Please enable JavaScript.
Coggle requires JavaScript to display documents.
The intelligent investor - Coggle Diagram
The intelligent investor
-
Base decisions on the value of the underlying business. When you’re buying shares — ask yourself if you’d be willing to buy the whole company for the valuation implied by that share price. Graham’s approach is built on analyzing businesses and not analyzing securities or trying to time the market.
Markets are fickle and market prices are largely meaningless. Don’t let market prices dictate your actions. Rather, view the market as a benefit. The market offers liquidity and provides the opportunity to buy more of a great investment or get out of an underperforming one.
The key concept of this book is “Margin of Safety”. Buy stocks that are clearly underpriced in the market. Look for “no brainer opportunities”, so even if your calculations were a little bit off or specific assumptions about future prospects don’t materialize, you’re still likely to earn a profit. These opportunities are hard to find, but worth waiting for.
The higher the price the riskier the investment. At a high price your margin of safety shrinks. Some of the biggest losses come from buying bad stocks in a bull market.
Dollar-cost averaging is critical. Make purchases every month so you buy at a variety of prices and smooth out regular market fluctuations. Employee contributions to 401(k) plans or IRAs are a great way to accomplish this.
That being said, don’t ignore the performance of your investments. It’s important to be an intelligent investor and an intelligent owner. Read proxy statements, 10-Q filings, etc., and make sure the company is performing.
Obvious growth in an industry does not translate to good investment returns. Graham uses the example of the airline industry. It was clear in the early days that the industry would experience dramatic growth. Yet, it’s been absolutely terrible for investors.
Buying lightly-traded stocks is risky. Even if you find a great opportunity that the market grossly undervalues, it may take a very long time for the market to realize and the price to correct. (Given higher trading volumes, algorithmic trading, etc., I imagine this is less relevant today than it was at the time of Graham’s writing)
-
-
Buy a mix of stocks and bonds. A 50/50 mix of low cost stock and bond index funds is a good starting point. Revise based on your risk tolerance, but don’t put more than 75% of your investments in one or the other.
-
-
-
-
Investing up to 33% of stock portfolio (i.e. up to 16.6% to 25% of total portfolio) in low cost index funds focused on foreign stocks.
The good news: being a defensive investor is easy, particularly with the abundance of low cost index funds. The bad news: it’s boring. Zweig offers the suggestion of actively managing up to 10% of your portfolio if you’re feeling the itch to be more hands-on.
-
If you want to take the leap and be an Enterprising Investor, Zweig suggests testing the waters with a portfolio tracker for one year before putting any money at risk. If you’re unsuccessful or don’t like it — you haven’t done any harm and can go back to being Defensive.
· The first step is to identify financially sound businesses. Graham’s approach is all about identifying undervalued — but sound — companies, not taking speculative risks. Graham’s suggested criteria (updated by Zweig in 2006) that a company should meet are as follows:
-
-
-
-
-
As mentioned above, Margin of Safety is the key concept. After identifying companies that meet the standards above, Graham recommends only purchasing securities that offer a large margin of safety. Graham and Zweig offer some criteria to look for:
-
-
Companies where the product of the P/E ratio and Price / Book Value ratio is less than 22.5. When calculating, use average earnings over the last three years. [Note: P/E ratios can be a useful first screen, but can be misleading. If a company reported a year of bad earnings, resulting in a disproportionate drop in share price, the P/E ratio may appear excessive even though it could be a great investment. The converse is also true if unexpected good news caused a disproportionate increase in share price]
Examine the inverse of the P/E ratio (E/P ratio). If E/P (which is essentially earnings yield) is greater than the bond yield that could be supported by the company, the stock is worth considering
My own notes
-
investment funds/mutual funds bring a lot of costs that will eat up big amounts of potential profits
for a company to be considered large, it should have a total stock value or also called ''market capitalization'' of at least $10 billion dollars
-
'blessed, is he who expects nothing, for he shall not be disappointed.'' staying humble about your forecasts will prevent you from risking too much.
first trust, then verify a financial adviser
two good hedges for inflation are Reits, real estate investment trusts and Tips, which are treasury inflation protected securities
red flags: unexpected, sharp change in strategy, increase in expenses (managers are cashing), large and frequent tax bills (excessive trading), sudden huge wins/losses
-
-
things to keep in mind when analyzing a company: the company long term prospects, the quality of its management, its dividend record, its financial strenght and capital structure, its current dividend rate
-
-
review at least 5 years worth of 10k reports, either from the companies website or from the database at www.sec.gov.
when you think it can not go any further, now that it can
are they managers or promoters (just focusing on getting investors to invest their money or truly trying to build something
-