This used to be one of my favorite investment books. Nowadays, I don't pick it up as often, but sometimes, I will pick it up, flick through some pages, read the highlighted parts when I need some investment inspiration. In the past, I used to read it diligently, every word and every page, highlighting the key points that I didn't know before - I did this at least twice years ago.
Wikipedia has an introduction of the book here - http://en.wikipedia.org/wiki/The_Intelligent_Investor. It looks similar to the one I have, except mine has yellowed pages, marked with various coloured highlighters, and looked a lot older than it really is.
It's impossible to summarize a book like this in this blog. Everyone takes different things out from a book like this. Even the same person takes different things from this book at different times. To me, this is not the sort of book that will inspire one to earn 50% or 100% return from the stock market. Instead, it will teach you how to make intelligent investment amongst others, with "safety of principal" and "adequate return". (Graham believes that achieving a return similar to the market over the long term represents a great achievement - subsequent studies showed that 80%-90% of investors don't beat the market in the long-term).
Here is a small sample of the more interesting value investing concepts from various places in the book:
- "To invest successfully over a lifetime does not require stratospheric IQ, unusual business insights or inside information. What's needed is a sound intellectual framework to make decisions, and the ability to keep emotions from corroding that framework."
- A stock is not just a blinking ticker symbol... it's an ownership interest in an actual business with an underlying value that doesn't depend on its share price.
- The habit of relating (or comparing) what is paid (or price) to what is being offered (or value) is an invaluable trait in investment. A great company is not a great investment if you paid too much for the stock. An average company can be a great investment if it's given away close to nothing.
- Buying stocks is more intelligent when it is like buying groceries (looking for value and bargains) than when buying perfumes (when one typically tend to ignore the high price).
- The stock market is a pendulum, that swings between unsustainable optimism (giving high prices), and unjustified pessimism (giving low prices). Refuse to let other people mood swings govern your sound intellectual framework. Instead, the intelligent investor seeks to profit from this folly.
- Stock market fluctuations are certain. Prepare for it financially and psychologically. (E.g. in market crashes - you need both a lot of cash and a lot of courage to buy).
- No matter how careful you are, you can never eliminate the risk of being wrong. The future of security prices is never completely predictable. Always insist on a "margin of safety" to minimize the odds and the consequences of being wrong.
- Don't take foolish risks - it can put you so deep in the hole, that it's virtually impossible to get out.
- Being an intelligent investor is more "character" than "brains". The investor's chief problem - even his worst enemy - is likely to be himself. (To me, the hard part is not figuring out the sound intellectual framework, but sticking to it.)
- Whilst enthusiasm is necessary for great accomplishments elsewhere, on the stock market, it almost invariably leads to disaster. (e.g. stock market bubbles).
- Stocks become more risky, not less, as prices rises.
- Additional concepts for defensive (or passive) investors. 1. Limit the share universe to well-established stocks and funds. 2. Dollar cost averaging. 3. Portfolio or formula investing - "50/50 formula". (For 2. and 3., I used modified forms which I feel are more effective).
- Invest only if you feel comfortable owning the business, even if you have no way of knowing its daily share price. (or its daily volume; Buffett feels the same way too, as he always focus on "owners earnings" in his annual reports than the daily / closing share price).
- Graham thinks diversification can be achieved with 10 to 30 stocks (although if I'm not mistaken, I read somewhere that he himself holds nearly "hundreds" of stocks).
(If these concepts doesn't make sense, feel free to leave a comment or 2 here. All non-destructive comments and questions welcome! There's no such thing as a silly question. Graham goes into detail in many of the concepts in the book).
Most stock investors I know are not aware of the book. Fundamental and value investors might have heard it, but the few that has, have mostly yet to read the book in its entirity. Come to think of it, I have yet to know of another person who has actually read the book in its entirity twice (except for Buffett). The feedback I've heard is that it is heavy going, and it is ... but I must say that it has shaped my thinking a lot about investing intelligently. If it's any consolation, my first attempt to finished reading the book took me at least 4 years. If you are a value investor, and find the above concepts resonate within you, consider buying and owning this book as a lifetime friend and constant source of reference, especially if you still have decades of investing years ahead of you.
Special Note: If you are a trader ... sad to say Graham doesn't think too highly of traders ... during his time (he first wrote the book in 1949, and updated it several times in the 60s and until his death in 1976), he has yet to meet a trader who consistently beat the market in the long term. (Another interesting character in the early 1900s which Graham is certain to be aware of is Jesse Livermore, who is probably the world's greatest trader from that era - unfortunately, he lost nearly all his fortunes gained from trading, and eventually committed suicide ... ). What is interesting to me is that the few value investors I know are thrifty people who live simpler lives (including Buffett, the world's 2nd richest man), whereas the few traders I've heard about seem to have lived "the rich and extravagant life". Perhaps a generalization and stereotyping, but I can't help but wonder if that is because of the different approaches that successful value investors and traders acquire wealth - trading can bring wealth very quickly which can tempt one to spend it more lavishly, whereas value investors who patiently looks for bargains in the stock market tend to apply that habit to the other aspects of their lives, always subconsciously looking for value and bargain ... :-)
Happy reading and investing!
