SPONSOR BESTBOOKBITS BY USING PATREON This is a fundamental concept in his approach, and drawing a line between intelligent
[Link] investing activity and speculation is a recurring theme. According to Graham investment
consists of three equal parts:
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150 Summaries PDF [Link] • Thorough fundamental analysis of companies in which you invest.
Coaching Program [Link] • Deliberately protecting yourself against serious losses.
• Aspiring to “adequate”, not extraordinary, performance.
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Youtube: [Link] Graham suggests two possible investment approaches:
Website: [Link]
Instagram: [Link]
Spotify: [Link] 1. Defensive: “[an investor] interested chiefly in safety plus freedom from bother” (p.22)
Facebook: [Link] 2. Enterprising:You put a lot of time and effort into your investment operations.
Book Club: [Link]
Mailing List: [Link]
The enterprising approach is physically and intellectually taxing, while the defensive
approach is emotionally demanding (since it requires detachment from market panic).
These approaches are not binary – you can find a blend which suits your personality
(see Chapters 4-5).
Chapter 2: The Investor and Inflation
You must understand inflation, specifically:
• You must measure your investing success not just by what you make, but by how much
you keep after inflation.
• Inflation is not going away, and it must always be factored into your risk analysis.
• Stocks tend to outpace inflation 80% of the time (p.61).
• To bolster your defenses against inflation, you can branch out beyond stocks to: REITs
(Real Estate Investment Trusts) and TIPS (Treasury Inflation-Protected Securities).
Chapter 3: Stock Market History
Chapter 1: Investment vs. Speculation (and the Defensive vs. Enterprising It is a common mistake to forecast the future (specifically stock prices) exclusively by
Investor) extrapolating the past. The reasons why people fall into making this mistake are:
Graham defines an investment (as opposed to speculation) as: one which, upon • Buying into the hype of strong Bull markets.
thorough analysis, promises safety of principal and an adequate return. Operations not • Trusting so-called experts too much (and not doing their own homework).
meeting those requirements are speculative. (p.18) • Not staying humble about forecasting powers.
The value of any investment is, and always must be, a function of the price you pay for • Always be on the look out for temporary unpopularity which enables you to buy a
it.(p.83) great company at a good price.
“The intelligent investor, however, gets interested in big growth stocks not when they
are at their most popular – but when something goes wrong” (p.183).
Chapter 4-5: Defensive Investor Principles
• Diversify your portfolio – it is advisable to buy foreign stocks – you never know what
the future will hold at home and abroad.
The decision about how defensive/enterprising your approach is should be
based not on your appetite for risk, but rather on your willingness to put time and effort
into your portfolio.
Chapter 8: The Investor and Market Fluctuations
Your risk appetite should not be based on your age, but on your circumstances – are
people depending on you? Are you self employed? How much can you afford to lose?
• “If you want to speculate, do so with your eyes open, knowing that you will probably
lose money in the end; be sure to limit the amount at risk and to separate it completely
from your investment program” (p.188). I.e. separate the money completely.
• “A stock does not become a sound investment merely because it can be bought at close
• Graham insists that everyone should keep a minimum of 25% in bonds. That cushion, to its asset value. The investor should demand, in addition, a satisfactory ratio of
he argues, “will give you the courage to keep the rest of your money in stocks even earnings to price, a sufficiently strong financial position, and the prospect that its
when stocks sink.” (i.e. He also advises a maximum of 75% of total assets in stocks). earnings will at least be maintained over the years.” (p.200)
(p.103) • There is a paradox in that the more successful the company, the greater the
• “The more familiar a stock is, the more likely it is to turn a defensive investor into a fluctuations in the price of its shares. This really means that, in a very real sense, the
lazy one” (p.127) better the quality of the common stock, the more speculative, it is likely to be.
• “Buying stocks in tiny increments for years on end can set off big tax headaches. If you • On investment vs. speculation: The speculator’s primary interest lies in anticipating
are not prepared to keep a permanent and exhaustively detailed record of your and profiting from market fluctuations. The investor’s primary interest lies in
purchases, do not buy in the first place.” (p.129) acquiring suitable securities at suitable prices.” (p.205)
• “Don’t invest in only one stock – or even just a handful of stocks […] Graham’s
guideline of owning between 10 and 30 stocks remains a good starting point for
investors who want to pick their own stocks, but you must make sure you are not ***JOIN THE BESTBOOKBITS BOOK
overexposed to one industry” (p.129)
• “If, after you set up an autopilot [defensive] portfolio, you find yourself trading more CLUB HERE ***
than twice a year, or spending more than an hour or two per month, total, on your
investments – then something has gone badly wrong. […] Do not let the ease and up-to-
the minute feel of the Internet seduce you into becoming a speculator” (p.129)
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Chapter 6-7: Portfolio Policy for the Enterprising Investor Listen on Apple Podcast
•
•
Day trading carries extreme risk – avoid.
IPOs are frequently overpriced (“It’s Probably Overpriced”) – avoid.
Listen on Spotify
• Treat junk bonds with scepticism Chapter 9: Investing in Investment Funds
• Exercise extreme caution buying foreign bonds, annual operating expenses should be
no higher than 1.25% (p.148)
• A great company is not a great investment if you pay too much for the stock: The Exploring research into investment funds, key points to take from this chapter are:
bigger firms get, the slower they grow. When price/earnings ratios go above 25-30,
then the risk is too high.
