The Intelligent Investor by Benjamin Graham is a classic book on the principles of value
investing. Praised by Warren Buffet, it’s a book that every investor should try to read at least
once in their lifetime. Warren Buffet first read The Intelligent Investor when he was just 19,
and later when he went on to Columbia Business School, the author of the book Benjamin Graham
actually became Warren Buffet's professor. Warren Buffet has referred to the book as “By far the
best book on investing ever written”, and they definitely slap that all over the covers. It's
definitely a book that beginners can read, but with that said it is going to helpful to have a
basic understanding of how the stock market and investing works. If this is all new to you, here
are a few terms that may be helpful to know before you actually start this book. It isn't the easiest
book in the world to read, but a way around this is to get the version that has the commentary
chapters, and what you can actually do is to read through these commentary chapters first so that
you have a better understanding of what that chapter is going to be talking about. Benjamin
Graham starts the book of by talking about the difference between investing and speculation. He
comments that there are three goals when you are actually investing and not speculating.
Using thorough fundamental analysis, seeking safe and steady (but still adequate) returns,
and protecting against loss. And we'll break these down further in some of the following sections.
The next key takeaway is that you need to determine what type of investor you are.
This book categorizes the types of investors in two ways - the active or enterprising investor
and the passive or defensive investor. An active or enterprising investor is going
to be an investor that is always researching and analyzing the fundamentals of different stocks or
bonds. This type of investing is going to take more time on your part. A passive or defensive
investor usually has a long term portfolio that they kind of want to put on autopilot. A lot of
the time they may include ETFs or different types of funds in their portfolios since that makes it
a little bit easier to manage and they don't have to research and analyze those individual stocks.
Investing passively takes up less of your time, but the book does point out that no matter which
way you go with, you are going to have to take your emotions out of your investing decisions.
Knowing that stock prices will fluctuate, even if you are a passive investor you will
still need to be able to get through all of the highs and the lows of the market.
The third key takeaway from the book is to invest in order to protect yourself from
inflation. Inflation happens when the dollar loses value or purchasing power. To put this
into perspective if you had $1 in the year 1900 you could have bought 70 lbs of potatoes,
but today if you had $1 you would be lucky to find a pack of gum or a piece of candy that costs less
than $1. When talking about inflation, Benjamin Graham also talks about this psychological effect
that he calls the "money illusion". So he gives an example where the inflation rate is going up,
meaning the dollar is losing value, but you get a raise. That raise doesn't actually make up for
the rate of inflation, so in the end you're losing money. But we kind of overlook that
because of the feel good effect of getting that initial raise. So the point that he's getting at
here is that if you had two dollars and you put one in a bank account or under your mattress,
and you invested the other, that dollar that you invested has a lot more potential to grow over
time than that dollar that you tucked away under your mattress that just sits there losing value.
The fourth lesson from this book is the importance of fundamental analysis. According to the author,
your investments should be based on numbers and performance, and not your emotions or hype. These
are a few of the factors that Benjamin Graham looked at when selecting stocks. EPS - which is
earnings per share. P/E Ratio - which is the price to earnings ratio. And long term growth rate. So
through the book, Benjamin Graham reiterates this idea of the importance of fundamental analysis
and he also talks about investing in stocks that are performing well versus the stocks
that you know. So what he meant by that is even if you know and you like and you use a company,
those feelings toward that company do not necessarily override how that company is actually
performing. So to him, he believed that even if you like a company, if the numbers didn't line up,
then it didn't necessarily make sense to invest in it even if you were familiar with the name.
The fifth key takeaway from the book is the whole idea of value investing. The whole goal of using
fundamental analysis like we just talked about is to find the intrinsic value of a company. In other
words - how much a company is actually worth. Once you find the intrinsic value of a company
the whole idea with value investing is to find companies that are trading under that intrinsic
value. Benjamin Graham's investing strategy was to always buy stocks that were undervalued.
As you've probably heard many times, diversification is key, and The Intelligent
Investor definitely reinforces this. Benjamin Graham specifically talks about having a mix of
stocks and bonds, and he also touches on adding REITs or different funds to your portfolio in
order to diversify. The way in which you actually choose to diversify is personal,
and it does depend on if you are an active or a passive investor, but the bottom line for all of
this is to not put all of your eggs in one basket. Another lesson from The Intelligent Investor
is to use dollar cost averaging as a way to stay consistent and to avoid trying to time
the market. Dollar cost averaging simply means investing consistently over time.
This is usually taking a fixed amount of money and investing that every week, or every month,
and to always invest that much regardless of what the share price is doing. Let's say that you
invest $500 every month into your Roth IRA. Some months when the market is up, that $500 is going
to buy less shares of the companies that you want, but when the market is down that $500 is going to
buy more shares. So over time, your average share prices will likely even out. If you use dollar
cost averaging in your investing strategy, in today's world it's helpful if you use a platform
that offers fractional shares. That wasn't a thing when Benjamin Graham wrote this book, and even
when they did the revisions, but there are lots of platforms that offer that now and make dollar cost
averaging really easy. One of the best known bits from The Intelligent Investor is this imaginary
character Mr. Market. So Mr. Market shows up every day with price quotes for what he will
buy or sell things for, but this all is dependent on Mr. Market's mood. And that mood swings from
extreme optimism to extreme pessimism. Benjamin Graham created Mr. Market as an allegory for the
emotional swings that the stock market takes and the groupthink that happens in the stock market
and with investors. With this character, he points out that optimism towards the market makes prices
go higher, and pessimism makes prices go lower. He advises against reacting immediately to swings
in the market or swings in Mr. Market's mood. The ninth lesson is that price does matter and not
to overpay. So we touched on dollar cost averaging or investing consistently without worrying too
much about small changes in price. But Benjamin Graham does give his opinion that even if a stock
is a "good stock" it's still possible to overpay for it, and if you're buying a good stock at a bad
price, then that isn't a good investment. And of course an investor is never going to be 100% right
on the price that they think a stock should be, but this is why Benjamin Graham always encourages
people to go back to that fundamental analysis to really get the best idea of what a stock is worth.
And one of the biggest concepts that is repeated throughout the book is to have a margin of safety.
So a margin of safety is partially based on that intrinsic value of the stock and the price that
you ideally buy it undervalued for. And buying at that undervalued price does give you a little bit
of buffer room if that price moves. But another part of that margin of safety does go back to
diversification. By having a mix of where you're putting your money, you're making sure that
everything in your portfolio isn't necessarily dependent on one area doing well. So how do you
become an intelligent investor? Benjamin Graham believes that fundamental analysis, seeking safe
and steady returns, and minimizing your loss and your risk is the best way to go. If you're
interested in learning more about becoming a passive investor and how you can start automating
your finances, go ahead and click this video right here where I talk about the easiest way
to automate all of your finances and the easiest platform to use for automating your investments.