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I am collaborating with Joseph Hogue, Chartered Financial Analyst (CFA) on a chapter-by-chapter review and analysis of The Intelligent Investor: The Definitive Book on Value Investing by Benjamin Graham.
We are reviewing the latest edition of the book that contains a preface by Warren Buffett, billionaire investor and Graham student, and commentary by Jason Zweig, a financial journalist who now writes a column for the Wall Street Journal. This edition covers investment history and Graham's insights on current events through 1972. Zweig's commentary is more recent, written from a 2006 vantage point.
Graham teaches investors to make decisions based on discipline, not emotion
In The Intelligent Investor, Graham sets out investing frameworks. These allow investors to make decisions that rely on an investment plan and policy, not an emotional reaction to activity in the stock and bond markets.
He also describes two types of investors for which he writes his book:
- Defensive investors or passive investors (aka lazy investors) who seek to 1) avoid mistakes and 2) be free from “effort, annoyance, and the need for frequent decisions”; they can expect average performance compared to the market (or less, depending on their stock-bond allocations)
- Enterprising investors or active or aggressive investors who are willing to spend the time and effort in selecting securities that are attractive and sound; they may be able to achieve above-average performance
Both of these types of investors are distinct from speculators, most of whom make short-term trading decisions based solely on market activity and not underlying value.
Investing wisdom draws on knowledge of historical patterns
Graham says “To invest intelligently in securities one should be forearmed with an adequate knowledge of how the various types of bonds and stocks have actually behaved under varying conditions — some of which, at least, one is likely to meet again in one's experience.”
I've noticed that investing circumstances tend to ebb and flow, often in conjunction with economic growth and slowdowns as well as investors' excitement and skepticism.
Consistency of historical patterns of market gains and retreats, however, doesn't mean predictability. Pinpointing the exact timing and nature of stock movements is difficult, if not impossible — even for the most intelligent of investors.
Application of investing wisdom should be adapted to current circumstances
The Intelligent Investor is a classic and Graham's wisdom, timeless. The principles of investing presented by Graham hold true in varied economic and investing climates. Still, how this wisdom is applied in making investment decisions can change to address varied circumstances. Graham writes: “The underlying principles of sound investment should not alter from decade to decade, but the application of these principles must be adapted to significant changes in the financial mechanisms and climate.”
The investing climate of the 1970s referenced in the book may seem foreign to today's investor. At the time, interest rates on bank savings accounts were similar to those of high-grade bonds; high-grade bonds offered desirable rates of 6% or more. These rates were much higher than the then-prevailing dividend returns from stocks of similar quality.
Graham noted that this situation was unlikely to endure. But he mentioned it as a way of demonstrating that a stock-bond allocation ranging from 25-75 to 75-25 can make sense in a wide range of investing environments.
Further, in the time between Graham's writings and this latest edition's publication, many investment products have been launched and types of accounts introduced. These financial mechanisms include:
- Index funds, which were introduced by John Bogle at Vanguard in 1975
- ETFs, launched in the United States in 1993
- Target-date funds, introduced in 1994
- REITs became packaged in a way that made them accessible to average investors in the 1990s
- IRAs, which were introduced in 1974
- Roth IRAs, introduced in 1997
- 401(k) Plans, which companies started to introduce in the late 1970s and early 1980s
- Roth 401(k) Plans, which companies were allowed to offer in 2006
- 529 Plans, which were introduced in the 1990s
Knowing that new products and and accounts have been introduced since Graham wrote The Intelligent Investor may help readers understand the general principles being discussed. In this regard, Zweig's commentary after each chapter is useful in putting Graham's words and ideas in a more contemporary, understandable context.
The chapter-by-chapter reviews may also be helpful.
- Chapter 1 >> Hot Stocks and The Intelligent Investor at My Stock Market Basics by Joseph Hogue, CFA
- Chapter 2 >> Why Your Investments are Worth Half as Much as You Think at My Stock Market Basics by Joseph Hogue, CFA
- Chapter 3 >> 3 Simple Steps to Timing the Market at Peer Finance 101 by Joseph Hogue, CFA
- Chapter 4 >> How to Create a Portfolio Policy for the Lazy Investor at Investing to Thrive by Julie Rains
- Chapter 5 >> 4 Simple Investing Rules for Stocks My Stock Market Basics by Joseph Hogue, CFA
- Chapter 6 >> 3 Stock-Picking Strategies that Work and Two to Avoid at My Stock Market Basics by Joseph Hogue, CFA
- Chapter 7 >> How to Beat the Market as an Enterprising Investor at My Stock Market Basics by Joseph Hogue, CFA
- Chapter 8 >> Market Fluctuations: How to Act When They Happen at Investing to Thrive by Julie Rains
- Chapter 9 >> ETF Investing and How to Save $162,000 at My Stock Market Basics by Joseph Hogue, CFA
- Chapter 10 >> The Truth About Investment Advisors at My Stock Market Basics by Joseph Hogue, CFA
- Chapter 11 >> Simple Stock Analysis for Regular Investors and 4 Warning Signs at My Stock Market Basics by Joseph Hogue, CFA
- Chapter 12 >> Finding Tricks and Traps in Income Statements at Investing to Thrive by Julie Rains
- Chapter 13 >> 5-Minute Checklist to Compare Stocks to Buy at My Stock Market Basics by Joseph Hogue, CFA
- Chapter 14 >> 6 Simple Rules for Picking Stocks for Everyday Investors at My Stock Market Basics by Joseph Hogue, CFA
- Chapter 15 >> Beat the Stock Market with Proven Strategies at My Stock Market Basics by Joseph Hogue, CFA
- Chapter 16 >> Convertible Bonds, Understanding How They Work at Investing to Thrive by Julie Rains
- Chapter 17 >> How to Avoid Bubbles and Busts in the Stock MarThe Iteket at My Stock Basics by Joseph Hogue, CFA
- Chapter 18 >> The Worst Chapter in the Best Investment Book at My Stock Basics by Joseph Hogue, CFA
- Chapter 19 >> Dividends May Not Be As Important As You Think for Investors at My Stock Market Basics by Joseph Hogue, CFA
- Chapter 20 >> The Intelligent Investor's Motto: Margin of Safety at Investing to Thrive by Julie Rains
Let us know what you think about The Intelligent Investor and our chapter-by-chapter reviews.