Intelligent Investor - Benjamin Graham

• Investing consists equally of 3 elements:

  • You must thoroughly analyze a company, and the soundness of its underlying businesses, before you buy its stock 

  • You must deliberately protect yourself against serious losses

  • You must aspire to be “adequate”, not extraordinary performance

• Two inflation-fighters

  • REITS - Companies that own and collect rent from commercial and residential properties. Unlikely to be a foolproof inflation fighter, but in the long run it should give you some defense against the erosion of purchasing power without hampering your overall returns 

  • TIPS - Treasury Inflation-Protected Securities are US government bonds that automatically go up in value when inflation rises. Safe from risk of default. 

• The stock market’s performance depends on 3 factors: 

  • Real growth (the rise of companies’ earnings + dividends)

  • Inflationary growth (the general rise of prices throughout the economy)

  • Speculative growth-or decline (any increase or decrease in the investing public’s appetite for stocks)

• Misconception about risk 

  • Everyone seems to think risk is inversely correlated with age i.e the older you are the less risk you should take on (higher proportion in bonds vs common stocks)

    • Old way of thinking was 100 minus age = proportion of portfolio in stocks

  • But there are too many variables in this. An 80 year old woman should invest only 20% in equities, but what if she’s sitting on pile of cash and has successful children and grandchildren? What if a 30 year old has an upcoming wedding he needs to save for?  

• 2 major sources of undervaluation 

  • Currently disappointing results 

  • Protracted neglect or unpopularity

• “A great company is not a great investment if you pay too much for the stock” 

• Point on growth stocks

  • In 2002, Johnson & Johnson announced some investigation of false record keeping at a drug factory. Stock lost 16% in a single day

  • Multiple went from 24x to 20x. At that level you’re getting an excellent business at a better price.

• Between 1897 and 1949 there were 10 complete market cycles (bear to bull and back to bear low) 

  • 6 of these took less than 4 years, 4 ran for 6-7 years and 1 lasted 11 years. 

  • % of advance from lows to highs ranged from 44%-500%, with most between 50 to 100%

  • % of subsequent declines ranged from 24-89% with most found between 40-50%

    • A decline of 50% fully offsets a preceding advance of 100%

• Nearly all the bull markets had a number of characteristics

  • Historically high price level

  • High P/E

  • Low dividend yields as against bond yields

  • Much speculation on margin 

  • Many offerings of new common-stock issues of poor quality

• 5 elements that determine how much yous hould be willing to pay

  • Company’s general long term prospects

  • Quality of management

  • Financial strength + capital structure

  • Dividend record

  • Current dividend rate

• When looking through the annual/quarterly reports, look for the following:

  • What makes the company grow? 

  • Where do (and where will) its profits come from? 

• Today’s investor is so concerned with anticipating the future that he is already paying handsomely for it in advance. Thus what he has projected with so much study and care may actually happen and still not bring him any profit. If it should fail to materialize to the degree expected he may in fact be faced with a serious temporary and perhaps even permanent loss