The Intelligent Investor, Revised Edition, by Benjamin Graham and commentary by Jason Zweig, is a classic book on investing that has been called “the best book on investing ever written” by Warren Buffett. Financial journalist Jason Zweig provides insightful commentary after each chapter to apply Graham’s teachings to modern investing. Known as the definitive text on value investing, the book presents Graham’s investment philosophies and the concept of “margin of safety.” It’s a guide for individuals who wish to make sound, long-term investment decisions based on fundamental business aspects rather than market whims and trends. Whether you’re a seasoned professional or a novice, Graham’s teachings and Zweig’s modern interpretations offer a foundation for making intelligent investment decisions.
My Kindle version of The Intelligent Investor was an almost unwieldy 767 pages. However, if you have the interest and patience for it, the book provides a master class in investing that will allow you to outperform the majority of professional investment managers. Here are my favorite twelve takeaways:
Make sound, but unpopular investments
“‘Obvious prospects for physical growth in a business do not translate into obvious profits for investors.’ While it seems easy to foresee which industry will grow the fastest, that foresight has no real value if most other investors are already expecting the same thing. By the time everyone decides that a given industry is “obviously” the best one to invest in, the prices of its stocks have been bid up so high that its future returns have nowhere to go but down… To enjoy a reasonable chance for continued better than average results, the investor must follow policies which are (1) inherently sound and promising, and (2) not popular on Wall Street.“
The 10% rule for speculative investments
“Just as sensible gamblers take, say, $100 down to the casino floor and leave the rest of their money locked in the safe in their hotel room, the intelligent investor designates a tiny portion of her total portfolio as a ‘mad money’ account. For most of us, 10% of our overall wealth is the maximum permissible amount to put at speculative risk.“
Balance between stocks and bonds
“We have suggested as a fundamental guiding rule that the investor should never have less than 25% or more than 75% of his funds in common stocks, with a consequent inverse range of between 75% and 25% in bonds… sound procedure would call for reducing the common-stock component below 50% when in the judgment of the investor the market level has become dangerously high… We are thus led to put forward for most of our readers what may appear to be an oversimplified 50–50 formula. Under this plan the guiding rule is to maintain as nearly as practicable an equal division between bond and stock holdings. When changes in the market level have raised the common-stock component to, say, 55%, the balance would be restored by a sale of one-eleventh of the stock portfolio and the transfer of the proceeds to bonds. Conversely, a fall in the common-stock proportion to 45% would call for the use of one-eleventh of the bond fund to buy additional equities… we are convinced that our 50–50 version of this approach makes good sense for the defensive investor. It is extremely simple; it aims unquestionably in the right direction; it gives the follower the feeling that he is at least making some moves in response to market developments; most important of all, it will restrain him from being drawn more and more heavily into common stocks as the market rises to more and more dangerous heights.“
Periodic 401(k) rebalancing
“Fortunately, through your 401(k), it’s easy to put your portfolio on permanent autopilot. Let’s say you are comfortable with a fairly high level of risk—say, 70% of your assets in stocks and 30% in bonds. If the stock market rises 25% (but bonds stay steady), you will now have just under 75% in stocks and only 25% in bonds.5 Visit your 401(k)’s website (or call its toll-free number) and sell enough of your stock funds to “rebalance” back to your 70–30 target. The key is to rebalance on a predictable, patient schedule—not so often that you will drive yourself crazy, and not so seldom that your targets will get out of whack. I suggest that you rebalance every six months, no more and no less, on easy-to-remember dates like New Year’s and the Fourth of July.“
A dollar-cost averaging strategy for index fund investments
“The ideal way to dollar-cost average is into a portfolio of index funds, which own every stock or bond worth having. That way, you renounce not only the guessing game of where the market is going but which sectors of the market—and which particular stocks or bonds within them—will do the best. Let’s say you can spare $500 a month. By owning and dollar-cost averaging into just three index funds—$300 into one that holds the total U.S. stock market, $100 into one that holds foreign stocks, and $100 into one that holds U.S. bonds—you can ensure that you own almost every investment on the planet that’s worth owning… Every month, like clockwork, you buy more. If the market has dropped, your preset amount goes further, buying you more shares than the month before. If the market has gone up, then your money buys you fewer shares.“
Index funds beat the best market-timing newsletters
“A study by two finance professors at Duke University found that if you had followed the recommendations of the best 10% of all market-timing newsletters, you would have earned a 12.6% annualized return from 1991 through 1995. But if you had ignored them and kept your money in a stock index fund, you would have earned 16.4%.“
The pitfalls of the “New Era” investing
I found this passage especially relevant to the stock market today: “Several of the circumstances surrounding the ‘performance’ phenomenon caused ominous headshaking by those of us whose experience went far back—even to the 1920s—and whose views, for that very reason, were considered old-fashioned and irrelevant to this (second) ‘New Era.’ In the first place, and on this very point, nearly all these brilliant performers were young men—in their thirties and forties—whose direct financial experience was limited to the all but continuous bull market of 1948–1968. Secondly, they often acted as if the definition of a “sound investment” was a stock that was likely to have a good rise in the market in the next few months. This led to large commitments in newer ventures at prices completely disproportionate to their assets or recorded earnings. They could be “justified” only by a combination of naïve hope in the future accomplishments of these enterprises with an apparent shrewdness in exploiting the speculative enthusiasms of the uninformed and greedy public.“
One of the stupidest things an investor can do
“buying funds based purely on their past performance is one of the stupidest things an investor can do… Your chances of selecting the top-performing funds of the future on the basis of their returns in the past are about as high as the odds that Bigfoot and the Abominable Snowman will both show up in pink ballet slippers at your next cocktail party… yesterday’s winners often become tomorrow’s losers. But researchers have shown that one thing is almost certain: Yesterday’s losers almost never become tomorrow’s winners. So avoid funds with consistently poor past returns—especially if they have above-average annual expenses.“
How to beat the market
“If all analysts were agreed that one particular stock was better than all the rest, that issue would quickly advance to a price which would offset all of its previous advantages.” The key to beating the market is to find companies where the analysts are wrong and investing in them.
Own the haystack
“Think of it this way: In the huge market haystack, only a few needles ever go on to generate truly gigantic gains. The more of the haystack you own, the higher the odds go that you will end up finding at least one of those needles. By owning the entire haystack (ideally through an index fund that tracks the total U.S. stock market) you can be sure to find every needle, thus capturing the returns of all the superstocks. Especially if you are a defensive investor, why look for the needles when you can own the whole haystack?“
Practice first
“Graham advised investors to practice first, just as even the greatest athletes and musicians practice and rehearse before every actual performance. He suggested starting off by spending a year tracking and picking stocks (but not with real money)… you can use “portfolio trackers” at websites like www.morningstar.com, http://finance.yahoo.com, …After a year, measure your results against how you would have done if you had put all your money in an S & P 500 index fund. If you didn’t enjoy the experiment or your picks were poor, no harm done—selecting individual stocks is not for you. Get yourself an index fund and stop wasting your time on stock picking. If you enjoyed the experiment and earned sufficiently good returns, gradually assemble a basket of stocks—but limit it to a maximum of 10% of your overall portfolio (keep the rest in an index fund). And remember, you can always stop if it no longer interests you or your returns turn bad.“
Pascal’s Wager
Avoid any possibility of catastrophic loss: “Simply by keeping your holdings permanently diversified, and refusing to fling money at Mr. Market’s latest, craziest fashions, you can ensure that the consequences of your mistakes will never be catastrophic.“