A short summary of The Intelligent Investor by Benjamin Graham.
The book was first published in 1949 by Benjamin Graham; the famous investor Warren Buffett described it as “by far the best book on investing ever written”
Never have less than 25% or more than 75% of funds in common stocks.There should be adequate though not excessive diversification; this might mean a minimum of 10 different issues and maximum of about 30.
Investors should impose some limit on the price they will pay for an issue in relation to its average earnings over, say, the past seven years. We suggest that this limit be set at 25 times its average earnings, and not more than those of the last twelve month period.
A company’s finances are not conservative unless the common stock (at book value) represents at least half of the total capitalization, including all bank debt.
Five Fields of Recommendation for Enterprising Investment
The relatively unpopular large company: Companies that are out of favor because of unsatisfactory developments of a temporary nature.
Two majors sources of undervaluation: (1) Currently disappointing results, and (2) protracted neglect or unpopularity
Companies that are inherently speculative because of widely varying earnings tend to sell both at a relatively high price and at a relative low multiplier in their good years, and conversely at low prices and high multipliers in their bad years.
Bargain issue purchases: An issue is not bargain unless the indicated value is at least 50% more than price. Bargain prices are defined as prices not more than two-thirds of the appraisal value of securities.
The type of bargain issue that can be most readily identified is a common stock that sells for less than the company’s net working capital alone, after deducting all prior obligations.
The true investor is scarcely ever forced to sell his shares, and at all other times, he is free to disregard the current price quotation.
The investor with a portfolio of sound stocks should expect prices to fluctuate and should not be concerned by sizable declines or get excited about sizable advances. He should never buy a stock because it has gone up or sell one because it has gone down.
Note on the Concept of “Risk”
If a group of well selected common-stock investments shows a satisfactory overall return, as measured through a fair number of years, then this group investment has proved to be “safe”. During that period its market value is bound to fluctuate, and as likely as not it will sell for a while under the buyer’s cost. If that fact makes the investment “risky”, it would then have to be called both risky and safe at the same time. This confusion may be avoided if we apply the concept of risk solely to a loss of value which either is realized through actual sale, or is caused by a significant deterioration in the company’s position.
On Stock Selection
- Adequate size of the enterprise: No less than $100 million of annual sales for an industrial company, and no less than $50 million of total assets for the public utility.
- Sufficiently strong financial conditions: Current assets should be at least twice current liabilities. Long-term debt should not exceed (110%)net current assets (or working capital).
- Earnings stability: Some earnings for the common stock in each of the past five years.
- Dividend record: Uninterrupted payments for at least the past 20 years.
- Earnings growth: A minimum increase of at least one-third in per-share earnings over the past ten years using three-year averages at the start and finish.
- Price: Less than 120% net tangible assets.
- Moderate price/earnings ratio: Current price should not be more than 15 times average earnings over the past three years.
- Moderate price-to-assets ratio: Current price should not be more than 1.5 times the book value last reported. However, a multiplier of earnings below 15 could justify a correspondingly high multiplier of assets. As a rule of thumb, we suggest that the product of the multiplier times the ratio of price to book value should not exceed 22.5.
The buyer of bargain issues places particular emphasis on the ability of the investment to withstand adverse developments. For the enterprising investor, this means that his operations for profit should be based not on optimism but arithmetic.
Have the courage of your knowledge and experience. If you have formed a conclusion from the facts and if you know your judgment is sound, act on it — even though others may hesitate or differ.
To achieve satisfactory investment results is easier than most people realize, to achieve superior results is harder than it looks.
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