The Intelligent Investor by Benjamin Graham, Jason Zweig & Warren E. Buffet (Summary)

“In this concise summary of The Intelligent Investor, you will discover my essential takeaways organized chronologically, designed to save time and serve as a convenient reference for future use. When relevant, I include a personal note to express my opinion or key take-away from the text, adding a personalized touch to the summary. To dive deeper into the complete book, I have provided an affiliate link to Amazon, where you can effortlessly purchase it for global delivery.” – Jeroen Snoeks.

How “The Intelligent Investor” Broadened My Perspective

After reading Mr. Warren Buffet description of The Intelligent Investor, describing it as “by far the best book ever written about investing”, my curiosity was piqued to delve deeper into Buffet’s acclaimed concepts of Mr. Market and the margin-of-safety principle.

Inherently attracted to robust balance sheets, I naturally gravitate towards a fundamental approach in the stock market. From my perspective, technical analysis primarily serves as a timing tool. Thus, upon reading the introduction to this enlightening book, I was instantly captivated and finished the book in no-time.

As time has progressed, I’ve revisited “The Intelligent Investor” on multiple occasions, each reading serving as a reaffirmation of the timeless principles the book clearly expounds.

In the following sections, I’ve detailed my key takeaways from each chapter in the same order they appear in the book. This structure should make it easier for you to cross-reference any particular chapter if you decide to delve deeper into the subject matter.

Preface to the Fourth Edition, by Warren E. Buffet

Warren Buffet advises to pay special attention to Chapters 8 and 20 to get the best out of your investments.

Introduction: What This Book Expects to Accomplish

The one principle that applies to nearly all the so-called “technical approaches” is that one should buy because a stock or the market has gone up and one should sell because it had declined. This is the exact opposite of sound business everywhere else, and it is most unlikely that it can lead to lasting success on Wall Street.

Commentary on the Introduction

This book will teach you three powerful lessons:

  1. How you can minimize the odds of suffering irreversible losses;
  2. How you can maximize the changes of achieving sustainable gains;
  3. How you can control the self-defeating behavior that keeps most investors from reaching their full potential.

An “intelligent investor” has nothing to do with IQ or SAT scores. It simply means being patient, disciplined and eager to learn; you must also be able to harness your emotions and think for yourself. This kind of intelligence, explains Graham, “is a trait more of the character than of the brain”.

Chapter 1 Investment versus Speculation: Results to be expected by the Intelligent Investor

Try to find bargain issues easily identified as such that they were selling at less than their share in the net current assets alone, not accounting the plant account and other assets, and after deducting all liabilities ahead of the stock.

Personal note:

Use a Market Screener to find stocks according to the following formula:

Market price < (Current Assets – Total Liabilities) / Total Shares Outstanding

Commentary on Chapter 1

Graham’s definition on investing: “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return.” Thus, investing consists equally of three elements:

  1. You must thoroughly analyze a company, and the soundness of its underlying businesses, before you buy its stock;
  2. You must deliberately protect yourself against serious losses;
  3. You must aspire to “adequate”, not extraordinary, performance.

Chapter 6 Portfolio Policy for the Enterprising Investor: Negative Approach

As an investor you should be wary of newly issued shares (initial stock offerings or IPO’s), which means that they should be subjected to careful examination before they are purchased – especially at the top of a market cycle. The reason for this is that IPO’s are normally sold with an “underwriting discount” (a build-in commission) and when they are sold at the top of a market cycle the changes are that the conditions are more favorable to the seller and consequently less favorable for the buyer.

In addition, when newly issued shares are sold at the bottom of the market cycle, you should be wary too, as these shares could be reasonably priced.

Chapter 7 Portfolio Policy for the Enterprising Investor: The Positive Side

Four characteristics of the enterprising investor in the common stock field:

  1. Buying in low markets and selling in high markets.
  2. Buying carefully chosen “growth stocks”.
  3. Buying bargain issues of various types.
  4. Buying into “special situation”.

Commentary on Chapter 7

In an ideal world, the intelligent investor would hold stocks only when they are cheap and sell them when they become overpriced, then duck into the bunker of bonds and cash until stocks become cheap enough to buy.

Chapter 8 The Investor and Market Fluctuations

Two ways to profit from wide fluctuations in share prices (the pendulum swings):

  1. Timing: to buy or hold when the future course is deemed to be upward, to sell or refrain from buying when the course is downward.
  2. Pricing: to buy stocks when they are quoted below their fair value and to sell them when they rise above such value.

