THE INTELLIGENT INVESTOR SUMMARY (BY BENJAMIN GRAHAM)

Summary

The video script from 'The Intelligent Investor' by Benjamin Graham offers timeless investment wisdom. It introduces Mr. Market, a metaphor for market volatility, and emphasizes the importance of a sound decision-making framework over emotions. The script outlines strategies for both defensive and enterprising investors, advocating for diversification, value investing, and a 'margin of safety' to minimize risk. It challenges the academic theory linking higher risk with higher returns, arguing that smart investing can offer great rewards with lower risk.

Takeaways

• 🧐 Takeaway 1: Successful investing relies on a sound decision-making framework and emotional discipline, not on high IQ or luck.
• 📚 Takeaway 2: 'The Intelligent Investor' by Benjamin Graham offers a proven framework for investing that has stood the test of time.
• 🌟 Takeaway 3: Warren Buffett, one of the world's wealthiest men, endorses Graham's book as the best on investing, highlighting its significance.
• 🤔 Takeaway 4: Mr. Market is a metaphor for the volatile and often irrational stock market, which should not dictate the true value of your investments.
• 🏪 Takeaway 5: Stocks represent ownership in businesses, and their value can be decoupled from the prices Mr. Market offers.
• 💡 Takeaway 6: Investors should be prepared to hold stocks without being swayed by daily market fluctuations, viewing them as opportunities rather than obligations.
• 🔄 Takeaway 7: Dollar-cost averaging by investing fixed amounts at regular intervals can help mitigate the timing risk in the market.
• 📉 Takeaway 8: Defensive investors should maintain a balanced portfolio of stocks and bonds, adjusting allocations periodically to maintain balance.
• 🏭 Takeaway 9: For stock selection, defensive investors should focus on large, financially stable companies with a history of dividends and earnings growth.
• 📈 Takeaway 10: Enterprising investors should seek undervalued stocks, avoid overpaying for assets or earnings, and conduct thorough financial analysis.
• 🔐 Takeaway 11: A 'margin of safety' in investment means buying stocks at a price significantly below their calculated value to minimize the risk of being wrong.
• 🤝 Takeaway 12: Risk and reward are not inherently correlated; intelligent investing can yield high rewards with low risk by identifying undervalued assets.

Q & A

What is the core message of 'The Intelligent Investor' by Benjamin Graham?

The core message of 'The Intelligent Investor' is that successful investing requires a sound intellectual framework for decision-making and the ability to control emotions. It emphasizes understanding the intrinsic value of investments and not being swayed by market fluctuations.

Who is Mr. Market and what role does he play in the investment philosophy presented in the script?

Mr. Market is a metaphorical character representing the market's daily fluctuations in stock prices. He symbolizes the irrational behavior of the market, offering to buy or sell shares at prices that may not reflect their true value. The script suggests that investors should not let Mr. Market's mood dictate their investment decisions.

How does Warren Buffett view 'The Intelligent Investor'?

Warren Buffett regards 'The Intelligent Investor' as 'by far, the best book on investing ever written', highlighting its influence on his own successful investment strategies.

What is the significance of the Mr. Market concept in today's world of constant information and news?

The Mr. Market concept is significant because it reminds investors that the market's frequent offers to buy or sell should not dictate the perceived value of an investment. Despite the constant barrage of information today, investors should maintain a long-term perspective and not be swayed by short-term fluctuations.

What is the recommended strategy for a defensive investor according to Graham?

A defensive investor should create a diversified portfolio with a mix of bonds and stocks, typically a 50/50 allocation, and rebalance it periodically. They should also invest a fixed amount at regular intervals, practicing dollar-cost averaging, and focus on large, financially stable companies with a history of dividends and earnings growth.

What is the definition of a 'defensive investor' in the context of Graham's teachings?

A defensive investor, according to Graham, is someone who has limited time to dedicate to investing and prefers a more passive approach. This type of investor should focus on a balanced portfolio and follow a set of criteria to ensure diversification and financial stability.

What are the key characteristics of companies that a defensive investor should consider?

