Today, I’m going to summarize one of the best books ever written on investment called the intelligent investor by Benjamin Graham, it is such a great book that even warren Buffett himself wrote a preface for it.
Warren said that he first read the first edition in 1950. He was only 19 years old at the time and he thought it was the best book about investing. He still thinks the same today.
According to buffett. Investing successfully over a lifetime does not require a stratospheric iq, unusual business, insights or inside information.
You only need a sound intellectual framework for making decisions and the ability to keep emotions from spoiling it. This book is all about that framework. Warren specifically pointed out chapters 8, Mr Market and 20 margin of safety.
As the main two chapters that contain invaluable advice. He said that if we pay special attention to those two chapters, we will not get a poor result from our investments. I will summarize those two chapters and several others, but before I move on, I would like to explain what Graham meant by an intelligent.
what Graham meant by an intelligent
If you think that it has something to do with IQ, then you are wrong. Being an intelligent investor simply means being patient disciplined and eager to learn.
We must also be able to harness our emotions and think for ourselves. This kind of intelligence explains, graham, is a trait more of the character than of the brain.
There is evidence that high iq and education are not enough to make an investor intelligent in this book, graham talks about Isaac Newton and how he failed miserably as an investor despite his intelligence and high iq in 1998, long-term capital management, a hedge fund, run by a battalion of mathematicians computer scientists and two nobel prize-winning.
Economists lost more than two billion dollars in a matter of weeks on a huge bet when I summarized james ricard’s book called road to ruin. I shortly talked about long-term capital management and how they were about to cause a global crisis in 1998.
If you’ve not seen that video, I recommend checking it out anyway, as you can see, even the nobel prize, winning economist, can fail miserably in investing graham says that most of the time people who failed in investing is not because they are stupid.
It’s because they have not developed the emotional discipline that successful investing requires. So I hope now you are convinced that iq has nothing to do with being intelligent in the investment world.
Also, enthusiasm is not a good thing to have in investing graham always says that, while enthusiasm may be necessary for great accomplishments elsewhere, when it comes to investing, it almost leads to disaster the investor’s main problem and even his worst enemy is himself
chapter 1: The difference between investment and speculation
It is not an unethical thing to speculate, what is important is that we keep the activities of investing and speculation separate.
It is dangerous to think that we are investing when we actually are speculating graham advises us to limit our allocation to our speculation position, also known as mad money account to no more than 10 percent of the investment funds.
Do not allow our speculative thinking to spill over into our investing activities. We must know the difference between investing and speculation. Investing is an operation which, upon thorough analysis, promises safety of principle and an adequate return operations. Not meeting these requirements are speculations
chapter 2: What can we do to help us beat inflation?
I love henry youngman’s quote about inflation. It said americans are getting stronger 20 years ago. It took two people to carry 10 worth of groceries. Today, a five-year-old can do it.
Investors often overlook the importance of understanding inflation, psychologists, call this the money illusion. For example, if we receive a two percent raise in salary in a year when inflation is four percent, we will most certainly feel better than if we take a two percent pay cut.
During a year when inflation is zero, both scenarios leave us in a virtually identical position, but we feel better. In the first scenario, you must measure your investing success, not just by what you make, but by how much you keep after inflation. Inflation is not going away and it must always be factored into your analysis.
Traditionally stocks can withstand inflation better than bonds, leading many to believe that they should solely invest in stocks, but nothing in investing is completely sure everything fluctuates and it is impossible to completely predict the future.
Diversification is always a better choice than relying on a single type of stock or bond. The author recommends two options to protect yourself from inflation. The first is real estate investment trusts, these companies, own properties, collect rent and do a great job of withstanding inflation.
The other option is government bonds that automatically scale with inflation. Above all, the intelligent investor diversifies
Chapter 3: A century of stock market history
The most important thing that we can learn so far from 100 years of stock market history is that the intelligent investor must never forecast the future of the stock market based on the past. Just because something has happened before. Even if it has happened several times, there is no guarantee that it will happen again.
The stock market will not go up and down indefinitely. We must always be careful and keep in mind that when stock prices rise, it becomes riskier not less graham asks. Three simple questions number one: why should the future returns of stocks always be the same as their past returns?
Number two, If every investor comes to believe that stocks are guaranteed to make money in the long run, won’t the market end up being wildly overpriced. And number three, and once that happens, how can future returns possibly be high
Chapter 4: Passive and active investor
Graham divides investors into two categories. Passive and active, being a passive or active investor has nothing to do with the degree of risk you can take.
It is a common belief that those who cannot take risks should get low returns, and vice versa, graham says that the rate of return an investor should expect to receive is according to the amount of time and effort he is willing to put another common misconception. Is that your age should determine the amount of risk you can take today?
If you go to an investment consultant, he will most probably ask your age and recommend building your portfolio according to that, for example, if you are 25 years old, you will be recommended to put 25 in bonds and 75 percent into stocks, because you are young and can stand against the volatility of the stock market?
On the other hand, if you are old, then you will be advised to put the majority of your investments into bonds, since they are less volatile and less risky. Graham says that this approach is completely wrong and your age should not determine the amount of risk you should take to determine the amount of risk you can take.
Ask the following questions: are you single or married? Will you have children?
Will you inherit money, or will you end up financially responsible for aging parents? If you are self-employed? How long do businesses similar to yours tend to survive? What factors might hurt your career, given your salary and your spending needs?