Personal note:

Timing is of no real value to the investor unless it aligns with pricing – specifically, if it allows them to purchase the shares below their fair value.

Nearly all bull markets had a number of well-defined characteristics in common, such as:

  • a historically high price level;
  • high price/earnings ratios;
  • low dividend yields against bond yields;
  • much speculation on margin;
  • many offerings of new common stock issues of poor quality.

Personal note:

Bear market characteristics (according to Google):

  • Investors turn pessimistic;
  • Stock values decline (often below book value) and more companies are loosing money;
  • Market declines at least 20%;
  • A rise in short selling to bet that the market continues to go down;
  • A decline in IPO’s.

Selection criteria for the conservative investor in common stocks:

  • Pay no more than one-third above the tangible asset value;
  • A satisfactory ratio of earnings to price;
  • A sufficiently strong financial position;
  • The prospect that its earnings will at least be maintained over the years.

Concept of Mr. Market

Everyday Mr. Market tells you what your company’s interest is worth and furthermore offers either to buy you out or to sell you an additional interest on that basis. Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them. Often, on the other hand, Mr. Market lets his enthusiasm or his fears run away with him, and the value he proposes seems to you a little short or silly.

Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.

Commentary on Chapter 8

“”The happiness of those who want to be popular depends on others; the happiness of those who seek pleasure fluctuates with moods outside their control; but the happiness of the wise grows out of their own free acts.” – Marcus Aurelius.

Commentary on Chapter 10

Don’t stop your due diligence once you hire an adviser. Here is the kind of lingo that should set off warning bells:

“offshore”, “exclusive”, “the opportunity of a lifetime”, “You should focus on performance, not fees”, “prime bank”, “Don’t you want to be rich?”, “guaranteed”, “can’t lose”, “You need to hurry”, “This upside is huge”, “It’s a sure thing”, “There’s no downside”, “our proprietary computer model”, “I’m putting my mother in it”, “The smart money is buying it”, “Trust me”, “It’s a no-brainer”, “You can’t afford not to won it”, “We can beat the market”, “We can cap your downside”, “You’ll be sorry if you don’t …”, “No one else knows how to do this”

Commentary on Chapter 11

Warnings for potential stocks to buy:

  • The company is a serial acquirer. If the company itself would rather buy the stock of other businesses than invest in its own, shouldn’t you take the hint and look elsewhere too?
  • The company is an OPM addict. If the company keeps borrowing debt or selling stock to raise Other People’s Money (look at “cash from financing activities” on the company’s cash flow statement).
  • The company is a Johnny-One-Note. If the company relies on one customer (or a handful) for most of its revenues.

Positive signs for potential stocks to buy:

  • The company has a wide moat (or competitive advantage). Examples: a strong brand identity (Harley Davidson); a monopoly or near-monopoly on the market (Gillette); a unique tangible asset (Coca-Cola’s formula); a resistance to substitution (Utility companies).
  • The company is a marathoner, not a sprinter. Companies that see revenues and net earnings to have grown smoothly and steadily over the past (10) years are preferred.
  • The company sows and repeats. A company must spend some money to develop new business (look at Research & Development expenses).

A company’s executives should say what they will do, then do what they said. Read the past annual reports to see what forecasts the managers made and if they fulfilled them or fell short. Managers should forthrightly admit their failures and take responsibility for them, rather than blaming all-purpose scapegoats like “the economy”, “uncertainty”, or “weak demand”.

Five signs which imply management does not act in the interest of the people owning the company:

  1. Overpaying its CEO;
  2. Repricing the company’s stock options for insiders;
  3. Broad insider selling;
  4. Executives spend more time promoting the company than managing it;
  5. If “non-recurring” charges keep “recurring”, if “extraordinary” items seem “ordinary” or do acronyms like “EBITDA” take priority over “net-income”, be careful!

A good business generates more cash than it consumes. Good managers find ways of putting that cash to productive use. Has “cash from operations” (see cashflow statement) grown steadily throughout the past (10) years? Only then look further!

Chapter 12 Things to Consider About Per-Share Earnings

The more seriously investors take the per-share earnings figures as published, the more necessary it is for them to be on their guard against accounting factors of one kind and another that may impair the true comparability of the numbers. Three factors to watch:

  1. The use of special charges.
  2. The reduction in the normal income-tax deduction by reason of past losses.
  3. The dilution factor implicit in the existence of substantial amounts of convertible securities or warrants.

