If there’s one book that every successful investor recommends you read, it is Benjamin Graham’s ‘The Intelligent Investor.’ The book is outdated and lacks practicalities, but the principles of value investing it teaches are still very relevant today.
That’s the reason why Warren Buffet, the billionaire investor and disciple of Benjamin Graham, calls ‘The Intelligent Investor’ “the best book on investing ever written.”
In this post, I highlight key takeaways and my notes based on the topics I found interesting. This is not a book summary, it’s what I was able to glean from the book given that a lot of what the book discusses is outdated.
Key Takeaways from The Intelligent Investor
- Speculation is like gambling, the house always wins.
- Invest in the business, not a ticker symbol.
- Time in the market is better than timing the market.
- Day-to-day fluctuations in stock price mean nothing in the long run.
- Instead of trying to outsmart the market, try not to be stupid.
About Benjamin Graham
In a nutshell, his investment philosophy was a mix of human psychology, buy-and-hold forever, and fundamental analysis.
He graduated from Columbia University at the age of 20 and started his career on Wall Street. Later, he held teaching positions at his Columbia University and the University of California, Los Angeles.
The main goal of The Intelligent Investor is to provide you a foundational guide to investing. It explains the tenants of a value investor, a.k.a. the Intelligent Investor.
Investor vs. Speculator
A speculator gambles that a stock will go up in price because somebody else will pay even more for it.The Intelligent Investor
Learn the difference between an investor and a speculator.
The goal of the investor is to increase the return on investment by taking calculated risks. On the other hand, the goal of a speculator is to make short term bets in the hopes of high returns.
Returns are never achieved in the short term.
As time goes by, the purchasing power of your money decreases. Historically, stocks have shown that they can withstand inflation better than other investment securities such as bonds.
But nothing in investing is fool proof.
Consider diversifying into two great options currently available to investors; REITs and inflation-protected securities, or TIPS.
REITs are real estate investment trusts and an alternative to owning physical real estate. They own properties, collect rent, and do a great job of withstanding inflation.
TIPS are government bonds that adjust with inflation.
Remember, don’t put all your eggs in the same basket.
Active vs. Passive
Ask yourself if you are an active investor or a passive one.
Active investors have the time and desire to build their own portfolio, mostly from scratch, and constantly update it based on the market.
Passive investors, on the other hand, create a portfolio and turn the ‘autopilot’ ON by making periodic investments.
These two approaches to investing are personal preferences based on your ultimate goal and personality.
Investors should allocate 75% of their investment portfolio into stocks and 25% in bonds. This is considered a little on the risky side. If you prefer, you can reverse the allocation to be more risk averse.
Unless there’s a major life event, consider keeping the course with allocation overtime. Even if things are stable, consider re-balancing your portfolio periodically.
For e.g., if you have 80% of your money invested in stocks and 20% in bonds and the stock market rises, cash in on the gains by selling the stocks and reinvesting the money in bonds.
This keeps your stock allocation percentage at 80% and ensures that you are buying low and selling high.
Buy to Hold
Value investors are long term investors and don’t try to time the market or buy to sell quickly for a mediocre profit.
Consider taxes when selling an investment. Short term capital gains are taxed at a higher rate than long term capital gains.
Avoid investing in initial public offerings (IPOs) and junk bonds. They are high risk and tend to underperform.
At heart, “uncertainty” and “investing” are synonyms.The Intelligent Investor
To succeed in the stock market, your ultimate goal should risk management. In other words, don’t try be smart, try not to be stupid.
Risk comes with the territory. Having a clear roadmap and half-decent emotional IQ, you should be able to navigate with minimum hiccups.
Is ‘The Intelligent Investor.’ outdated? Yes, much what is in the book is outdated, but the principles it teaches you about value investing are still relevant today.