The Intelligent Investor

by Benjamin Graham
ISBN: 0316017930
Finished 12/22/16
Amazon page for details and reviews


Practically ancient value investing wisdom that has stood the test of time. Sometimes the examples were old and hard to imagine in a current scenario (railroads, anyone?), but more recent examples were given at the end of each chapter. Follow the advice most of the time, and know when you are breaking the rules.


Investing successfully over a lifetime requires a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework

A stock is an ownership interest in an actual business, with an underlying value that does not depend on its share price

The market is a pendulum that forever swings between unsustainable optimism and unjustified pessimism. The intelligent investor is a realist who sells to optimists and buys from pessimists


Dollar cost averaging: regular monthly purchases of strong common stocks through thick and thin

Most technical approaches address buying because the market has gone up and selling because the market has gone down, but this is the exact opposite of sound business sense

On Wall Street, enthusiasm almost invariably leads to disaster

The defensive investor will place his chief emphasis on the avoidance of losses as well as the frequent need to make decisions

The enterprising investor is characterized by his willingness to devote time to scrutinizing and selecting securities that are both sound and more attractive than the average

It has long been the prevalent view that the art of successful investment lies first in the choice of those industries that are most likely to grow in the future and then in identifying the most promising companies in these industries. However, there are pitfalls with this approach

Obvious prospects for physical growth in a business do not translate into obvious profits for investors

Being clever may often result in you doing worse, not better, than the average investor

This book will teach you 3 powerful lessons:
1. How you can minimize the odds of suffering irreversible losses
2. How you can maximize the chances of achieving sustainable gains
3. How you can control the self-defeating behavior that keeps most investors from reaching their full potential

Being an intelligent investor is more a matter of character than brain

1. Investment vs. Speculation

An investment operation promises safety of principle and an adequate return. Operations not meeting these requirements are speculative

There is intelligent speculation just as there is intelligent investment. But speculation may be unintelligent in these ways:
1. Speculating when you think you are investing
2. Speculating seriously when you lack proper knowledge and skill for it
3. Risking more money in speculation than you can afford to lose

Almost always, bonds have fluctuated much less than stock prices

The interest and principle payments on bonds are better protected, and thus more certain, than those on stocks

A remote chance of accelerating inflation would, in one way or another, make stocks preferable to bonds

Given uncertain possibilities, an investor should maintain investments in both stocks and bonds, with a minimum of 25% and a maximum of 75% in either

The defensive investor should consider funds, managed investments, or dollar-cost averaging

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

By logical and reasonably dependable standards, a fair number of securities can be considered undervalued

By speculating, you lower your own odds of building wealth and raise someone else’s (the brokerage’s)

You should invest in a stock only if you would be comfortable if there was no way to know its daily price

Flashy gimmicks may work in short streaks if you’re lucky, but over the long term, they will get you killed

People are holding onto stocks and mutual funds for increasingly short periods of time. While availability of online trading platforms have increased, true investment knowledge is seldom to be found

Stocks do well or poorly in the future because the businesses behind them do well or poorly, nothing more or less

2. The Investor and Inflation

A loss of the dollar’s value may be offset by advances in dividends and the price of shares

The investor should allow for continuant or recurring inflation to come

Inflation and events of stock price increase are generally not time correlated

Real estate, largely considered a good investment, is subject to wide fluctuations

Diversification is not possible for the investor of moderate means outside of funds

There is a real risk of inflation or stagflation

Stocks fail to keep up with inflation about 1/5 of the time

Real Estate Investment Trusts (REITs) do a decent job at combatting inflation

Treasury Inflation Protected Services (TIPS) automatically go up in value when inflation rises. However, this is regarded as taxable income, so TIPS are best used for tax deferred retirement accounts

3. A Century of Stock Market History

Old standards of evaluation are inapplicable to the present market, while new standards are not time tested

If the investor is in doubt, he should choose the path of caution

1. No borrowing to buy or hold securities
2. No increase in the proportion of funds held in common stocks
3. A reduction in common stock holdings where needed

The intelligent investor must never forecast the future exclusively by extrapolating the past

The more enthusiastic investors become about the market in the long run, the more likely they are to be proved wrong in the short run

The worse the future looks the better it usually turns out to be

4. General Portfolio Policy: The Defensive Investor

The rate of return sought should be dependent on the amount of intelligent effort the investor is willing to commit to the task

