Book Review – The Intelligent Investor
Benjamin Graham wrote what is considered today one the classics on investing The Intelligent Investor. He provides deep and insightful principles on stock analysis, assets allocation, business analysis but more importantly behavioural advice on attitude towards investing in the stocks market.
The book was written mostly in the U.S. context of the sixties and seventies however with the information overload existing today in TV channels, online news portals and social media it is important to go back to basic principles and stay focused on our own plan, strategy and goals.
Below I have outlined some the key lessons that I learned from this book:
Average Results: investors cannot expect to get better portfolio performance than the average of the market in the long term and in fact attempting to beat the market by buying ‘quick profit’ shares could end up resulting in performing below average.
For this reason, many investors opt to apply a strategy called dollar-cost averaging which basically means investing the same amount of money in stocks each month or quarter so that they can balance the times that the market goes up and down. Some may argue that this is not practical because we can have fluctuations of income during some periods of our life therefore the way I do it is to plan the amounts that I’m going to invest every month regardless of what the market is doing and buy more stocks. Usually when my plans are very clear I notice I get less eventualities that can interfere with my plan. Benjamin Graham provides references to studies that have been conducted on dollar-cost averaging.
Buying Gold: in some economies around the world people have decided to buy gold to protect their money from the effects of a high inflation, however, from an investing perspective this can put the investors in disadvantage because they have to pay for storage and the gold would not be providing any return (it’s not an asset). It may be better to put their money in a savings account.
Rate of return vs. effort: investors shall expect a rate of return from their investments in accordance with the amount of effort they are willing to put into the whole process of investing. This involves doing research, reading financial information and taking action. For this reason, he differentiates between the passive investor and the active or enterprising investor. He suggests specific strategies for both regarding asset allocation, diversification, record of dividend payments and types of companies according to their preference of risk exposure.
Market Fluctuations: investors cannot trust market predictions seriously because often there’s no basis in logic or experience on which to make these predictions. Some investors pay attention to these because they need a guide and trust what others guess the market will do. This has become in many cases a way to make money for many “experts”.
Timing the market can be a psychological tool for speculators who want to make a quick profit, but for the average investor waiting for the “right” time to buy can become a very long time.
True investors rarely need to sell their shares, they can benefit from keeping them long term, however paying attention daily to someone’s judgement of the market price can be a real disadvantage and distraction. In some cases, investors will do better if they ignore market prices and pay attention to dividend returns and the financial results of their companies.
One of the wealthiest men in the world, Warren Buffett, shared this piece of advice in the annual letter to his shareholders in 2014:
“Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important. (When I hear TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle’s scathing comment: “You don’t know how easy this game is until you get into that broadcasting booth.”)”
Investment Funds: one investing strategy for some investors is to buy shares in investment companies, this allows for investors to diversify their money into various companies and mitigate the risk. Benjamin Graham explains that the average individual who has invested exclusively in investment funds in the last 10 years (early seventies) has experienced higher returns than those who bought individual stocks only.
He advises investors to pay attention to those funds that have high costs and that attempt to beat the market because this can involve various forms of risk.
Financial Advice: those investors who decide to rely completely on financial advisers must choose a standard and conservative strategy or must have a strong knowledge of the person who is going to manage their investments. However, intelligent investors will not make their investment decisions relying exclusively on financial advice from others, they take full responsibility to grow themselves in knowledge and experience to the point where financial advice is merely a suggestion.
Stock Analysis and Selection Criteria: the process of analysis of stocks involves both, a qualitative and quantitative approach. The qualitatively approach includes factors such as prospects of the business and management, which are not measurable but still are highly important. The quantitative approach includes measurable factors including financial strength of the company, uninterrupted of dividend payments and dividend rate. Graham presents several methods for individual stocks selection but expresses his doubts about the probability of obtaining better results than the market by doing this.
Overall, I think this book is suitable for those who already understand some basic concepts of investing. The reader can learn specific metrics used to study and compare stocks through several examples which are great for those trying to understand what to monitor in their portfolio. Undoubtedly the biggest lesson was understanding the way the author thinks which assists readers to develop their own judgement and momentum to educating themselves for as long as they are investing.