A defensive investor should consider companies that are large, conservatively financed with a current ratio of at least 200%, have paid dividends for at least 20 years, have no earnings deficit in the last ten years, show growth in earnings, are not overpriced based on net asset value or earnings, and are diversified across different industries.

What is the alternative investment strategy for investors who are satisfied with average market returns?

For investors seeking average market returns without extensive research, an alternative strategy is to invest in an index fund, which provides returns similar to the overall market performance.

What does Graham suggest for an enterprising investor looking to beat the market?

An enterprising investor should be patient, disciplined, eager to learn, and willing to spend time analyzing companies. They should avoid overvalued 'growth stocks' and look for undervalued companies, possibly trading below their net working capital, and insist on a margin of safety in their investments.

What is the concept of 'margin of safety' in investing?

The 'margin of safety' is a principle that suggests investors should only buy a stock when its price is significantly below its calculated intrinsic value. This provides a buffer against the risk of being wrong in the valuation and helps to minimize potential losses.

How does Graham refute the academic theory that risk and reward are always correlated in investing?

Graham argues that risk and reward are not necessarily correlated because the price and value of assets can be disconnected. He believes that by finding undervalued assets, an investor can achieve high rewards with low risk, contrary to the academic view that higher returns require taking on more risk.

What formula does Graham provide to calculate the intrinsic value of a company?

Graham provides the following formula to calculate intrinsic value: Value = current (normal) earnings x 8.5 + 2 x expected annual growth rate. The growth rate should reflect the expected yearly growth of earnings for the next 7 to 10 years.

How does the script suggest using the intrinsic value formula to evaluate current stock prices?

The script suggests that the intrinsic value formula can be used not only to calculate a company's value but also to assess whether current stock prices are rational based on expected growth rates. If the expected growth rate to justify the current stock price is unrealistically high, it indicates overvaluation.

Outlines

00:00

📈 The Intelligent Investor's Framework & Mr. Market

This paragraph introduces the concept of investing intelligently as outlined by Benjamin Graham in 'The Intelligent Investor'. It emphasizes that successful investing relies on a sound decision-making framework and emotional control rather than high IQ or insider information. The metaphor of 'Mr. Market' is introduced to illustrate the irrationality of daily market valuations and the importance of viewing stocks as ownership interests in businesses. Graham advises investors to not be swayed by Mr. Market's moods and to take advantage of his over-optimistic or pessimistic pricing to buy or sell. The paragraph also touches on the increased frequency of Mr. Market's appearances in modern times due to technology and the need for investors to maintain a long-term perspective.

05:03

🛡️ Defensive Investing Strategy & Index Funds

The second paragraph delves into Graham's classification of investors into defensive and enterprising types, suggesting that most people are better suited to the defensive strategy due to limited time for investing. It outlines the defensive investor's approach to creating a balanced portfolio of bonds and stocks, with a focus on diversification, investing in large, financially stable companies with a history of dividends and earnings growth, and avoiding overpayment for assets or earnings. The concept of dollar-cost averaging is introduced as a strategy for regular investment to mitigate the risk of poor market timing. Additionally, the paragraph mentions index funds as a modern alternative for achieving average market returns without extensive effort.

10:09

🚀 Enterprising Investor's Approach & Margin of Safety

This paragraph discusses the enterprising investor's strategy, which requires more time, patience, and discipline to potentially outperform the market. It contrasts the ease of achieving average returns with the difficulty of beating the market, highlighting the pitfalls of falling prey to market sentiment as illustrated by quotes from the dot-com bubble era. The enterprising investor is advised to focus on undervalued companies, avoiding overvalued 'growth stocks' and seeking out companies trading below their net working capital. The importance of a 'margin of safety' is underscored, with a formula provided to estimate a company's value and determine if it can be purchased with this margin. The paragraph also challenges the academic theory that risk and reward are directly correlated, arguing instead that the price and value of assets are often disconnected.

💡 Recap of Graham's Investing Takeaways

The final paragraph serves as a recap of the key takeaways from Graham's investment philosophy. It reiterates the importance of not being influenced by market optimism or pessimism, the defensive investor's diversified portfolio strategy, the enterprising investor's pursuit of undervalued stocks, the necessity of a margin of safety in investment decisions, and the disconnect between perceived risk and reward. The paragraph concludes by inviting viewers to share their thoughts on the relevance of Graham's advice in today's context and to suggest topics for future summaries, emphasizing the timeless nature of intelligent investing principles.

