The Intelligent Investor by Benjamin Graham
My recommendation: 9/10
The advice in this book is timeless! No wonder why this book has taken its well-deserved place in the best-ever investment books.
The main premise is investing in the companies we know of and believe its value at. Not blindly following any trends or market movements, but studying the companys' mission and financial position in the long run. Investing in the long term and diversifying to balance our risk and gains.
The defensive investor must confine himself to the shares of important companies with a long record of profitable operations and in strong financial condition.
The first is the purchase of the shares of well-established investment funds as an alternative to creating his own common-stock portfolio.
You must thoroughly analyze a company and the soundness of its underlying businesses before you buy its stock.
The intelligent investor never dumps a stock purely because its share price has fallen; she always asks first whether the value of the company's underlying businesses has changed.
The intelligent investor avoids investing in gold directly, within high storage and insurance costs; 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 (or perhaps 5% if you are over the age of 65).
The heat of Graham's argument is that the intelligent investor must never forecast the future exclusively by extrapolating the past.
The stock market's 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)
I suggest that you rebalance every six months, no more and no less, on easy-to-remember dates like New Year's and the Fourth of July.
Taxable or tax-free? Unless you're in the lowest tax bracket, you should buy only tax-free (municipal) bonds outside your retirement accounts.
Short-term or long-term? Bonds and interest rates teeter on opposite ends of a seesaw: If interest rates rise, bond prices fall although a short-term bond falls far less than a long-term bond. On the other hand, if interest rates fall, bond prices rise-and a long-term bond will outperform shorter ones.° You can split the difference simply by buying intermediate-term bonds maturing in five to 10 years-which do not soar when their side of the seesaw rises, but do not slam into the ground either. For most investors, intermediate bonds are the simplest choice, since they enable you to get out of the game of guessing what interest rates will do.
The more familiar a stock is, the more likely it is to turn a defensive investor into a lazy one who thinks there's no need to do any homework, Don't let that happen to you.
If someone asks whether bonds will outperform stocks, just answer, "I don't know and I don't care"-after all, you're automatically buying both.
Instead, recognize that investing intelligently is about controlling the controllable. You can't control whether the stocks or funds you buy will outperform the market today, next week, this month, or this year; in the short run, your returns will always be hostage to Mr. Market and his whims. But you can control; your brokerage costs, your ownership costs, your expectation, your risk, your tax bills, your own behaviour.
If you build a diversified basket of stocks whose current assets are at least double their current liabilities, and whose long-term debt does not exceed working capital, you should end up with a group of conservatively financed companies with plenty of staying power.
No matter which techniques they use in picking stocks, successful investing professionals have two things in common: First, they are disciplined and consistent, refusing to change their approach even when it is unfashionable. Second, they think a great deal about what they do and how to do it, but they pay very little attention to what the market is doing.
You can best shield yourself against loss not by buying one of these quirky contraptions, but by intelligently diversifying your entire portfolio across cash, bonds, and U.S. and foreign stocks.
Although there are good and bad companies, there is no such thing as a good stock; there are only good stock prices, which come and go.
What have we learned? The market scoffs at Graham's principles in the short run, but they are always revalidated in the end. If you buy a stock purely because its price has been going up instead of asking, whether the underlying company's value is increasing-then sooner or later you will be extremely sorry. That's not a likelihood. It is a certainty.
If you have any comments or questions about this book notes, you can write me at Twitter @oykun or email me at hello[at]oykun.com.
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