**Quick update** Thanks for reading, I’ve compiled this entire series into an electronic copy that you can take offline → here
My goal over the next few months is to write a blog style reporting of the “lessons learned” coming out of the book “The Intelligent Investor” by Benjamin Graham.
This first post is going to cover an introduction to the goals and rationale for creating this content and then will lead into a review of the Intro and Chapter One of the text itself.
I had picked up the book two or so years ago, and had started it out but only made it in about 3 chapters in before moving onto something else. This time, I set out to complete the reading and make public note of its lessons.
A brief overview of the introduction is described as focused on dismissing the “hot” investment techniques that live on Wall Street , and then to re-iterate the importance of buying securities for their underlying business value, versus an emphasis on the stock price itself. More can be found about the author : Benjamin Graham here.
The introduction goes through and lines up the difference between a defensive investor, and an aggressive investor. Graham then further explains that regardless of the type of investor, each needs to understand that their RRR shouldn’t be terribly higher than the market itself. These so-called “average returns” for the defensive investor, and “slightly-above-average returns” (+2–3%) for the aggressive investor be should always be satisfied by constant, repeatable wins , instead of big win/loss swings. As a side, this is much like the “repeatable golf” we all seek each time we swing the golf club.
Consistent growth over one-time wins
Graham begins to allude to his methods associated with value investing and primarily covers truths that affect both types of investors. He mentions :
“to invest in securities one should be forearmed with an adequate knowledge of how the various types of bonds and stocks have actually behaved under varying conditions”
His main points centering around understanding that there is no dependable way to select only the most promising companies in the most promising industries. He gives further insight into industry speculation by noting that:
“obvious prospects for physical growth in a business do not translate into obvious profits for investors”
Lastly, Graham focuses the reader’s attention to buying into the value of a company, rather than just the price of its stock. Making note that :
“the habit of relating what is paid to what is being offered is an invaluable trait in investment”
then suggests that the reader focus only on buying issues selling not far above their tangible asset value.
Graham begins chapter one with an focus on describing speculation versus investing. Outlining importantly that:
“an investment operation is one which , upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative”
Further expounding on speculation, he makes note that from 1949–1969, the price of the DJIA increased 5-fold , while the actual earnings and dividends only doubled. The emphasis being that the prices were influenced by speculator attitude, rather than underlying corporate value.
It’s also here where he references the Gordon Equation which is summarized in the link below:
Dividend Discount Model - DDM
A procedure for valuing the price of a stock by using predicted dividends and discounting them back to present value…
Due to some of the “speculation” that seems to go into predicting the dividend growth rate, I found it a bit ironic that this equation was referenced by Graham, however I recognize that using this model in tandem with other analysis is still better than a WAG or strictly speculating on the rise or fall of price.
Graham finally dives into what the Aggressive Investor needs to do to continually find better than average results. He needs to focus on investment practices that are:
- Inherently sound and promising
- Not popular on Wall Street
He then lays out that for investing to be anything other than speculating , you need three consistent elements:
- You must thoroughly analyze a company and the soundness of its underlying business. (thorough analysis: the study of facts in light of established standards of safety and value)
- You must deliberately protect yourself against serious losses
- You must aspire to “adequate”, not extraordinary performance
Graham is full of one line quotes that seem to capture his goals of orienting the reader with the difference between speculating and investing. His quote:
“invest only if you would be comfortable owning a stock even if you had no way of knowing its daily share price”
contrasts the fast-trading we tend to see in the modern information era of investing where stocks are bought and sold quickly. He finishes by focusing the rationale on two concepts that can be taken to heart.
- The intelligent investor has no interest in being temporarily right
- Stocks do well or poorly in the future because the businesses behind them do well or poorly — nothing more, and nothing less.
As I continue to work through the chapters, my goal is to post on each chapter’s central tenets. If you find something out of place, or care to strike up a discussion feel free to comment or find me on twitter @DavidCappelucci
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