Keywords

💡Investing

Investing refers to allocating resources, such as money, with the expectation of generating an income or profit. In the context of the video, investing is the central theme, emphasizing the importance of a sound intellectual framework and emotional control in making investment decisions. The script discusses various strategies for successful investing, as outlined by Benjamin Graham in 'The Intelligent Investor'.

💡Mr. Market

Mr. Market is a metaphor introduced by Benjamin Graham to illustrate the unpredictable and often irrational behavior of the stock market. In the script, Mr. Market is described as a bipolar individual who daily offers to buy or sell shares at prices that may not reflect their true value. The concept is used to teach investors not to be swayed by short-term market fluctuations.

💡Intellectual Framework

An intellectual framework is a set of principles or theories that guide an individual's thinking and decision-making. The video highlights the necessity of having a sound intellectual framework for making investment decisions, as presented by Graham, to ensure that emotions do not negatively impact one's financial choices.

💡Defensive Investor

A defensive investor, as described in the script, is someone who adopts a more passive investment strategy due to limited time or expertise. The video outlines specific criteria for defensive investors, such as diversifying investments and maintaining a balance between stocks and bonds, to mitigate risk and achieve stable returns.

💡Enterprising Investor

An enterprising investor is an individual who is willing to invest more time and effort to potentially outperform the market average. The script contrasts this with the defensive investor, noting that the enterprising investor engages in more active investment strategies and seeks out undervalued assets.

💡Dollar-Cost Averaging

Dollar-cost averaging is an investment strategy of investing a fixed amount of money at regular intervals, regardless of the price of the shares. The script mentions this as a technique for defensive investors to avoid the risk of buying at the wrong time and to achieve a fair average price for their investments over time.

💡Margin of Safety

The margin of safety is a principle that suggests investors should pay less than the calculated intrinsic value of an investment to mitigate the risk of estimation errors. The video emphasizes this concept as a key strategy for both defensive and enterprising investors to ensure they are not overpaying for assets.

💡Net Asset Value

Net asset value (NAV) is the value of an entity's assets minus its liabilities. In the context of the video, NAV is used to determine whether a stock is over- or undervalued. Graham's advice is to not overpay for assets, with the stock price ideally not exceeding 1.5 times the NAV.

💡Risk and Reward

Risk and reward are fundamental concepts in investing, referring to the potential for loss or gain, respectively. The script challenges the academic theory that higher risk always equates to higher reward, arguing instead that intelligent investing can yield high rewards with lower risks by focusing on undervalued assets.

💡Warren Buffett

Warren Buffett is mentioned in the script as a prominent disciple of Benjamin Graham and an exemplar of successful investing. Buffett, known for his wealth and investment strategies, regards 'The Intelligent Investor' as the best book on investing, highlighting the enduring relevance of Graham's principles.

💡Earnings Growth

Earnings growth refers to the increase in a company's profits over time. The script uses the concept of earnings growth to discuss the potential for investment returns and to illustrate the importance of realistic expectations, as seen in the formula for calculating a company's value.

Highlights

Successful investing relies on a sound intellectual framework and emotional control rather than IQ, insider information, or luck.

Benjamin Graham's 'The Intelligent Investor' offers a logical framework and strategies to control emotions in investing.

Warren Buffett, a disciple of Graham, is the third wealthiest man and considers the book the best on investing.

Mr. Market is a metaphor for the fluctuating opinions on business value, which should not dictate investment decisions.

A stock represents ownership in a business, not just a price tag, and its value can differ from Mr. Market's pricing.

Investors should be comfortable holding stocks without being swayed by Mr. Market's irrational price fluctuations.

Defensive investors should maintain a balanced portfolio of bonds and stocks, adjusting annually.

Dollar-cost averaging involves investing fixed amounts at regular intervals to avoid market-timing pitfalls.

Defensive investors should diversify, investing in 10 to 30 large, financially stable companies with consistent dividends and earnings growth.

