The Best Book I’ve Read on Investing
The Intelligent Investor by Benjamin Graham
The Intelligent Investor by Benjamin Graham
“Every day do something foolish, something creative, and something generous.” — Ben Graham
Investing basics
A stock is ownership in an actual business with an underlying value that does not depend on its share price.
The future value of every investment is a function of its present price. The higher the price you pay, the lower your return will be.
By the time everyone decides that a given industry is “obviously” the best one to invest in, the prices of its stocks have been bid up so high that its future returns have nowhere to go but down.
The stock markets performance depends on three factors:
- Real growth (the rise of companies' earnings and dividends)
- Inflationary growth (the general rise of prices throughout the economy)
- Speculative growth — or decline (any increase or decrease in the investing public’s appetite for stocks)
When stocks are priced reasonably enough to give you future growth, then you should own them, regardless of losses they may have cost you in the past.
Investing risks
No matter how careful you are, the one risk no investor can ever eliminate is the risk of being wrong. Only by insisting on the margin of safety — never overpaying, no matter how exciting an investment seems to be — can you minimize your odds of error.
Losing some money is an inevitable part of investing, and there’s nothing you can do to prevent it.
The intelligent investor
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.
The secret to your financial success is inside yourself. If you become a critical thinker, and invest with patient confidence, you can take steady advantage of even the worst bear markets. By developing your discipline and courage, you can refuse to let other people’s mood swings govern your financial destiny. In the end, how your investments behave is much less important than how you behave.
“Human happiness is produced not so much by great pieces of good fortune that seldom happen, as by little advantages that occur every day.” — Benjamin Franklin
Intelligence means being patient, disciplined, and eager to learn; you must also be able to harness your emotions and think for yourself. This kind of intelligence “is a trait more of the character than of the brain.”
The intelligent investor realizes that stocks become riskier, not less, as their prices rise — and less risky, not more, as their prices fall. The intelligent investor dreads a bull market since it makes stocks more costly to buy. And conversely, you should welcome a bear market, since it puts stocks back on sale.
The defensive investor (this is me)
The defensive (or passive) investor will place his chief emphasis on the avoidance of serious mistakes or losses. His second aim will be freedom from effort, annoyance, and the need for making frequent decisions.
The defensive investor must confine himself to shares of important companies with a long record of profitable operations and in strong financial condition.
A defensive investor runs — and wins — the race by sitting still.
“The happiness of those who want to be popular depends on others; the happiness of those who seek pleasure fluctuates with moods outside their control; but the happiness of the wise grows out of their free acts.” — Marcus Aurelius
When to invest
The death of the bull market is not the bad news everyone believes it to be. Thanks to the decline in stock prices, now is a considerably safer — and saner — time to be building wealth.
Never buy a stock immediately after a substantial rise or sell one immediately after a substantial drop.
Never buy into a lawsuit.
What to invest in
A simple portfolio policy: purchase high-grade bonds plus a diversified list of leading common stocks.
Index funds are a defensive investor’s dream come true.
A low-cost index fund is the best tool ever created for low-maintenance stock investing.
Limit yourself to stocks whose current price is no more than 15 times the average earnings over the past 3 years.
U.S. savings bonds are safe and a great option for individual investors. There is no other investment that combines absolute assurance of principal and interest payments, the right to demand full money back at any time, and a guarantee of at least a 5% interest rate for at least ten years.
Unless you’re in the lowest tax bracket, you should buy only tax-free (municipal) bonds outside your retirement accounts.
The portion of your investments held in bonds should never be less than 25% and never more than 75%.
Rebalance your stocks and bonds every six months.
Putting up to a third of your stock money in mutual funds that hold foreign stocks helps insure against the risk that our own backyard may not always be the best place in the world to invest.
Real Estate Investment Trusts, or REITs, are companies that own and collect rent from commercial and residential properties and do a decent job of combating inflation.
Avoid investing in gold directly, instead, seek out a well-diversified mutual fund specializing in the stocks of precious metal companies and charging below 1% in annual expenses. Limit your stake to 2% of your total financial assets.
Treasury Inflation-Protected Securities, or TIPS, are U.S. government bonds that automatically go up in value when inflation rises. They are safe from the risk of default. They insure you against financial loss and the loss of purchasing power caused by inflation. Allocate at least 10% of your retirement assets to TIPS.
Good things to remember
The investor’s chief problem is likely to be himself.
“All human unhappiness comes from one single thing: not knowing how to remain at rest in a room.” — Blaise Pascal
We have seen much more money made and kept by “ordinary people” who were well-tempered and well suited for the investment process than by those who lacked this quality, even though they had extensive knowledge of finance, accounting, and stock-market lore.
If you’ve failed at investing so far, it’s not because you’re stupid. It’s because you haven’t developed the emotional discipline that successful investing requires.
You should never succumb to the “certainty” that any industry will outperform all others in the future.
If the investor is in doubt as to which course to pursue he should choose the path of caution.
The intelligent investor must never forecast the future exclusively by extrapolating the past.
Just because of the uncertainties of the future the investor can not afford to put all of his funds into one basket.
Anyone who claims that the long-term record proves that stocks are guaranteed to outperform bonds or cash is an ignoramus.
The only thing you can be confident of while forecasting future stock returns is that you will probably be wrong.
The only indisputable truth that the past teaches us is that the future will always surprise us — always.
“Those who do not remember the past are condemned to repeat it.” — Santayana
In the financial markets, the worse the future looks, the better it usually turns out to be.
How defensive you are should depend less on your tolerance for risk than on your willingness to put time and energy into your portfolio.
Age should not affect your investment strategies.
The more you trade, the less you keep.
No outstanding rewards came from diversified investment in growth companies as compared with that in common stocks generally.
Don’t take a single year's earnings seriously.
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