How much money can you afford to lose on your investments, for each type of investor graham provides clear guidelines on creating a portfolio for that I would recommend checking out the book, because each of them is a separate video in itself.
Chapter 8: Stock market volatility and mr market
Imagine that you and I own shares in a private business that cost us a thousand dollars. Besides you and me, there is one more partner whose name is mr market.
Our partner, mr market, is a lunatic guy and every day he comes to tell us what he thinks our shares are worth and he offers us to buy new shares or sell our existing shares.
Sometimes his valuation appears justified, but most of the time it seems silly if we are an intelligent investor, should we let this lunatic guy’s daily communication determine our view about the value of our share in the company.
Of course not, we may be happy to sell him when he offers a ridiculously high price and happy to buy his shares when his price is too low, but the rest of the time.
We would be wiser to form our views based on reports from the company about its operations, as well as its financial positions, as you have already guessed in the above example, the lunatic guy is market fluctuation, graham says that most investors fail because they pay too much attention to what the stock market is doing currently, they keep checking the price of their shares several times a day and get easily influenced.
Let me explain this in this way. If you buy an investment property or new business, would you call your broker twice a day and ask how much your property or business is worth at the moment? of course not.
It sounds silly, but most people do the exact same with their stocks and let the lunatic guy influence their decision. This chapter is warren buffett’s, most favorite chapter.
If you listen to him, you will see that he always talks about owning solid businesses and holding them for a long time. Despite the market fluctuations for many people, owning stock is just owning a piece of paper.
They don’t treat it as owning a business when you buy stocks of a company, you actually own some portion of that company.
You become an owner and everyone, including the ceo of that company work for you. So you should treat it as your business and don’t let some lunatic guy influence your decision.
The best strategy for an intelligent investor is to automatically contribute some portion constantly, regardless of the market fluctuation. This is known as dollar cost averaging your commitment and controlling your emotions will make all the difference.
Also, don’t ever try to time the market, your chance of timing, the market right is equal to the chance of donald trump showing up at your cocktail party in a pink bunny costume,
Chapter 9: Investing in funds
funds are popular because they are convenient, diversified and professionally managed, but these funds are far from perfect.
Many fund managers try to time the market, which is not wise. Additionally, many funds come with excessive trading fees and higher costs, because the managers trade frequently.
Let me give you an example. If you want to understand how investing in a fund looks like, let us say I come to you and offer you a partnership.
I say: look. I have a business idea, but I don’t have any money, so you will put 100 of the money, take 100 of the risk and I will manage the business if we are profitable.
We both win, but if we are not, I will still take my fee for managing the business. Oh by the way, I have to tell you that I am a terrible businessman, there’s a high probability that I will fail and I have a terrible track record.
Would you partner with me I’m sure your answer would be hell, no get lost in normal conditions.
You would never accept such a partnership, but when you are investing in funds, you are accepting the same conditions. You are putting all the money and you are taking all the risk.
The majority of the time fund managers don’t put anything, they only manage the fund and they are terrible at it. They only have one job and they can’t do it most of the time. Managed funds can’t even beat the passive index funds.
You think that they are professionals and they know which stocks to choose, but in reality they don’t. If you just invest in some passive index fund by yourself, you will outperform them occasionally.
Fund managers are right and they take the portion of the profit, but most of the time they are wrong and you lose money, but they still take their profit as management fees, trading costs, etc.
In 1973, princeton university, professor burton malkiel, claimed in his best-selling book that a blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts burton was wrong.
The monkeys did a much better job than experts, so if you know someone selling a dart throwing investment monkey, let me know if you decide to hire a fund manager or some advisor make sure that he knows his staff and is open with you in the book There is a list of great questions to evaluate your advisor.
A lot of financial advisors are con artists who make you trust them and talk you out of investigating them before you put your financial future with them. It is important to find someone honest.
There is a famous saying trust, then verify always do your due diligence to make sure that your advisor truly knows his stuff about the true fundamentals of investing and has a satisfactory amount of years in the game for a passive investor.
The author recommends owning index funds rather than managed funds, while regular funds own certain stocks based on the manager’s decisions index funds hold all of the stocks in a certain market, simply to say instead of trying to pick the best fruit from the basket you own, the entire basket, when you invest in an index fund, for example, the s p 500, is an index of the 500 largest publicly traded companies in america.
When you invest there, you basically own a small portion of the 500 biggest companies in america.
Index funds have extremely low fees, they work well, if you hold them for a long period. The only problem is that these kinds of passive index funds are not sexy. You can’t brag how you picked the next great stock. At your friend’s barbecue party. Sorry,
Chapter 20: Margin of safety
This is the second chapter that warren buffett recommends. The margin of safety is often said by benjamin, graham as the secret of sound investment. The margin of safety in investing is the difference between the real value of the company and the price we pay.
For example, if a stock is worth a hundred dollars and we purchase it for 75, then we have 25 margin of safety. If the stock reaches the real value of 100, then we have a 33.
return, the greater the margin of safety, the more space we have for things to go bad in investing the main rule is not to lose money and the margin of safety reduces the likelihood of losing money, which is why I believe warren Buffett loves this chapter.
Buffett has two rules, when it comes to investing: rule number one, don’t lose money. Rule number two, don’t forget rule number one.