Avoid overpaying for assets or earnings by comparing stock prices to net asset value and p/e ratios.

Enterprising investors require patience, discipline, and extensive research to potentially beat the market average.

Avoid 'growth stocks' as they are often overvalued and based on unreliable future earnings projections.

Investors should seek companies trading below their net working capital for potentially high returns with low risk.

A margin of safety in investing involves buying stocks at a price significantly below their calculated value to minimize risk.

Graham's formula for company value and expected growth rate provides insight into whether current stock prices are rational.

Risk and reward are not inherently proportional; intelligent investing can yield high rewards with low risk through value investing.

Graham's advice remains relevant today, emphasizing the importance of value investing and emotional control in a noisy market environment.

Transcripts

Successful investing does not require stratospheric IQ, insider information, or luck for that matte.r

Instead what's needed is a sound intellectual framework for making decisions, combined with an ability to keep emotions from ruining it.

In "The Intelligent Investor", Benjamin Graham presents such a framework together with logic that will help to keep your emotions under control.

Arguably, he's investing strategy has been one of the most successful ones during the last hundred years. The impressive records,

not just of Graham himself,

but also of numerous of his disciples are impossible to ignore.

Among these, the brightest shining star is Warren Buffett, who, at the time of this video making, is the third wealthiest man in the world.

Warren Buffett refers to this book as "by far, the best book on investing ever written". In this video,

I will present the, in my opinion, greatest takeaways from the book.

Takeaway number 1: Meet Mr. Market

Imagine that you own a part of a business that you paid $1000 for. Every day, a certain bipolar person called

Mr. Market comes to your home with an opinion about how much you're part of that business is worth. Furthermore,

he offers to buy your share or sell you an additional one on that basis. History has shown that

Mr. Market's opinion about how much your part of the business is worth, can be pure gibberish. For instance, back in March 2000,

he estimated the value of your share to be $2600. Only one year later, in March 2001,

he thought it was worth $500.

Even though the income of the company increased with 50% and the profit increased by 20% during the same period.

Should you let this guy decide how much your $1000 of interest in that business is worth? Of course not!

One of Graham's core principles, is that a stock is not just a ticker symbol combined with a price tag,

it's an ownership interest in a business. And because

Mr. Market isn't always rational, the underlying value of the business can differ from the price he is willing to pay for it.

In fact, it frequently is over- or underpriced as Mr. Market easily becomes over optimistic, or conversely too pessimistic.

Graham advises you to invest only if you would feel comfortable to hold the stock in the future without seeing the fluctuating prices that

Mr. Market presents you with. But for the investor who can keep his head cool,

Mr. Market presents a great possibility of making money, for he doesn't force you to strike a deal with him,

he merely presents you with an opportunity of doing so! You should be happy to sell to him when he offers prices that are

ridiculously high, and similarly, you should be happy to buy from him when he presents you with bargains.

We must consider that, at the time when Graham wrote this book, people were far less bombarded with news,

forecasts, stock quotes, and so on than we are today. Back in the 1970s,

Mr. Market arrived maybe once a day, together with the morning newspaper.

Today, he wants to do business with us

every time we open our phone. Which, if you're anything like me, is more than 100 times every day, Just because

Mr. Market visits you more often,

it doesn't mean that you must trade with him any more frequently than people had to in the

1970s. If he doesn't present you with an offer that meets your standards,

ignore him, and move on with your day!

Takeaway number 2: How to invest as a defensive investor.

There are two types of investors according to Graham - the defensive (or passive) one and the enterprising (or active one).

Most people are better suited for the defensive strategy, as the time

they are willing to dedicate to investing is limited. The defensive investor should create a portfolio with a mixture of bonds and stocks,

say 50% stocks and 50% bonds.

Note that how much you should devote to each asset category depends on your life situation and the current difference in the average yield of

stocks versus bonds.

Restore this allocation once or twice every year, so that if stocks suddenly make up 60% of the portfolio

compared to only 40% in bonds, sell stocks and buy bonds, until 50/50 is restored.

Invest a fixed amount of capital at regular intervals. For instance, straight after you get your salary.

