[svenski7]

I'd like to share my two cents on a book many consider the Bible of bond and stock investing. This is a book that first came to my attention from the suggested reading material section of WestCoast's blog.

The Intelligent Investor was written by Benjamin Graham, mentor of Warren Buffett who is considered by many as the greatest investor of all time. The book was first published in 1949 and was last revised by Graham in the early 70's before his death. Each edition contains small predictions as to the current economic outlook at the time of publication. Graham uses individual stocks (many of which are no longer traded) for examples but does not endorse any security.

Graham does not write in absolutes. He avoids passing judgment on as many things as possible. He remains the eternal skeptic, usually citing examples of where everything went wrong and how investors may or may not have been able to see it coming. The book is not for those looking to analyze stock picks; Graham wrote two books regarding selection, The Interpretation of Financial Statements and Security Analysis.

Here are the most important things I've learned from The Intelligent Investor in no particular order.

1. Never buy an IPO.

IPOs are floated by investing houses and banks who usually make tons of money overselling the new stock that is quite often worthless. Information on an IPO is limited. As a definition this corporation was previously privately-owned so not as many of its financial filings have been seen by the public compared to a corporation that is already publicly traded (IBM, Coke, GE). Facebook would be a good example of this. The stock price changed during the IPO and when the first public financial papers were filed out came the "irregularities." The banks floating the IPO already knew about these problems and still made a killing of it.

Graham recommends allow an IPO to settle and begin to establish a performance record before investing.

2. Stock ownership is company ownership.

When you purchase a stock of Coca-Cola Co., you are now a silent owner in the business. What's that? There are 15 billion other shares out there? It doesn't matter. Stocks should not be seen as items that are rapidly traded to make money or which depend on a flashing ticker to determine value. If you own stock you are literally invested in the future performance of that business. You should be prepared for the stock exchange to shut down for the next ten years without any price updates. If you couldn't do that, don't invest in stocks.

3. Mr. Market the schizo.

Graham personifies day trading in Mr. Market, the schizo vacuum cleaner salesman who runs up and down the street and quotes you on the value of your share of the business each day. Sometimes Mr. Market is correct, but most often he either overstates or understates the value of your ownership. Mr. Market should be ignored.

4. A balanced portfolio consists of bonds and stock.

Graham suggests a 1/3 ratio of either stocks to bonds or vice versa. Age is not a reason not to diversify.

5. Control your emotions.

Do not panic sell. If you don't have nerves of steel and cannot bear seeing 40% losses for 3-4 years, don't invest.

6. Past performance is a poor indicator of future performance.

Good bonds and stocks often go bad. Bad stocks and bad stocks usually stay shitty. Graham statistically shows that bonds with high Morningstar ratings actually return less than those with mediocre ratings.

7. You don't know enough to figure any of this out.

Graham waits until the middle of the book to basically state that 95% of investors who pick individual stocks from any kind of analysis they perform will see below-market returns. He suggests the average investor buy index funds which he admits is boring.

8. Foreign investment and options trading should occur in a separate account.

Graham doesn't advise foreign investments or options trading for the average investor. He compares it to going to Vegas. He does admit it can be fun. He suggests that you take a small amount (5-10%), something you can afford to completely lose and place it in a separate account devoted to this type of trading. This is similar to business owners creating a checking account just for business expenses.

9. Margin of Safety

Only buy a stock when it is trading significantly below what you believe it to be worth. We are talking a 30-40% discount. Graham kicks some mathematical knowledge about how devastating to yields high prices are. Additionally, if you make a bad pick, you don't lose as much principal.

If you see a Honda Civic on Craigslist for $2k and you think it's worth $2k, should you buy it? No. You have no way of knowing whether or not the dude just put sawdust in the bumpers and heavyweight oil in the motor to cover up problems. Buy at a discount and if it lasts 10 years, you win. If the engine blows up next week, you lost $1,500 and not $2k.

10. Value Investing is Not Growth Investing.

Graham doesn't like growth investors. He is a value investor. If you are a growth investor, don't read this book. According to Graham, growth investors are investors who try to predict a company's earnings out into the future to justify current trading price. The idea is that this company will generate $5 per share with a 15% increase for the next 10 years. You don't know that and it usually doesn't work out.

