The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition) Benjamin Graham (Author)
The Intelligent Investor: The Definitive Book on Value Investing.
A Book of Practical Counsel (Revised Edition) Paperback – Benjamin Graham (Author), Jason Zweig (Author), Warren E. Buffett (Collaborator)
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The Intelligent Investor by Benjamin Graham, first published in 1949, is a widely acclaimed book on value investing. The book teaches readers strategies on how to successfully use value investing in the stock market. Historically, the book has been one of the most popular books on investing and Graham’s legacy remains. The Intelligent Investor is notable today, with many famous investors praising it for helping them learn how to determine value in the stock market and successfully pick stocks for their portfolios. The main analysis of the book is focused on value investing, the allegory of Mr. Market, Determining Value, and Margin of Safety.
“The thing that I have been emphasizing in my own work for the last few years has been the group approach. To try to buy groups of stocks that meet some simple criterion for being undervalued -- regardless of the industry and with very little attention to the individual company... I found the results were very good for 50 years. They certainly did twice as well as the Dow Jones. And so my enthusiasm has been transferred from the selective to the group approach.” Benjamin Graham
Warren Buffett has recommended “Intelligent Investor” countless times.
After all, “my financial life changed with that purchase [of ‘ The Intelligent Investor’],” Buffett wrote in his 2013 letter to Berkshire Hathaway shareholders. “Ben’s ideas were explained logically in elegant, easy-to-understand prose.”
Warren Buffett On The Intelligent Investor; Market Fluctuation 'Mr. Market' & Margin Of Safety. Chapters 8 & 20:
Much Thank you to Forbes for interview! www.forbes.comAnalysis:
- Value Investing
Graham’s main investment approach outlined in The Intelligent Investor is that of value investing. Value investing is an investment strategy that targets undervalued stocks of companies that have the capabilities as businesses to perform well in the long run. Value investing is not concerned with short term trends in the market or daily movements of stocks. This is because value investing strategies believe the market overreacts to price changes in the short term, without taking into account a company’s fundamentals for long-term growth. In its most basic terms, value investing is based on the premise that if you know the true value of a stock, then you can save lots of money if you can buy that stock on sale.
- Mr. Market:
The Intelligent Investor Chapter 8: The Investor and Market Fluctuations
Main article: Mr. Market
One of Graham's important allegories is that of Mr. Market, meant to personify the irrationality and group-think of the stock market. Mr. Market is an obliging fellow who turns up every day at the shareholder's door offering to buy or sell his shares at a different price. Often, the price quoted by Mr. Market seems plausible, but sometimes it is ridiculous. The investor is free to either agree with his quoted price and trade with him, or ignore him completely. Mr. Market doesn't mind this, and will be back the following day to quote another price.
The point of this anecdote is that the investor should not regard the whims of Mr. Market as a determining factor in the value of the shares the investor owns. He should profit from market folly rather than participate in it. A common fallacy in the market is that investors are reasonable and homogenous, but Mr. Market serves to show that this is not the case. The investor is advised to concentrate on the real life performance of his companies and receiving dividends, rather than be too concerned with Mr. Market's often irrational behavior.
- Determining Value
In The Intelligent Investor, Graham explains the importance of determining value when investing. To invest for value successfully and avoid participating in short-term market booms and busts, determining the value of companies is essential. To determine value, investors use fundamental analysis. Mathematically, by multiplying forecasted earnings over a certain number of years times a capitalization factor of a company, value can be determined and then compared to the actual price of a stock. Five factors are included in determining the capitalization factor, which are long-term growth prospects, quality of management, financial strength and capital structure, dividend record, and current dividend rate. To understand these factors, value investors look at a company's financials, such as annual reports, cash flow statements, and company executive’s forecasts and performance. This information is all available online as it is required for each public company by the SEC (Securities and Exchange Commission).
- Margin of Safety
The Intelligent Investor Chapter 20: Margin of Safety
Definition: Margin of Safety (MOS) is the principle of investing in which an investor only purchases securities when their market price is significantly below their intrinsic value.
Ben Graham called margin of safety “the secret of sound investment” and “the central concept of investment”.
Warren Buffett – One of the most successful investors in the world quotes “Margin of Safety are the three most important words in investing”
Graham also advocated for an investing approach that provides a margin of safety—or room for human error—for the investor. There are a couple of ways to accomplish this, but buying undervalued or out-of-favor stocks is the most important. The irrationality of investors, the inability to predict the future, and the fluctuations of the stock market can provide a margin of safety for investors. Investors can also achieve a margin of safety by diversifying their portfolios and purchasing stocks in companies with high dividend yields and low debt-to-equity ratios. This margin of safety is intended to mitigate the investor's losses if a company goes bankrupt.
The Intelligent Investor FAQs
What Does The Intelligent Investor Teach You?
The Intelligent Investor is widely considered to be the definitive text on value investing. According to Graham, investors should analyze a company's financial reports and its operations but ignore the market noise. The whims of investors—their greed and fear—are what creates this noise and fuels daily market sentiments.
Most importantly, investors should look for price-value discrepancies—when the market price of a stock is less than its intrinsic value. When these opportunities are identified, investors should make a purchase. Once the market price and the intrinsic value are aligned, investors should sell.
About the Author
- Publisher : Harper Business; Revised ed. edition (February 21, 2006)
- Language: : English
- Paperback : 640 pages
- ISBN-10 : 9780060555665
- ISBN-13 : 978-0060555665
- Item Weight : 1.06 pounds
- Dimensions : 5.31 x 1.6 x 8 inches
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