This is called dollar-cost averaging, and will allow for a fair average price of stocks and bonds.

Most of all,

it will assure that you don't concentrate your buying at the wrong time. For the stock component of the portfolio,

the defensive investor should aim for the following 8:

1: Diversification in the companies he invests in. 10 to 30 companies should be adequate.

Also, make sure that you are not overexposed to a single industry.

2: The companies should be large, which Graham defined as generating more than a $100 million in yearly sales.

After inflation, this equals approximately to $700 million in today's value.

3: Look for companies that are conservatively financed. Such a company has a so called "current ratio" of at least

200%. This means that its current assets are at least twice as big as its current liabilities.

4: Dividend should have been paid to shareholders for at least the last 20 years.

5: No earnings deficit in the last ten years.

6: At least 33% growth in earnings during the last ten years.

This translates to a conservative growth of 2.9% annually.

7. Don't overpay for assets.

The price of the stock should not be higher than 1.5 times its net asset value.

The net asset value can be calculated by subtracting the company's liabilities from its assets. 8: Don't overpay for earnings (either).

Don't let the p/e ratio be higher than 15 when using the last 12-month earnings.

An alternative today is to invest in an index fund, which by definition will have returns similar to the average of the market.

If you are satisfied with an average reward through your investing, you only need these two first takeaways.

However, if you thirst for more, you will also need to consideeeeeeeer ....

Takeaway number 3: How to invest as an enterprising investor.

As it's so easy for the defensive investor to get the average return of the market,

it would seem a simple matter to beat the market. You just devote a little more time to investing than these average investors do, right?

To be an enterprising investor, and to beat the market, is much more demanding as such a logic suggests.

It requires patience, discipline, an eagerness to learn and a lot of time.

Many professionals and private investors alike aren't suited for this. It's easier to fall victim to the price quotations of Mr. Market than one could possibly imagine.

Just listen to these two statements from the early 2000s, at the peak of the dot-com bubble,

made by the chief investment strategist at 2 large mutual funds:

"It's a new world order...."

"We see people discard all the right companies, with all the right people, with the right visions, because their stock price is too high."

"That's the worst mistake an investor can make."

"Is the stock market riskier today than two years ago simply because the prices are higher? The answer is no!"

But the answer is yes, yes, YES!

Of course, both statements turned out to be costly for the investors who put their money in these funds.

Since the profits that companies can earn are

finite, the price the intelligent investor should be willing to pay for these companies must also be finite.

Price is truly an important factor for the enterprising investor.

Just like the market tends to overvalue

companies when they have been growing fast or is glamorous for some other reason, it tends to undervalue the ones with

unsatisfactory development. The intelligent investor should therefore try to avoid so-called "growth stocks" as much as possible. Why?

Simply because the investment decision is based relatively more on future earnings, and future earnings are less reliable than current valuations.

If you, on the other hand, can find a company which is valued lower than its net working capital,

you essentially pay nothing for all the fixed assets, such as buildings, machinery goodwill, etc.

The net working capital can be calculated by subtracting total liabilities from current assets.

Such companies were proven truly profitable during Graham's investment career.

Unfortunately, they are rare today except during tough bear markets.

Luckily, Graham suggests an additional method of finding investments for the enterprising investor.

These criteria are similar to the ones that the defensive investors should use, but the constraints are looser,

allowing for the enterprising investor to consider more companies. Note that there is no constraint at all regarding company size.

Also, some diversification should be applied,

but the number of companies held isn't carved in stone for the active investor.

In analyzing a company, the enterprising investor should also study its annual financial reports.

Graham has written a whole book on this subject called "The Interpretation of Financial Statements." So we should speak more about this, on another occasion.

Takeaway number 4: Insist on a margin of safety.

There's one risk that no careful consideration can truly eliminate: the risk of being wrong.

You can, however, minimize this risk. To do this,

you must insist that every investment you make has a "margin of safety".

As mentioned before, the price and value of a company is not always the same.

When the price is at most two thirds of its calculated value, the investor has found a company with enough margin of safety.

You wouldn't construct a ship that sinks if 31 Viking boarded it, if you know that it regularly will be used to transport 30 of them.