Value investors rely on net asset value and the current worth of a company. Price to earnings is a huge concern as are dividend payouts. That said, high prices are not justified by future expectations. Value investors are thrift shopping.

11. Stocks tips from friends and relatives are usually shit.

Everyone has done it. Your barber tells you that IBM is hot. You buy 10 shares at $200 and the next day it drops to $180/share. That year it loses 30% of its value. If someone recommends a stock, avoid it. In fact, try not to look at stock prices until after your analysis.

This is a 600-page book which I am still working on. I will post more relevant points as I finish.

Tidbits:

Later in his life, Graham stated that his books were some of the most widely read yet ignored books on investing.

Warren Buffett offered to work for Benjamin Graham for free after college. Graham said that that would be paying Buffett too much.

Benjamin Graham was actually fairly negative about IBM stock in the last edition of his book. He viewed the company as a "growth stock." Ironically, Warren Buffett owns more IBM stock than any other in his portfolio.

[Andy_B]

I read the Intelligent Investor about 8 years ago.

I can still remember 80% of the basic points in the book because it was so well-written and compelling.

Once you understand the basic principles of value investing, you'll never look at stocks the same way again. It absolutely SHREDS media stock market discussions to pieces.

[svenski7]

According to Buffett, the pivotal part of value investing is understanding that stock ownership is directly owning a piece of that company. He has stated in interviews that he viewed stocks as speculative investment possibilities and flashing tickers until he read this book.

[kbell]

I have the older version which is from the 70s. Its only about 300 pages. I'm going to start reading that tomorrow. I don't know much about stocks, and it sounds like it might be helpful for a beginner.

[tdawg]

Buffett talks a great book. He's the best there's ever been. But he hasn't beaten the S&P on a consistent basis in a long time.

[LeBeau]

(10-10-2014 10:02 PM)tdawg Wrote:  

Buffett talks a great book. He's the best there's ever been. But he hasn't beaten the S&P on a consistent basis in a long time.

Then who are you proposing reading/following as an alternative?

That would probably add more value than just a negative comment.

[Chewbacon]

(10-19-2013 07:04 PM)svenski7 Wrote:  

According to Buffett, the pivotal part of value investing is understanding that stock ownership is directly owning a piece of that company. He has stated in interviews that he viewed stocks as speculative investment possibilities and flashing tickers until he read this book.

So we have heard. But is that actually the truth?

Moreover, even if that is true, how strong is the actual relationship between owning a piece of a company and the profit/performance of that company?

[Paracelsus]

(10-10-2014 10:12 PM)SHANbangs Wrote:  

(10-19-2013 07:04 PM)svenski7 Wrote:  

According to Buffett, the pivotal part of value investing is understanding that stock ownership is directly owning a piece of that company. He has stated in interviews that he viewed stocks as speculative investment possibilities and flashing tickers until he read this book.

So we have heard. But is that actually the truth?

Moreover, even if that is true, how strong is the actual relationship between owning a piece of a company and the profit/performance of that company?

Legally, yes it's the truth: ownership of a stock makes you a shareholder with all the rights that entails. You basically are an owner of the company. That's basic corporate law.

On the other hand whether it makes you the operator of the company is another story entirely. Directors and the board of a company invariably have that job, and if there are thousands of individual shareholders the consequent atomisation of ownership (see The Gridlock Economy) means your individual power to influence the profit/performance of the company is very small. Buffett, via Berkshire Hathaway, historically tended to work towards having a controlling or major influence on the way a company was run, typically by buying out the company entirely.

If you're investing for the long-term, it's probably helpful to have the mindset that you own a piece of the company, since presumably you'll take a closer interest in its affairs. But on its own this advice strikes me no more delphic or helpful than "The best fertiliser is the farmer's shadow".

And Buffett is perfectly capable of bullshit, too: he advises taking a keen interest in the operations of a company you're invested in. This would be fine advice if Buffett had not been the chief shareholder of Moody's during and ahead of the subprime crisis but protested he didn't even know where Moody's office was.

[kbell]

I wouldn't recommend this book for an absolute beginner. I did not understand most of the terms like mutual bonds, and JIAN or something they kept mentioning. It seems more like a good book for once you have the basics down and you can get a lot out of the book.