Review of The Intelligent Investor by Benjamin Graham

The Intelligent Investor

The Intelligent Investor written by Benjamin Graham is probably the most influential book on value investing. It was published in 1950. Benjamin Graham is the mentor of famous and successful investor Warren Buffet. Warren wrote the preface of the revised edition. In this book, Benjamin Graham lays out some philosophy and techniques of investment. By following some investing ideas and investment principle, anyone can beat the market. This book is not about how to get great stocks to invest. There is no illustration of a specific strategy of application of theories which can make anyone rich. The purpose of the book is to build a mindset, which is far more important and valuable to set an investment strategy in long run.

Chapter Summary

Benjamin Graham highlighted investing function by comparing with speculation. His opinion is, an investment must fulfill three criteria: it has to go through analysis which is considered as fundamentals; there is a minimum safety of not losing capital and investment is something that provides, a return for advantageous risk and there is a tradeoff between them. The bulk of the first half of the book discusses about the portfolio policy. The construction of the portfolio of two types (Passive and active) of investors differs in a significant way. Both types of investors are intelligent which means they are disciplined, patient and eager to learn.

Themes

The chapters of the book are organized into three basic themes. First of all, the author started with giving the examples why some stocks are undervalued in the market. This can occur for various reasons such as, one-time events which have a connection to the particular company; the stock is out of favor with Wall Street, a bad quarter etc. An investor needs to make sure that the there is no impact of undervaluation on its earnings and revenues. The purpose of the analysis is to find financially sound company but out of the favor of the market.

Investment Strategy

The author asserts that good companies can be found from the low price to book value ratio for example 1.4 or below that. There are some companies which have below 1 price to book value ratio which means that the price of the stock is almost equal to the value of the company’s assets. These companies have less downside risk because and have an upside potential since the financial health of the company is great. Investors should not be short-sighted since to recognize diamond they have to give some time for it.

One-Time Events

Benjamin Graham emphasized on the one-time events because they can play on investing success. Sometimes the market follows the positive news and negative news. Negative news on a financially healthy company tells that is a great buying opportunity for an investor. A market can respond the retirement of a CEO of a successful company negatively which results in a shock in stock price (Gide 351). The company is still financial healthy so an investor can get the stock at a better value. The last half of the book describes how an investor can analyze individual stock or bond.

Arguments Against the Investment Strategy

There are some arguments against this investment strategy because a market is too efficient and technology makes the information so fast that the advantages are eliminated. Graham forbids depending on what people are saying because they may repeat the analysis of someone else. Buying and holding mix of value stock can equal the performance of the average market and sometimes beat the market average. He also suggested holding some bonds which can be 25%-50% of total investment. Bond is necessary for marginal safety as it gives an investor a steady return. The author has also talked about the inflation. He stated there is no time connection between the price index of market and earnings of common stock. Inflation is a crucial factor as it reduces the real earning of an investor. The only way an investor can raise his income is increasing the rate of earnings on capital.

Revisions and Relevance

The Intelligent Investor has been revised periodically a number of times by Graham after releasing it in 1949. When the book was published, it had created a vibe in a market that changed the point of view of the investors. The philosophy of Graham later was supported by many academicians and scholars. Graham revised the book multiple times until 1976. Warren Buffet and Jason Zweig a revised book published in 2003 which updates only the commentaries on each chapter to add better explanations. The market is changing rapidly day by day. Though the basic notions and principles of investment have not changed, mechanism of the market has changed in a significant way. Information travels faster than before, so it is very difficult to make a profit from the unattractive investment (Samaras 355). Though the world has changed and certain styles will not work today as it was during that time the principles of Benjamin Graham are still relevant today.

Personal Learning

Personal learning from the book which has changed the knowledge

Best learning of the book is principles of business and investments for example according to Benjamin market is a pendulum which swings between optimism and pessimism. The future value of the investment is the function of the present price of a stock So the higher price paid the lower return will be. I have learned that an investor has to be patient and confident as well as he has to think of a business while investing in any asset. An investor should not try to make an excess profit out of the securities except the interest of dividend income.

Behavioral Issues

The author told about the mindset of an investor which is far more important than illustrating techniques because the behavioral issues have a great impact on decision making. Fear and greed are the most cited drives which can cause investors to bid up a price of stocks to an overvalued level during the period of good news or push the stocks unreasonably low during a bad event hits. An interesting learning is that an investor can easily align his attitude to investment with his technical knowledge of investing in assets. Making investment is not like gambling in a casino because every security may be viewed as the ownership of interest or claim against the specific business enterprise.

Problems Faced by Investors

Benjamin Graham understood that the problems and major enemies of investor are knowledge of finance, emotional disturbance, and lack of confidence. Only the knowledge of business, accounting and finance cannot lead to success until the emotions are controlled. An intelligent investor exploits the foolish decision of other investors. Stock screening is the first process no matter how well the stock performed historically. An intelligent investor considers the financial strength of a company, match with the own risk tolerance and time horizon.

Works Cited

Gide, Pierre-Axel. “’The New, Patient, Focused Intelligent Investor’: Dividends, Hedge Funds, and Active VS Passive Investing”. International Finance, vol 15, no. 5, 2017, pp. 345-356. Elsevier BV, doi:10.2139/ssrn.2957990.

Samaras, Georgios D., and Nikolaos F. Matsatsinis. ”Intelligent Investor: An Intelligent Decision Support System For Portfolio Management”. Operational Research, vol 4, no. 3, 2004, pp. 357-371. Springer Nature, doi:10.1007/bf02944152.