When Warren Buffett was 19, he stumbled upon this book that forever changed his life. He even says that it’s “By far the best book on investing ever written”. Much of Buffett’s investing style has been influenced by his mentor and the author of this book; Benjamin Graham.
The Intelligent Investor was the second book I read, and YES, it was absolutely life changing. I read it again a few times again and will continue to re-read it in the future, as you should.
It doesn’t require excessive intelligence nor does it require much math, most calculations is elementary level (lucky for us, or at least, for me).
Not only has it provided me with great investment knowledge and shaped by investment style, it also strongly shaped my business perspective. This book opened my mind to the investment world and it allowed me to easily read every other investing book that followed.
Every student, let alone business students, should read this; the sooner the better. You can get the book here. Below I outline the main concepts from a few important chapters:
Chapter 1: Investing vs Speculating
There is an important line between investing and speculating. Benjamin Graham states it as follows:
“An investment operation is one which, upon through analysis promises safety of principal and an adequate return, operations not meeting these requirements are speculative”.
Proper investing requires necessary fundamental analysis, margin of safety and excellent temperament.
You hear speculation often: “I bought shares of XYZ because the price dropped, I feel like its going to go up tomorrow, I’ll sell it when it goes back up”: this is a gamble, not an investment.
Chapter 8: The concept of Mr. Market
The stock market is paralleled with a character that Graham calls Mr.Market. Imagine you own a share of a small business with your partner, Mr. Market. Everyday Mr. Market will tell you what he thinks your interest is worth and can offer to buy or sell you shares. Mr. Market has wild mood swings; sometimes he’s very optimistic and sometimes very pessimistic. Sometimes his valuation of your interest in plausible, and often other times, his valuations are illogical and silly.
Should you let Mr. Market’s daily evaluation of your share of the business influence and determine your view of the value of the share?
Only when you agree with him or want to trade. You may be happy to sell it to him when he quotes you a very high price for your share, and would be delighted to buy from him if he sells you his share for a cheap price. The rest of the time, you’re better off thinking for yourself and forming your own ideas of your value based on the business’ financial reports and operations.
Chapter 14: Defensive Investing
Graham notes 7 criteria for defensive stock selection:
1. Adequate Size and Enterprise: “All minimum figures must be arbitrary and especially in the matter of size required”. Avoid small companies, and companies with less than $100 million of annual sales for industrial companies, and not less than $50 million of assets for public utility.
2. A Sufficiently Strong Financial Condition: Current assets should at least double liabilities. Long term debt should not exceed net current assets.
3. Earnings Stability: Earnings are stable for past 10 years.
4. Dividend Record: Constant dividend payments for last 20 years.
5. Earnings Growth: Minimum increase of one-third of earnings per share during the last 10 years, calculate it by using 3 years averages at the beginning and end.
6. Moderate Price/ Earnings Ratio: P/E should be less than 15 for the past 3 years.
7. Moderate Ratio of Price to Assets (Price to Book Value): The price should not exceed more than 1.5x the most current report of book value.
Chapter 20: Margin of Safety
“The risk is not in our stocks, but in ourselves”
This is one of the most important chapters (along with chapter 8) according to Warren Buffett. This chapter explores the risk factor. Determining a stock’s “true” value can be highly subjective, therefore intrinsic value isn’t a concrete value. By purchasing a “good company” at a significant discount, you leave yourself a margin for unforeseen errors (margin of safety). Think of it like this: “If I’m right, I can make a good sum of money, but what if I’m wrong”? You want to determine and minimize your exposure to risk.
If you’re building a sofa to support 6 people weighing 1000 lbs, you really want it to be able to support 1500 lbs; in case of a rainy day.
“If you understood a business perfectly and the future of the business, you would need very little in the way of a margin of safety. So, the more vulnerable the business is, assuming you still want to invest in it, the larger margin of safety you’d need”.
If you’re driving a truck across a bridge that says it holds 10,000 pounds and you’ve got a 9,800 pound vehicle, if the bridge is 6 inches above the crevice it covers, you may feel okay, but if it’s over the Grand Canyon, you may feel you want a little larger margin of safety“
I strongly recommend this book to anyone, it will help shape the way you think as an investor and a businessmen or businesswomen, as it did for The Oracle; Warren Buffett, myself, and all those whom have read it.
You can get a copy of The Intelligent Investor here.
“The fault, dear investors, is not in our stars- and not in our stocks, but in ourselves”
– Benjamin Graham, The Intelligent Investor