• The average fund does not pick stocks well enough to overcome its costs of investors who promise an annual return higher than 10% and advisers who will not
researching and trading them. show you their Form ADV (this is a professional requirement).
• The higher a fund’s expenses, the lower its returns.
• The more frequently a fund trades its stocks, the less it tends to earn.
• Highly volatile funds, which bounce up and down more than average, are likely to stay
volatile
• Funds with high past returns are unlikely to remain winners for long Chapter 11-12: Security Analysis for the Lay Investor – General Approach and Per-
Share Earnings
Later in his life, Graham praised index funds as the best choice for individual investors,
as does Warren Buffett (p.249), that said, the chapter still explores mutual funds, and The purpose of security analysis is to estimate a value of a given stock which can then
the things to look for when choosing one: be compared with the current price to determine whether or not the security is an
attractive purchase.
• Their managers are the biggest shareholders.
• They are cheap. Graham makes it clear that any kind of security analysis which requires more than basic
• They dare to be different. arithmetic and algebra is likely to be flawed or bogus.
• They shut the door (i.e. they don’t take on too many clients).
• They don’t advertise (clients should come to them). (p.250) What should you consider to avoid overpaying for a company?
The order you should look at a mutual fund (the opposite way to how most buyers do
it): 1. Long term prospects
2. Management quality
3. Financial strength and capital structure
1. Fund’s expenses 4. Dividend record
2. Riskiness of the fund 5. Current dividend rate
3. Manager’s reputation
4. Past performance
Chapter 14-15: Stock Selection for the Defensive/Enterprising Investor
Chapter 10: The Investor and his Advisors
This chapter deals with how to seek and select help with your investments. The major
caveat with seeking a full-time financial adviser is that you need at least $100,000 to The enterprising investor approach is built upon the same foundations as that of the
invest (p.277). Until you reach this point, Graham suggests low-cost index funds. defensive investor, but with greater flexibility:
In terms of selecting an adviser, the types of things you want to know about them are: “[…] apply the various tests of quality and price-reasonableness along the lines we have
proposed for the defensive investor. But they [enterprising investors] should be less
inflexible, permitting a considerable plus factor to offset a small black mark in another.”
• What is your investing philosophy? (p.382).
• Do you focus solely on asset management, or do you also advise on taxes, estate and
retirement planning, budgeting and debt management, and insurance?
• Do you use stocks or mutual funds? Guidelines for the Enterprising Investor (similar to those for the defensive investor, but
• How will you track and report my progress? Do you provide a checklist I can use to slightly more leeway):
monitor the implementation of any financial plan we develop?
• Do you use technical analysis? 1. Financial condition (a) Current assets at least 1.5 times current liabilities, and (b) debt
• Do you use market timing? not more than 110% of net current assets (for industrial companies)
2. Earnings stability: No deficit in the last five years
A ‘yes’ to either of the last two questions is a ‘no’ signal to you. (p.276). Other red flags 3. Dividend record: Some current dividend.
include advisers who have fees that will consume more than 1% of your assets annually, 4. Earnings growth: Last year’s earnings more than those of 1966 [i.e. previous year]
5. Price: Less than 120% net tangible assets. (p.386) “In the ordinary common stock, bought for investment under normal conditions, the
margin of safety lies in an expected earning power considerably above the going rate for
bonds.” (p.514)
Chapter 16: Convertible Issues and Warrants “The margin-of-safety idea becomes much more evident when we apply it to the field of
undervalued or bargain securities. We have here, by definition, a favorable difference
Discusses the pros/cons of convertible bonds – investments which behave like stocks between price on the one hand and indicated or appraised value on the other. That
and work like options: you can keep the bond and earn interest on it, or you can difference is the safety margin.” (p.518).
exchange it for the common stock of the issuing company at a predetermined ratio.
There is a close logical connection between the concept of a safety margin and the
“Wall Street’s salespeople often describe convertible bonds as a ‘best of both worlds’ principle of diversification […] for the margin guarantees only that he has a better
investment. But the intelligent investor will quickly realize that convertibles offer less chance for profit than for loss – not that loss is impossible (p.518)
income and more risk than most other bonds.” (p.419)
Verdict: Unless you are dead set on only holding bonds, convertible bonds aren’t a great
choice. SPONSOR BESTBOOKBITS BY USING PATREON
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Chapter 19: Shareholders and Managements
Coaching Program [Link]
• A stock split (technically called a stock dividend, though rarely called this as it is Where to follow to get more bestbookbits:
confusing) is a restatement of the common-stock structure “presumably because [the Youtube: [Link]
resulting] lower price range would be more acceptable to old and new shareholders” Website: [Link]
(p.493) Instagram: [Link]
• A proper stock dividend (commonly called a dividend) is one that is paid to Spotify: [Link]
shareholders to give them tangible evidence of earnings. Facebook: [Link]
Book Club: [Link]
“It is our belief that shareholders should demand of their managements either a normal Mailing List: [Link]
[dividend] payout of earnings -on the order, say, of two-thirds- or else a clear-cut
demonstration that the reinvested profits have produced a satisfactory increase in per-
share earnings.” (p.492)
Chapter 20: “Margin of Safety” as the Central Concept of Investment
Graham’s concept of the margin of safety is built on arithmetic reasoning from statistical
data – i.e. understanding the intrinsic value of investments using the techniques from
earlier chapters. The intelligent investor must focus on getting their analysis right, but
also on understanding and taking precautions against the inevitable event of making
errors.
