The Intelligent Investor by Benjamin Graham is touted as one of the best investment books ever written. Here is my summary of that book and the lessons that I learned.
Graham uses a word picture to describe the stock market. The company you invest in will be valued at a certain price, but Mr. Market will tell you what he thinks it's worth every day. Mr. Market is presenting you with opportunities. If he presents you with a high price, you can sell for a profit. If he presents you with a low price, you can buy more of what you already own.
How to invest as a defensive investor
Have a balanced portfolio of stocks and bonds. Reallocate annually if one of those asset classes outperforms or underperforms so the balance is brought back to the original percentages. Invest regularly via automatic deposit to dollar-cost-average your positions.
What a defensive investor should look for when investing in stocks:
- Diversify: 10-30 companies
- Large companies
- Conservatively financed: 200% current ratio
- Dividends: No missed dividend payments for the last 20 years
- No earnings deficit in the last 10 years
- Earnings growth of at least 2.9% annually for 10 years
- Don't overpay for assets: (Assets-liabilities)*1.5
- Don't overpay for earnings: P/E <15
How to invest as an enterprising investor
Requires discipline, patience, eagerness to learn, and lots of time.
Since profits are finite, the price an investor should pay for a company should also be finite.
If you can pay for an investment for less than working capital, you pay nothing for assets. How to calculate working capital: current assets-liabilities.
What an enterprising investor should look for when investing in stocks:
- Some diversification
- Size of company doesn't matter
- Current ratio of 150%
- Dividend paid at least this year
- No earnings deficit for at least 5 years
- Earnings growth: >0% annually for 5 years
- Price paid for assets: (tangible assets-liabilities)*1.2
- Cheap earnings: P/E for the investor to decide
Margin of safety
Every investment you make needs to have a margin of safety
Price does not equal value
Price < 2/3 value
Value= current earnings * (8.5*2*expected annual growth rate)
Expected growth of earnings in the next 7-10 years
Risk and reward are not always correlated
Maximum return is not achieved by taking maximum risk but rather by exercising maximum intelligence and skill.