By sacrificing quality, an investor can obtain a higher income from his policy. Long term experience says the ordinary investor should stay away from lower-rated bonds

2 ways to become an intelligent investor:
1. By continually researching, selecting, and monitoring a dynamic mixture of stocks, bonds, or mutual funds
2. By creating a permanent portfolio that runs in autopilot but generates very little excitement

Financial risk lies not only in the economy or within our investments, but also within ourselves

Your age should not determine how much risk you can take

Why not 100% stocks? It may make sense for a tiny minority of investors that:
1. Have set aside enough cash to support their family for at least one year
2. Will be investing steadily for at least 20 years
3. Buy stocks in bear markets

Unless you’re in the lowest tax bracket, you should buy only tax-free municipal bonds outside of retirement accounts

Bond prices fluctuate on an inverse relationship to interest rates. You can hedge by buying intermediate-term bonds, which mature in 5-10 years

Buying individual bonds makes no sense for diversification unless you have at least $100k to invest. The only exception is treasury bonds, which are government protected. Bond funds offer cheap and easy diversification, along with monthly income

– Treasury bonds
– Savings bonds
– Mortgage securities (only as bond funds)
– Annuities (consider only those you can buy directly from providers)
– Preferred stock (typically a bad option)
– Common stock

No intelligent investor would buy a stock for its dividend income alone. The company and its businesses must be solid, and its stock price must be reasonable

5. The Defensive Investor and Common Stocks

4 rules:
– Adequate but not excessive diversification
– Each company selected should be large, prominent, and conservatively financed
– Each company should have a long record of continuous dividend payments
– The investor should impose a limit to how much he will pay for a share versus the average earning over a time period, e.g. 7 years

Growth stock: one which has increased its price at a rate faster than other stocks, and is expected to continue to do so

Growth stocks are too uncertain and risky for the defensive investor

Dollar cost averaging can yield impressive results over time

An industrial company’s finances are not conservative unless the common stock, at book value, represents at least half of the total capitalization, including all bank debt. For a railroad or public utility, the figure should be at least 30%

Finding the promising company is only the first step. The next step is doing the research

Insiders often possess only the illusion of knowledge, not the real thing

The more familiar a stock is, the more likely it is to convert a defensive investor into a lazy one

Buying stocks in tiny increments for years on end can set off big tax headaches

A good diversification starting point is to own between 10 and 30 stocks

You and only you must investigate whether an advisor is trustworthy and charges reasonable fees before you hand over your money

Mutual funds are the ultimate way for a defensive investor to capture the upside of stock ownership without the downside of having to police your own portfolio

Index funds are highly unlikely to cause any suffering or surprises

By putting every investment decision on autopilot, you eliminate any self-delusion that you know where the markets are headed

The ideal way to dollar cost average is into a portfolio of index funds

6. Portfolio Policy for the Enterprising Investor: Negative Approach

The aggressive investor should start from the same base as the defensive investor: dividing his funds between high grade bonds and stocks

It is unwise to buy securities that lack adequate safety merely because the yield is attractive, especially is the securities are not at a discount

Most new securities are sold under favorable market conditions for the seller and are subject to special salesmanship

Don’ts for today’s investor:
– High yield junk bonds and funds. The funds can be used only as a small portion of investments
– Emerging market bonds: don’t allocate more than 10% of your portfolio to these
– Day trading. A short-term trader needs to gain 10% just to break even due to brokerage fees, market impact, and capital gains taxes. The more you trade, the less you keep
– IPOs

A long-term investor is the only kind of investor there is

7. Portfolio Policy for the Enterprising Investor: The Positive Side

Strategies for common stock management:
1. Buying in low markets and selling in high markets
2. Buying carefully chosen growth stocks
3. Buying bargain issues
4. Buying into special situations

It is difficult to statistically predict when a market will be low and high

Investing in a diversified portfolio of growth stocks did not outperform common stocks

To obtain better than average results over an extended time period requires a policy with two qualities:
1. It must meet objective standards of underlying soundness
2. It must be different than the policy followed by most investors or speculators

These approaches meet these criteria:
1. Investing in large companies that are temporarily undervalued
2. Purchase of bargain issues (undervalued stocks)

Two major sources of undervaluation:
– Currently disappointing results
– Protracted neglect or unpopularity

There are many examples of declines which were not followed by increases after some time period. Thus one must scrutinize its past average price over earnings as an indication of its ability to overcome setbacks

