Most investors are familiar with Warren Buffett and his concepts on value investing. But, not many know that Buffett learned those ideas from his former professor Benjamin Graham. This book by Graham lays out the fundamentals of value investing, which he termed “intelligent investing.” In this this free version of The Intelligent Investor summary, you’ll learn invaluable insights on adopting a disciplined, rational investment approach, to focus on the intrinsic value of a company instead of market speculation.
What’s Intelligent Investing?
Warren Buffett is well-known for his concept of value investing, which originated from Graham’s teachings on intelligent investing. This is not about having a high IQ or mastering financial techniques, but having the knowledge, principles and mindset to be an astute investor. The goal is not to beat the market or get rich overnight, but to build wealth in a steady, consistent way.
Although Graham first published this book decades ago, the timeless principles remain relevant today. There’s a lot in this book, ranging from investment/financial concepts to guidelines, detailed numbers and case studies. In our full 16-page version of The Intelligent Investor summary, we’ve streamlined and organized the content into 3 parts: (i) the foundational principles of intelligent investing, (ii) the 2 investment pathways, and (iii) other investment insights. For now, we’ll dive into an overview of the core principles of intelligent investing and some key application insights.
Foundational Principles of Intelligent Investing
To become an intelligent investor, there are numerous concepts you must grasp and apply. Graham eleborated on each idea at length, along with historical numbers and detailed analyses. Here’s a visual summary of the inter-related concepts:
We’ll just outline a few concepts here. You can get more details, examples and actionable tips for each one in our complete 16-page version of The Intelligent Investor summary bundle.
Invest, Don’t Speculate
There’s a major difference between investment and speculation. An investment is based on robust analysis, with the goal to preserve your principal and obtain sufficient returns in the long term. For example, you may buy a stock after analyzing the company’s financial health and future potential.
Anything that’s not an investment is a speculation, such as buying a trending stock in hopes that its price will go up, or acting based on an unverified “tip”.
The goal of intelligent investing isn’t to outperform the market every year. It is to:
• Achieve steady, positive returns over time; and
• Preserve your principal by avoiding severe losses. If you lose $90,000 out of $100,000 investment capital, you’d need returns of 900% just to recoup your initial amount.
Having said that, speculation isn’t “bad”. The danger lies in confusing speculation and investment—to think you’re investing when you’re speculating and exposing yourself to unnecessary risks. If you wish to try your hand at speculation, Graham recommends keeping separate accounts: one for genuine investments and a smaller account for speculative activities. This limits losses from speculations, and keeps you from muddling your investment strategy with speculative bets.
Manage your Responses to Market Fluctuations
Price fluctuations are inevitable in the market. A key difference between investors and speculators lies in their response to stock-market movements. Speculators try to make a quick profit by second-guessing short-term market shifts, while intelligent investors make strategic buy/sell decisions based on the intrinsic value of the securities.
Think of the stock market as an erratic business partner “Mr. Market”. Some days he’s overly optimistic, offering to buy your stakes at exorbitant prices. Other days he’s pessimistic, proposing to sell his shares at a steal. The wise strategy is to maintain your independent view of your stock’s true value, then exploit Mr. Market’s mood swings: buy from him when he undervalues his stocks and sell to him when he overvalues them.
However, even the most astute investor can be swayed by emotions or market hype. Thus, you need to mitigate your impulses using several safeguards: (i) go for a margin of safety, (ii) diversify, and (iii) conduct rigorous analysis before buying or selling any stock, bond, or security. More details in our full summary!
Other Important Concepts
• Understand the stock market history. A good investor should understand the history and performance of financial markets. To that end, Graham analyzed a century of stock market data, emphasizing the need to understand (i) price fluctuations, and (ii) the relationship between stock prices, earnings and dividends. We’ll deep-dive into the market’s long term trends and key learning points in our full summary.
• Focus on real returns after inflation. Inflation erodes your money’s purchasing power over time. If your investment returns are lower than inflation rates, you effectively lose wealth. In our full summary, we’ll elaborate on how you can use assets to hedge against inflation, and look at stocks vs bonds vs other tangible assets for this purpose.
Applying Value Investing
Again, the book covers the application of the value investing principles in great detail, ranging from financial guidelines and checklists to strategic principles. Here’s a quick glimpse of the key ideas:
Security Analysis Made Simple
Any investor must minimally understand a company’s financial reports, including the balance sheet, income statement, and notes. Never buy/sell a security (a stock, bond, or derivative) without rigorous analysis.
Benjamin Graham dives into loads of details on how to evaluate stocks, bonds, and other securities. The key is to combine a range of financial metrics and qualitative factors to get a holistic view of a company’s value and potential.
Here are some examples of important things to look out for in evaluating stocks:
• Valuation: To avoid overpaying for growth, use this formula to gauge a growth stock’s intrinsic value: Value = Current earnings × (8.5 + 2 × expected annual growth rate).
