With the extra time I have found available during the current shelter in place, I have decided to re-read the classic investing bible, “The Intelligent Investor,” by Benjamin Graham. I will share my summary of each chapter here (mostly for my own review at a later date, but I also hope it will prove helpful to any readers who stumble upon the post – Read Part 2 Here):

The Intelligent Investor was originally published in 1949. It was last revised by Benjamin Graham in the early 1970’s and published in 1973. The most recent version with commentary from Jason Zweig explores events up to the early 2000’s and was published in 2006.

Introduction

• Investing, “does not require stratospheric IQ, unusual business insight or inside information — Only sound intellectual framework and ability to keep emotions in check”
• Everyday, “do something foolish, something creative & something generous.” – Benjamin Graham 
• Sooner or later all bull markets will end badly
• “Those who do not remember the past are condemned to repeat it,” (Understanding how stocks and bonds have responded to various circumstances in the past will help shape future strategy)
• Measure or quantify all stock purchases — for 99/100 companies there exists a price low enough to purchase or high enough to avoid
• Obvious prospects for physical growth in a business or industry do not translate into obvious profits for investors 
• The experts do not have dependable ways of selecting and concentrating on the most promising companies within the most promising industries

Defensive Vs. Enterprising Investor

• The passive (defensive) investor has two main goals:
  •  Avoiding costly mistakes/losses 
  • Minimize decisions & time required 
• The passive investor should be satisfied with average results
• Aggressive (enterprising investor) has more time/care to devote into security selection. For this added effort enterprising investor expects better than average return (but first needs to avoid a worse return than average return)
• Available time/effort NOT available funds or time until retirement should dictate risk appetite

Core Pillars

1. A stock is not just a ticker symbol. It represents an interest in an actual business. The underlying business value does not depend on the share price
2. The market is a pendulum. It swings between unsustainable optimism & unjustifiable pessimism. The intelligent investor should be a realist who sells to optimists & buys from pessimists
3. One can never fully eliminate the risk of losing money investing.
4. Don’t accept wall street “facts,” on faith (challenge everything & arrive at your own conclusions)

Year	Bond Return (*US T-Bill 10 year)	Dividend Return (*DJIA)
1949	2.66%	6.82%
1964	4.4%	2.92%
1972	7.19%	2.76%
2003	3.8%*	1.9%*
2020	1.25%*	2.65%* (2019)

Chapter 1: Investment vs Speculation 

“All of human happiness comes from one single thing: not knowing how to remain at rest in a room” – Blaise Pascal

• “An investment operation is one which upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.” (Wall street would have you believe anyone who buys or sells securities is an investor)
  1. Thoroughly analyze company & soundness of its underlying business before buying it’s stock
  2. Deliberately protect against losses
  3. Aspire to adequate not extraordinary performance
• An investor calculates what a stock is worth based on the value of its business while a speculator gambles that a stock will go up because somebody else will be willing to pay more
• “Invest only if you would be comfortable owning a stock even if you had no way of knowing its daily share price”
• Don’t drop a stock just because the price has fallen. Ask if something about the underlying business has changed
• “Some speculation is necessary and unavoidable, for in many common stock situations there are substantial possibilities of both profit and loss” Speculation is part of human nature & can be fun. However avoid:
  • Speculating when you think you are investing
  • Speculating seriously instead of as a past time
  • Risking more money than you can afford to lose 
• Put aside a portion (max 10% of net worth) of your funds for speculation and never mingle these funds with your investing funds
• Divide investment funds between stocks & bonds with sliding 25/75 75/25 ratio depending on the markets & your appetite for risk
• Gordon equation says stock markets future return is sum of current divided yield + expected earnings growth. (2% dividend + 2% long term earnings growth + 2% inflation = 6% annual return expected OR 2% dividend yield + 4% expected annual appreciation = 6% return before tax)
• DJIA average return = 7.75% (1921 to 2019 not adjusting for inflation)
• Between 1949 and 1969 DJIA price advanced 5x while earnings and dividends increased ~2X. So larger part of growth was due to change in investor sentiment than underlying corporate values
• Future growth = Inflation + Profits + Investor Sentiment
• To enjoy reasonable chance of better than average results you must follow sound and promising policies that are not popular on Wall Street
• However buying neglected stock can prove a patience trying experience. Selling stocks short is a test of courage, stamina & ones wallet
• Bargain issues = stocks selling at less than their intrinsic value. AKA the pro-rata share of net current assets (working capital – liabilities) is higher than the share price

Click Here to Read Part 2