“The Intelligent Investor” by Benjamin Graham was called the best investment book ever written by Warren Buffett. After close to 60 years after it was first written, one continues to be amazed by its depth and clarity and its relevance even today.
It is almost like financial philosophy, akin to the ‘Bhagavad Gita’ of investing and finance for the individual investor – whenever you pick it, you learn a new piece of investment wisdom. If an individual investor must read only one book on investing, ‘The Intelligent Investor’ is the one.
It is difficult to pick up the best parts from such a book – it covers everything from definition of investment to specific criteria for stock selection.
Here are some of the key takeaways from the book Investment versus Speculation:
Investing means any operation that on thorough analysis promises safety of principal and an adequate return.
- Bonds versus Stocks in Asset Allocation:
Graham presents a simplistic 50:50 formula of allocation between fixed income bonds and stocks that works for most investors – giving a leeway of 25% on either side. I.e. at no time should the allocation of either stocks or bonds fall below 25%.
The guiding rule is to keep re-adjusting this allocation when one component increases above a certain defined limit, like 60%, by selling the additional 10% of the increased component and buying the other. This does not guarantee the highest returns – but is a mechanical program that is most likely to work – simply because it advises selling and buying when it is counter intuitive, and “chiefly because it gives the investor something to do”.
- Defensive versus Enterprising Investors:
Graham makes a distinction between types of investors not based on risk taking abilities or age but rather on the amount of intelligent effort that is put into an investment operation.
The Defensive investor will place emphasis on avoidance of serious mistakes and losses, and seeks freedom from effort, annoyance and the need to make frequent decisions.
The Enterprising investor will be able and willing to put in time and effort in the selection and tracking of securities that may appear to be better valued than the general market from time to time – which may help him achieve better returns than the market over long periods of time.
Majority of investors would fall into the Defensive category. To achieve satisfactory results available to the defensive investor is easier than most people realize, to achieve superior results sought by the enterprising investor is harder than it looks.
- The famous Mr Market:
This is perhaps the most valuable part of the book – on how to approach the widely fluctuating markets that an investor will face number of times in his investing life.
Treat the market as an obliging, emotional partner in your businesses – i.e. the securities of which you own. Every day, he tells you what he thinks of the value of the share of business that you own, and offers to buy your share at a price or sell you his share at a price. Sometimes his fears overtake him so offers you rock bottom prices, while sometimes he is excited about the future thus offering you great prices.
The best part is he does not mind being neglected – he will come back again tomorrow if you neglect him. Your best interests are then served if you only transact with him if and when you agree with his prices – the rest of the time, it is best for you to neglect him and focus on the operations of your business.
In the book, Graham goes on to provide clear stock selection criteria for defensive and enterprising investors – with great examples to help stock evaluation practically.
But more than those, the clear framework based on the above – definition of investment, asset allocation, the decision on type of investor, and the attitude towards market fluctuations – are most valuable for an individual investor to go about his investment operations.
Graham’s advice and wisdom are unlikely to make anyone rich in a hurry – perhaps only when one gets old. But the principles are timeless and practical.