Substantial profits from the purchase of secondary companies arise in a variety of ways:
– The dividend return is relatively high
– The reinvested earnings are substantial in relation to the price paid
– A bull market is most generous to low-priced issues
– Even in relatively featureless market periods, a continuous price adjustment goes on
– The specific factors that led to the absence of earnings may be corrected by new conditions, policies, or management

A majority of security owners should elect the defensive classification

For most investors, market timing is a practical and emotional impossibility

When stocks grow faster than companies, investors always end up sorry

The bigger a company gets, the slower it grows

Almost all really big fortunes from common stocks have been made by people who packed all their money into one undiversified investment. But almost no small fortunes have been made in this way and not many have been kept this way

Putting up to 30% in mutual funds that hold foreign stocks hedges against future potential losses in the US economy

8. The Investor and Market Fluctuations

Two ways to profit from market fluctuations:
– Timing: anticipating future market action
– Pricing: buying stocks quoted below their fair value and selling them above such value

Putting an emphasis on timing means the investor ends up speculating

The speculator wants to make his profit in a hurry. A waiting period is of no consequence to the investor

Timing is of no real value to the investor unless it coincides with pricing

The classic definition of a shrewd investor is one who bought in a bear market and sold in a bull market

There are sufficient variations between bull and bear markets that complicate buying low and selling high

The advent of popularity of various formula investing approaches marked almost the exact moment when the system ceased to work well

The more successful the company, the greater chance of fluctuations in the prices of its shares

The stock market can go far wrong, and sometimes an alert investor can take advantage of its patent errors

Most businesses change in character and quality through the years, sometimes for the better, but perhaps more often for the worse

Holding off until the market is low may result in a loss of investment opportunities

It may be better for the investor to put his money in the market whenever he has money to do so, except when the market is way higher than justified

The price fluctuations of convertible bonds and preferred stocks result from 3 factors:
1. Variations in the price of the related common stock
2. Variations in the credit standing of the company
3. Variations in general interest rates

Most if the time, the pricing of stocks is right. But sometimes it is not

The whole point of investing is not to earn more money than average but to earn enough to meet your needs

Selling into a bear market can make sense if it creates a tax windfall

9. Investing into Investment Funds

Even though the average performance of funds is typically no better than that of common stocks, an investor in funds may do better than one who invests solely in common stocks

Large funds, when well managed, can produce at best only slightly better than average results

Most funds underperform the market, overcharge investors, create tax headaches, and suffer erratic swings in performance

The typical fund has to beat the market by 3.5% per year before costs just to to match costs

An index fund will beat most funds over the long run

High returns are not justification for higher fees. High returns are usually temporary while fees are not

Because expenses are more predictable than future returns you should look at these first

Next evaluate risk by looking at the Morningstar ratings and the worst quarterly loss

Finally look at past performance. Avoid funds with consistently poor past performance

By selling when a style of investing is out if fashion you lock in losses and miss out on the eventual recovery

Mutual fund red flags:
– a sharp and unexpected change in strategy
– an increase in expenses
– large and frequent tax bills generated by excessive trading
– suddenly erratic returns

Patience is the fund investor’s single most powerful ally

10. The Investor and His Advisors

Truly professional investment advisors are quite modest in their promises. For the most part, they place assets in standard interest- and dividend-paying securities

The intelligent investor will not do his buying and selling solely on the recommendations received from a financial service

The value of a financial analyst to the investor depends on whether the investor asks the right questions

11. Security Analysis for the Lay Investor: General Approach

Most security analysts use mathematics in the areas least appropriate to exact treatment, especially regarding future projections

Factors affecting the capitalization rate:
1. General long-term prospects
2. Management
3. Financial strength and capital structure
4. Dividend record
5. Current dividend rate

Two questions to ask yourself:
– How does this company grow?
– How does this company make profits?

