Summary | The Intelligent Investor Book by Benjamin Graham

Book Details

Book NameThe Intelligent Investor
AuthorBenjamin Graham
SubjectsSecurity and Investment
Publishing Date1949
Rating by Editor4.5/5.0

Teenage is the most misunderstood age among humankind. At this period, i.e., 13-19, we possess a lot of energy as a form of potential energy which, if used in a better way, can lead you to live your middle age magnificently. During this age, we explore many hobbies, develop many dreams that we aspire to live. But nothing is permanent during this age. In most cases, the hobbies you acquire in this age group are merely a buzzword that hits your brain. One must be very careful during this period. This period has the power to uplift you or age after 19 in the age to act upon whatever you have learned.

The most common question teenagers have, “Can I do something from now so that when I grow up, I have a good passive income source?
The answer to this is, “Yes, you can learn to invest. You can become an Intelligent Investor, and that does not require dead serious efforts to do so.”

How to become an Intelligent Investor?

The most loved book on Investing is “The Intelligent Investor written by Benjamin Graham” who is also Warren Buffett’s mentor. Warren Buffett is better known as “The Number 1 Investor” and World’s third richest man in the world(2019). The intelligent investor by Benjamin Graham is also called “The Bible of Investing.”

Some Core Fundamentals to become an Intelligent Investor :

These are some of the book The Intelligent Investor’s core fundamentals, which will help you become a great investor and a successful person.

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Aggressive V/S Defensive

Aggressive V/S Defensive : The Intelligent Investor By Benjamin Graham

Aggressive Investor: These are the type of investors who expect higher returns on their investment. So, they put their money on new and emerging companies desiring to get a very high return.

Defensive Investor: These are the types of investors who are very much careful before investing. Defensive investors mainly invest in reputed companies and hope not to get a heavy loss on their investment.

Imagine a scenario

There are two friends, Mr. Sky, a defensive investor, and Mr. Fury, an aggressive investor. Both want to be rich, and both are smart.

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Mr. Sky considers many factors before investing his money. he went through intensive research and invested his money in five different old and reputed companies.

Mr. Fury, on the other hand, invested his money in new emerging companies hoping to get a higher return. He does not consider any system before investing as Mr. Sky does.

After few months, Mr. Fury went to Mr. Sky and said, “See, I got a 60% return on this investment of mine”. Learning this, Mr. Sky thought it is fantastic for a while to invest in such companies.

BUT

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Obviously, there is a high return there is an equal chance to get a high loss. What Mr. Fury was hiding.

Lets, look on a graph(hypothetical) :

InvestmentMr. FuryMr. Sky
1st60% Profit8% Profit
2nd40% Loss3% Loss
3rd20% Profit5% Profit
4th18% Loss6% Profit
5th15% Loss2% Loss
Total Profit80% Profit19% Profit
Total Loss73% Loss5% Loss
Net Profit/Loss7% Profit14% Profit

Aggressive investing is like gambling; once you gain that big profit, but to gain a big profit, you will lose so many times that you will end up equaling both. Benjamin, in the book “The Intelligent Investor,” said that this is a fact that if you are taking less risk, you will get less reward. As you will start taking high stakes, you may get high rewards. 

Mr. Market Concept

Mr. Market Concept : The Intelligent Investor By Benjamin Graham

Here Mr. Market is referred to as Stock Market. Stock Market is a platform from where you can buy shares of your favorite company and become a shareholder of that company (if your company has registered itself.)

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Most people are so aggressive in buying shares of companies that they do not consider doing prior research. They buy the shares at whatever price it is available at the moment and do not consider waiting. So, Benjamin Graham, in his book The Intelligent Investor, says that. If you want to be an intelligent investor, you must watch your move. Study the price and buy the shares when the price is low and sell it when the price is high. i.e., Buy when cheap, Sell when costly.

Defensive Investors

Defensive Investors : The Intelligent Investor By Benjamin Graham

Defensive investors are also called passive investors.

Benjamin Graham suggests people become defensive investors because most people do not have much time to study the company, research the company. Defensive investors invest with a mindset to gain profits in the long term. They play long and safe.

Fundamentals to become an excellent defensive investor:

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i. Divide your portfolio in a 50:50 ratio.

  • Invest 50% on stocks
  • And the rest 50% on bonds/cash.

ii. Diversification

  • Invest your money in 10-30 different companies that to in various industries.

iii. Large Companies

  • Invest in big companies, the companies established for a long time and having good market capital.

iv. Conservatively Financed

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  • Invest in companies that are conservatively financed means the companies current ratio is more than 200%.

In other words, the companies whose assets are double than their liabilities.

v. Dividend History

  • The dividend is a sum of money companies give to their shareholders if the company is doing good.
  • Invest in those companies which are offering continuous dividend from 10-20 years.

vi. Earning History

  • Invest in companies that have no earning deficits.

vii. Growth

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  • Invest in those companies that are growing by 3% each year in the past ten years.

viii. Cheap Assets

  • Invest in such companies whose stock price is not more than 1.5 times its Net Assets.

ix. Cheap earning

  • The companies whose profit earning ratio is less than 15 in a year by those stock.

Enterprising Investors

Enterprising investors are the third kind of investor. Enterprising investors don’t want average returns like defensive investors, but they also don’t want to take huge risks on illogical speculation like an aggressive investor.

They are the person who invests a lot of his time and efforts om researching the company and making the best decision. They very carefully invest in stocks to get a high return at low risk. They are very active, and they are the only person who can beat the market.

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Fundamentals to become an excellent enterprising investor

To become an ideal enterprising investor, you must have four things:

  1. Patience
  2. Discipline
  3. Eagerness to learn
  4. A lot of time.

i. Go against the market

  • Buy when everyone else is selling, and the market is down, and sell when the market is good, and everyone is buying.

ii. Buying Growth Stocks

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  • Buy a stock of such company which is a big company but not popular.

iii. Buying Bargain Stocks

  • These are the stocks that are sold less than their intrinsic value. Buy stocks of those companies which are well established.

iv. Buy Special Cases

  • These are the stocks of some companies that are small but will be acquired by a big company.

Margin Of Safety

Margin Of Safety : The Intelligent Investor By Benjamin Graham

Example: Imagine a ship which can carry 50 people’s weight. Does the manufacturer build it for only 50 people’s weight? The answer is NO; For safety, they make it in such a way that the ship can carry 70-100 people’s weight. It is a margin of safety. But as a standard, it is said to be carrying 50 people so that no misfortune can occur.

Same with Stock Market. In the stock market, the price of the stock is not equal to its actual value. That is why keeping in mind the margin of safety; Benjamin Graham recommends that you must not give more than 2/3rd value of any stock. The problem with many people is that they buy the stock at a very high price, hoping that it will rise and gain profit. But an intelligent investor will buy the stock with a margin of safety to gain instant profit and do not have to rely on the future.