Chapter 14 Stock Selection for the Defensive Investor

Current price should not be more than 1.5 the (tangible) book value last reported. However a multiplier of earnings below 15 could justify a correspondingly higher multiplier of assets. As a rule of thumb we suggest that the product of the multiplier times the ratio of price to (tangible) book value should not exceed 22.5. Clarification: 1.5 Price to Tangible Book Value x 15 P/E ratio = 22.5, or 2.5 Price to Tangible Book Value x 9 P/E ratio = 22.5.

Personal note:

To find potential companies for my portfolio, I recently made use of a stock screener which selects companies trading at 0.4 Price to Tangible Book Value and a Price to Earnings ratio of 10, resulting in value of just 4. Just to give an idea that Graham’s values above are not extreme. (Of course, when companies comply with such low multipliers, it’s still just a starting point for further due diligence.)

Commentary on Chapter 14

When institutions own approximately 60% of a company’s shares the stock is “over-owned”. When the share prices of these decline, they tend to move in lockstep, with disastrous results for the stocks’ share price.

Personal note:

In financial crisis, quality companies with a high percentage of institutional ownership often become a bargain as institutions seem to sell their positions with no regard to the underlying fundamentals of a company. Therefor, use a market screener and add the percentage of institutional ownership when the market is in a cyclical low to find buying opportunities.

Chapter 15 Stock Selection for the Enterprising Investor

We suggest the following five criteria to find buying opportunities:

  1. Financial condition: Current assets at least 1.5 times current liabilities (the “Current Ratio”) and debt no morethan 110% of net current assets (for industrial companies).
  2. Earnings stability.
  3. Dividend record: Some current dividend
  4. Earnings growth.
  5. Price: Less than 120% Net Tangible Assets.

Personal note:

As a fundamental focused investor, I believe the first criteria is the most important. However, in stead of using the Current Ratio, I prefer to use the Quick Ratio (which excludes inventory from the current assets), unless it’s a resource company whose inventory seems highly liquid to me.

Commentary on Chapter 15

An all-too-brief summary on Warren Buffet’s approach:

He looks for what he calls “franchise” companies with strong consumer brands, easily understandable businesses, robust financial health, and near-monopolies in their markets. Buffet likes to snap up a stock when a scandal, big loss, or other bad news passes over it like a storm cloud. He also wants to see managers who set and meet realistic goals; build their businesses from within rather than through acquisition; allocate wisely; and do not pay themselves hundred-million-dollar jackpots of stock options. Buffet insists on steady and sustainable growth in earnings, so the company will be worth more in the future than it is today.

Commentary on Chapter 16

About Covered Call Options: For individual investors, covering your downside is never worth surrendering most of your upside.

Commentary on Chapter 19

Paying out a dividend does not guarantee great results, but it does improve the return of the typical stock by yanking at least some cash out of the managers’ hands before they can either squander it or squirrel it away.

Unlike a dividend, a share buyback is tax-free to investors who don’t sell their shares. Thus it increases the value of their stock without raising their tax bill. And if the shares are cheap, then spending cash to repurchase them is an excellent use of the company’s capital.

However, senior executives who are heavily compensated with stock options have a vested interest in favoring stock buybacks over dividends. Why? For technical reasons, options increase in value as the price fluctuations of a stock grow more extreme. But dividends dampen the volatility of a stock’s price. So, if the managers increased the dividend, they would lower the value of their own stock options.

Chapter 20 “Margin of Safety” as the Central Concept of Investment

A Price to Earnings Ratio of 12 implies a (100 / 12 =) 8,33% earnings return on cost. If you receive a dividend yield of 4%, you will have 4,33% of your cost reinvested in the business.

Four key takeaways:

  1. Every corporate security may be best viewed as an ownership interest in a specific business enterprise.
  2. Keep away from ventures in which you have little to gain and much to lose.
  3. If you have formed a conclusion from the facts and if you know your judgement is sound, act on it – even though others may hesitate or differ.
  4. To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.

Commentary on Chapter 20

Losing some money is an inevitable part of investing, and there is nothing you can do to prevent it. But, to be an intelligent investor, you must take responsibility for ensuring that you never lose most or all of your money.

Reading the original book instead of a summary offers a comprehensive understanding, emotional connection, appreciation of the author’s writing style, direct support for the author, and the chance to discover hidden gems. Enhance your reading experience by purchasing the book through my affiliate link: Get the Book on Amazon.

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