• Price ratios: The Price-to-Earnings (P/E) ratio should be below 15 and the Price-to-Book (P/B) ratio should be below 1.5. When multiplied together, P/E and P/B should not exceed 22.5.
• Size and stability: Prioritize companies with significant annual revenue and consistent dividend payments.
• Ensure the current dividend rate is sustainable.
• Long-term prospects: Assess the company’s industry position and growth potential.
• Evaluate the management’s competence and integrity.
• Financial strength: Ensure the assets are greater than liabilities, with moderate debt levels.
Bonds are typically less risky than stocks, but they still require scrutiny. When evaluating bonds, look for:
• A strong equity-to-debt ratio of ideally 2:1 or more.
• A strong record of past earnings to cover interest charges, ideally by at least 7x.
The 2 Types of Investors (or the 2 Investment Pathways)
A significant portion of the book went into defining and discussing the different approaches for 2 types of investors :
• Defensive (passive) investors seek to avoid big mistakes and losses, and to earn decent returns with minimal effort. The ideal strategy is to go for a balanced portfolio with a blend of high-grade stocks and bonds, with a 50-50 split–but you can adjust it in 25-75% in either direction based on your financial needs and risk tolerance.
• Enterprising (aggressive) investors are willing to take more risk and put in much more time/effort to achieve higher returns. This approach brings potential for higher returns, also higher risks. Generally, the principles for defensive investing are also applicable to enterprising investing: to balance high-grade bonds and stocks, purchased at reasonable prices. But, enterprising investors tend to push the boundaries to explore more varied and potentially riskier assets that they believe can outpace the market.
Do check out our complete version of The Intelligent Investor summary for a detailed breakdown of the investment strategies, asset selection approach, and best practices for Defensive Investing vs Enterprising Investing.
Other Investment Insights
In our full summary, we’ll also dive deeper into considerations for:
• Other financial tools such as investment funds or mutual funds, convertible issues and warrants.
• Engaging professional investment advice (e.g. commercial bankers, brokerage/investment firms, financial services, and specialized investment advisers).
• Shareholder-management relations and dividend policy, including the tricky question of whether profits be reinvested for future business growth or distributed to shareholders as dividends.
• Comparative analysis in practice: In the book, Graham compared 4 real companies to illustrate how security analysis can be used to assess companies’ intrinsic values and potential risks. We’ve also included a simplified example in our full version of The Intelligent Investor summary, to show how to compare companies in practice.
Getting the Most from The Intelligent Investor
If you’d like to zoom in on the ideas above and get more detailed insights, examples and actionable tips, do check out our full book summary bundle that includes an infographic, 16-page text summary, and a 29-minute audio summary.
The book included detailed explanations of different investment instruments. It also analyzed historical numbers and data for various asset classes and types of companies across different industries. Besides the comparative analysis, Graham also presented 4 other case studies to illustrate market volatility and investment pitfalls. In addition, he compared 8 pairs of companies to reinforce the key factors that differentiate successful investments from less successful ones.
In each of the 20 chapters, financial journalist Jason Zweig also added his commentary to link Graham’s timeless principles to the current financial landscape. This included: updated statistics to show how Graham’s principles have held up over time, and modern examples to clarify or elaborate on how Graham’s principles may be applied in today’s markets. Feel free to purchase the book here!
About the Author of The Intelligent Investor
The Intelligent Investor: The Classic Text on Value Investing by Benjamin Graham was written by Benjamin Graham (1894–1976), who was widely regarded as the father of value investing. Graham graduated from Columbia University and took a job as a chalker at Wall Street. He went on to do financial research for his firm and was made a full partner. At age 25, he was earning >$500,000 a year, but lost all this wealth in the 1929 market crash. In 1934, Graham coauthored Security Analysis with David Dodd, which popularized the concept of intrinsic value. Later, he published The Intelligent Investor to capture his insights on investing. Graham also taught at Columbia University for 30 years, with Warren Buffett being one of his better known students.
The Intelligent Investor Quotes
“Sound investment principles produced generally sound results. We must act on the assumption that they will continue to do so.”
“Never mingle your speculative and investment operations in the same account, nor in any part of your thinking.”
“If you want to speculate do so with your eyes open, knowing that you will probably lose money in the end.”
“The only thing you can be confident of while forecasting future stock returns is that you will probably turn out to be wrong.” —Jason Zweig
“It is easy for us to tell you not to speculate; the hard thing will be for you to follow this advice.”
“If the reason people invest is to make money, then in seeking advice they are asking others to tell them how to make money. That idea has some element of naïveté.”
“Any approach to moneymaking in the stock market which can be easily described and followed by a lot of people is by its terms too simple and too easy to last.”