio with a mixture of bonds and stocks,

Note that how much you should devote to each asset category depends on your life situation and the current difference in the average yield of

Restore this allocation once or twice every year, so that if stocks suddenly make up 60% of the portfolio

compared to only 40% in bonds, sell stocks and buy bonds, until 50/50 is restored.

Invest a fixed amount of capital at regular intervals. For instance, straight after you get your salary.

This is called dollar-cost averaging, and will allow for a fair average price of stocks and bonds.

it will assure that you don't concentrate your buying at the wrong time. For the stock component of the portfolio,

the defensive investor should aim for the following 8:

1: Diversification in the companies he invests in. 10 to 30 companies should be adequate.

Also, make sure that you are not overexposed to a single industry.

2: The companies should be large, which Graham defined as generating more than a $100 million in yearly sales.

After inflation, this equals approximately to $700 million in today's value.

3: Look for companies that are conservatively financed. Such a company has a so called "current ratio" of at least

200%. This means that its current assets are at least twice as big as its current liabilities.

4: Dividend should have been paid to shareholders for at least the last 20 years.

5: No earnings deficit in the last ten years.

6: At least 33% growth in earnings during the last ten years.

This translates to a conservative growth of 2.9% annually.

The price of the stock should not be higher than 1.5 times its net asset value.

The net asset value can be calculated by subtracting the company's liabilities from its assets. 8: Don't overpay for earnings (either).

Don't let the p/e ratio be higher than 15 when using the last 12-month earnings.

An alternative today is to invest in an index fund, which by definition will have returns similar to the average of the market.

If you are satisfied with an average reward through your investing, you only need these two first takeaways.

However, if you thirst for more, you will also need to consideeeeeeeer ....

Takeaway number 3: How to invest as an enterprising investor.

As it's so easy for the defensive investor to get the average return of the market,

it would seem a simple matter to beat the market. You just devote a little more time to investing than these average investors do, right?

To be an enterprising investor, and to beat the market, is much more demanding as such a logic suggests.

It requires patience, discipline, an eagerness to learn and a lot of time.

Many professionals and private investors alike aren't suited for this. It's easier to fall victim to the price quotations of Mr. Market than one could possibly imagine.

Just listen to these two statements from the early 2000s, at the peak of the dot-com bubble,

made by the chief investment strategist at 2 large mutual funds:

"We see people discard all the right companies, with all the right people, with the right visions, because their stock price is too high."

"That's the worst mistake an investor can make."

"Is the stock market riskier today than two years ago simply because the prices are higher? The answer is no!"

Of course, both statements turned out to be costly for the investors who put their money in these funds.

Since the profits that companies can earn are

finite, the price the intelligent investor should be willing to pay for these companies must also be finite.

Price is truly an important factor for the enterprising investor.

companies when they have been growing fast or is glamorous for some other reason, it tends to undervalue the ones with

unsatisfactory development. The intelligent investor should therefore try to avoid so-called "growth stocks" as much as possible. Why?

Simply because the investment decision is based relatively more on future earnings, and future earnings are less reliable than current valuations.

If you, on the other hand, can find a company which is valued lower than its net working capital,

you essentially pay nothing for all the fixed assets, such as buildings, machinery goodwill, etc.

The net working capital can be calculated by subtracting total liabilities from current assets.

Such companies were proven truly profitable during Graham's investment career.

Unfortunately, they are rare today except during tough bear markets.

Luckily, Graham suggests an additional method of finding investments for the enterprising investor.

These criteria are similar to the ones that the defensive investors should use, but the constraints are looser,

allowing for the enterprising investor to consider more companies. Note that there is no constraint at all regarding company size.

Also, some diversification should be applied,

but the number of companies held isn't carved in stone for the active investor.

In analyzing a company, the enterprising investor should also study its annual financial reports.

Graham has written a whole book on this subject called "The Interpretation of Financial Statements." So we should speak more about this, on another occasion.

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THE INTELLIGENT INVESTOR SUMMARY (BY BENJAMIN GRAHAM)

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