Watch out for serial acquirers and other people’s money addicts

In the long run, a company that spends nothing on R&D is at least as vulnerable as one that spends too much

A basic definition of a good company is one that generates more value than it consumes

The burden of proof is on the company to show that you are better off if it does not pay a dividend. If the firm has consistently outperformed the competition in good and bad markets, the managers are putting the cash to optimal use. If the business is faltering or falling behind rivals, the managers are missing the cash by failing to pay a dividend

12. Things to Consider About Per-Share Earnings

Two pieces of advice:
1. Don’t take a single year’s earnings seriously
2. If you do pay attention to short-term earnings, look out for booby traps in the per-share figures

The more seriously investors take the per-share earnings figures as published, the more necessary it is for them to be in their guard

Pro-forma earnings enable companies to show how they might have done if they hadn’t done as badly as they did. As an intelligent investor, the only thing you should do with pro-forma earnings is ignore them

Malleable accounting rules permit managers to inflate reported profits by transforming normal operating expenses into capital assets

The intelligent investor must be on guard for “non-recurring” costs that just keep on going

13. A Comparison of 4 Listed Companies

Chief elements of performance:
1. Profitability
2. Stability
3. Growth
4. Financial position
5. Dividends
6. Price history

Criteria for inclusion in a defensive investor’s portfolio:
1. Adequate size
2. A sufficiently strong financial condition
3. Continued dividends for at least the past 20 years
4. No earnings deficit in the past 10 years
5. 10-year growth of at least 1/3 in per-share earnings
6. Price of stock no more than 1.5x net asset value
7. Price no more than 15x average earnings over the past 3 years

14. Stock Selection for the Defensive Investor

Even defensive portfolios should be changed from time to time, especially if the securities purchased have an apparently successive advance and can be replaced by issues much more reasonably priced

It is better to sell and pay capital gains taxes than to not sell and repent

For the defensive investor, the total stock market index fund should be the entirety or majority of your stock portfolio

Diversification minimizes your chances of being wrong and maximizes your chances of being right

The best values today are in stocks that were once hot but have since gone cold

15. Stock Selection for the Enterprising Investor

If reasonable expectations are built into market prices, movements are based on new, unexpected developments

But the market likely doesn’t work this way, and the enterprising investor can profit from undervaluations

When the going is good, stocks of no value at all are often bid up for no concrete reason

Graham suggests practicing trading for a year with no money, e.g. with an online portfolio tracker

A return on invested capital (ROIC) of at least 10% is attractive, although 6-7% is acceptable if the company has a strong brand

16. Convertible Issues and Warrants

Convertible issues are touted to be a win-win for the seller and buyer. But in exchange for the conversion privilege, the investor usually gives up quality or yield. The company surrenders part of its claim for future enhancement

Convertible issues flouted during the latter part of a bull market are bound to yield unsatisfactory results overall

Wall Street has a few famous principles that are forgotten when most needed

Although convertible bonds are called bonds, they behave like stocks, work like options, and are cloaked in obscurity

Covering your downside is never worth surrendering most of your upside

17. Four Extremely Instructive Case Histories

18. A Comparison of 8 Pairs of Companies

People often assign a mental value to stocks based largely on the emotional imagery that companies evoke, but the intelligent investor always digs deeper

A price to earnings ratio much above 24 made Graham grimace

19. Shareholders and Management: Dividend Policy

With very few exceptions, poor managements are not changed by actions of public stockholders, but only by the assertion of control by an individual or by a compact group

By keeping dividends small or not paying one at all, companies can use the money to the shareholders’ direct and immediate advantage by retaining it for profitable expansion

Many companies occupy an intermediate position between growth and non-growth enterprises

Shareholders should demand either a normal payout of 2/3 of earnings or demonstrate that reinvested profits have produced a satisfactory increase in per-share earnings

The proxy statement can act like an early warning system, signaling when something is wrong

When current dividends are low, future corporate earnings also turn out to be low. When current dividends are high, so are future earnings

20. Margin of Safety as the Central Concept of Investment

If growth stocks in general do not have much of a margin of safety, a diversified portfolio of these stocks may not be much better than owning a single growth stock

Even with the margin of safety in an individual’s favor, a single investment may work out badly. This, diversification is key

To have a true investment, a true margin of safety must be demonstrated.

Fundamental principles:
1. Do not try to make business profits out of securities (returns in excess of interest and dividend income) unless you know as much about security values as you would need to know about your own business
2. Do not let anyone else run your business unless you can supervise his performance or you have unusually strong reasons for placing implicit confidence in him
3. Do not enter upon an operation unless a reliable calculation shows that it has a fair chance to yield a reasonable profit
4. Have the courage of your knowledge and experience

To achieve satisfactory investment results is easier than most people realize. To achieve superior results is harder than it looks

When making decisions in positions of uncertainty, the consequences must dominate probabilities