Neither should you invest in stock that you think is worth, say, $31 if it currently is priced at $30.

It might be that your calculation is wrong. In the first case, a group of angry (and wet)

Vikings might hunt you down. In the second, you might postpone your financial freedom by a couple of years.

I don't know which situation that I'd consider to be worse: Use margins of safety!

A formula used in the book can give you some heads up regarding what the value of a company is, and therefore also if it can

be bought with a margin of safety.

Value = current (normal) earnings x 8.5 + 2 x expected annual growth rate

The growth rate should be equal to the expected yearly growth rate of earnings for the next 7 to 10 years.

Here's how much the three largest companies of the S&P 500 are worth according to the formula in September 2018:

Note that we can use the formula backwards too, to trace how much these companies must grow in the coming 7 to 10 years for

today's stock prices to be rational. There's a huge discrepancy here!

Amazon is expected to grow at 74% per year according to its stock price, while Apple is expected to grow at a mere 5.8%.

Do you think that this is reasonable?

Takeaway number 5: Risk and reward are not always correlated.

According to academic theory, the rate of return which an investor can expect must be

proportional to the degree of risk that he's willing to accept. Risk is then measured as the volatility of the returns on the investment,

meaning, how much it has differed historically from its expected value. Graham doesn't agree with this statement.

Instead, he argues that the price and value of assets often are disconnected.

Therefore, the return that an investor can expect is a function of how much time and effort

he brings in his pursuit of finding bargain assets.

The minimum return goes to the defensive (or passive) investor, while the maximum goes to the enterprising investor who exercises

maximum intelligence and skill.

Consider this:

It's 4:00 a.m in the morning,

and you've been out drinking in the streets of Moscow together with your friends. You decide that it's too early to call it a night,

and therefore you end up in the more obscure parts of town. At a particularly ambiguous bar you're approached by a man

who asks: "Do you want to play a game?"

"Well, of course, games are fun!" your bravest least sober friend replies. The man puts a revolving in front of you,

which is loaded with a single bullet.

"I'll give you $10,000 if you dare to take a shot, Russian Roulette." Your drunk friend reaches out for the gun,

but you stop him. "I think we'll pass on this one " you politely inform the man. "I thought so" he replies ...

"What about $100,000 for taking two shots?"

Now, this story

represents the academic way of demanding a higher potential reward for taking a higher risk. In the first offer, you were to receive

$10,000 at a

16.7% risk of blowing your brains out. In the second offer, the reward is

$100,000 because the risk of putting a hole through your head has increased to 33.3%.

Seems logical, right? But stock market investing doesn't have to be like that!

Remember that price and value are not the same. When you buy a company at 60 cents on the dollar,

you have a great potential reward, and a low risk.

Furthermore, if you can find another company that you can buy at 40 cents on the dollar, you have found a better potential reward,

combined with an even lower risk!

How could anyone in their right mind argue that it's riskier to buy a dollar at the price of 40 cents than to buy a

dollar at 60 cents, just because the potential reward is higher?

Quick recap of the five takeaways:

Firstly the market tends to be over-optimistic and too pessimistic from time to time.

Don't let this influence what you think the true value of your assets are. Instead, see it as a business opportunity,

where you get to deal with a person who has no idea of what he's doing!

Secondly, the defensive investor should go for a diversified portfolio of stocks and bonds, where the stock category consists of primarily low-priced issues.

Thirdly, the enterprising investor should also aim for stocks that show lower price tendencies. If he can find a company that is trading below its

net working capital, he might have found his El Dorado. The fourth takeaway

Is that the intelligent investor should insist on a margin of safety when acquiring an asset. And finally, takeaway number 5 is that risk

and reward aren't necessarily correlated.

What do you think of Graham's advice? Are they still as applicable today, as they were back in the

1970s? Share your thoughts with other viewers in the comments below. As always, if you want me to summarize a

book on investing, personal finance or money management, please comment on that as well.

And if you find that any of the takeaways of this book is especially interesting and want me to elaborate on it,

don't be shy, you may comment on that too! Thanks for watching guys and have a good one!