Last updated on March 20, 2023
“The Intelligent Investor” might be one of the most important books on stock market investing.
But make no mistake.
This isn’t a book about making a quick buck by short-term trading.
Oh, no. This is 100% focused on buying good businesses (at a fair price) and holding them for the long term.
Benjamin Graham’s approach to value investing has been the foundation for countless successful portfolios. And continues to influence investing strategies to this day.
So, if you’re ready to ditch the speculation and embrace the art of smart investing, grab a cup of coffee and buckle up.
In today’s article, I’ll:
- Dive into 5 key takeaways
- Give tips and strategies
- Answer frequently asked questions
- And provide famous quotes for inspiration
See, when it comes to investing, it’s all too easy to get caught up in the excitement of the market. And make impulsive decisions.
But as Benjamin Graham so wisely said, “to the man who only sees the past, the future is always dark.” And this is why you should be focusing on the long-term approach to investing.
“The Intelligent Investor” can change the way you think about investing forever.
So, let’s get started, shall we?
What you'll learn:
⓵ Introduction to value investing
Are you tired of playing the stock market like a game of roulette?
Then the world of value investing might be for you.
❖ What is value investing?
So, what exactly is value investing?
In simple terms, value investing is a long-term, value-based approach to investing that seeks to buy undervalued companies. And hold onto them for the long term.
It’s about finding stocks that are trading for less than their intrinsic value and holding onto them until their true value is reflected in the market.
Think of it this way. Have you ever walked into a store and found a diamond in the rough, a product that was mispriced and selling for less than it was worth?
That’s what value investing is all about.
You’re finding stocks that are selling for less than they’re worth. And holding onto them until their true value is reflected in the market.
Now, this is easier said than done. But don’t worry, I’ll be breaking down the key principles of value investing based on “The Intelligent Investor” and showing you how to apply them in your own portfolio.
So, let’s start with the basics.
❖ Fundamental analysis
The first principle of value investing is fundamental analysis. This is the process of evaluating a company’s financial health by analyzing its financial statements, management, and industry trends.
By doing this, you can get a better understanding of a company’s intrinsic value and determine if it’s undervalued.
For example, let’s say you’re considering investing in a tech company. You’ll want to look at its financial statements, analyze its revenue and earnings.
And determine if it’s growing or if it’s struggling. You can collect this data and more by going directly to the Investor Relations (IR) page of your prospective company.
You’ll also want to evaluate its management and look at the broader tech industry to see if it’s a good time to invest in tech companies.
If you determine that the company is undervalued and has a bright future, then you might consider investing in it.
So, that’s the first step in value investing. Determining if a company is undervalued (and if it has a bright future). But make no mistake. This isn’t just about finding a cheap stock and buying it.
❖ Margin of safety
The second principle of value investing is the margin of safety. This means that when you invest, you want to ensure that you have a cushion of safety in case things don’t go as planned.
For example, let’s say you determine that a stock is worth $100. But it’s currently trading for $80. You might consider investing in it, but you also want to make sure that you have a margin of safety.
So, you might only invest if it drops to $75 or lower. This way, even if things don’t go as planned, you’ll still have a cushion of safety.
But be careful as to not miss a great opportunity just to save a few cents. The point is to have a margin of safety not to wait until you get it for free (nothing good is ever free).
⓶ The principles of value investing
Now, it’s time to dive into the other key principles of value investing that will help you build a solid portfolio.
Are you ready?
Diversification is key to success in investing. Just like you wouldn’t want to put all your eggs in one basket, you don’t want to put all your money in one stock.
By diversifying your portfolio, you reduce your risk and increase your chances of success.
So, how do you diversify your portfolio?
Well, the easiest way is to invest in a mix of different stocks, bonds, and other assets. You might also consider investing in different industries, such as tech, finance, and healthcare. This way, if one industry struggles, you’ll still have other investments to help cushion the blow.
However, don’t just go buy random stocks just to be “diversified”. Only buy what falls into your buying criteria. This is not about having dozens of stocks in your portfolio.
Because remember: it takes 1 stock to double in price in order to double your portfolio value. Or 100 stocks to double in price to have the same results. So choose wisely and stick to a number that you can manage.
Another way to diversify is by investing in both growth and value stocks. Growth stocks are companies that are growing rapidly and are expected to continue to do so in the future.
Value stocks, as we covered in our last chapter, are stocks that are undervalued and trading for less than their intrinsic value.
By investing in a mix of both growth and value stocks, you can balance your portfolio and reduce your risk. But be careful.
Don’t discard opportunities based on price alone. In reality, all companies worth buying can be considered a good value. Because if their value is gonna go up in the future, then this is what you’re buying. The potential to grow.
Now if a company is stagnating and its price has been declining, it doesn’t make it an undervalued stock. And you shouldn’t invest in it.
❖ Emotional control
Emotional control is a critical component of value investing. When you invest, you’ll experience ups and downs. And it’s important to stay level-headed and not let your emotions control your decisions.
For example, let’s say you invested in a stock that you believe is undervalued, but the stock price drops shortly after you invest. If you let your emotions take over, you might panic and sell the stock, even though it’s still undervalued.
But if you have emotional control, you’ll remember why you invested in the stock in the first place and hold onto it for the long term.
So, how do you develop emotional control?
One of the best ways is to educate yourself about investing and to have a long-term investment plan.
When you understand the principles of value investing. And have a clear plan for your investments. It’s easier to stay focused and avoid making impulsive decisions based on emotions.
Finally, value investing requires patience. It’s not a get-rich-quick scheme. And it’s not something that will happen overnight. When you invest in undervalued stocks, it may take time for their true value to be reflected in the market.
But if you have patience and hold onto your investments for the long term, you’ll be rewarded with steady, consistent returns.
For example, let’s say you invested in a stock that was undervalued, and the stock price stayed the same for a year. If you had patience and held onto the stock, you might see a significant increase in its price over the next few years as its true value is reflected in the market.
But if you didn’t have patience and sold the stock after a year, you would have missed out on the long-term gains.
Nevertheless, always stay informed so you are aware if there is something fundamentally wrong with your choice. And if that is the case don’t just wait. Because you risk losing on other opportunities (known as opportunity cost).
⓷ The importance of emotional control
Have you ever heard of the phrase, “Don’t let your emotions run your investments”?
That’s exactly what Benjamin Graham was preaching. He understood the power of emotions in decision-making and the negative impact they can have on investing.
Think about it, how many times have you made an investment decision based on fear or greed?
It’s easy to fall into the trap of letting emotions control our actions. But as an investor, it’s crucial to remain level-headed and rational.
According to Graham, emotional control is essential to successful investing because it allows you to stick to your investment strategy (yes, even when the market is going through turbulence).
He encourages investors to maintain a long-term perspective. And avoid the temptation to make impulsive decisions based on short-term market movements.
Let me give you an example. Imagine the stock market is plummeting, and everyone around you is panicking and selling their stocks.
As an emotionally controlled investor, you stick to your investment strategy and hold on to your stocks (knowing that over time) the market will recover and your investments will appreciate.
On the other hand, an emotionally charged investor may sell their stocks out of fear, missing out on the eventual market recovery.
⓸ The benefits of long-term investing
Have you ever heard the saying, “slow and steady wins the race”?
Well, that’s exactly what Benjamin Graham preaches when it comes to investing.
In “The Intelligent Investor,” he emphasizes the benefits of a long-term investment approach over short-term speculation.
Let’s start by defining the two terms. Short-term speculation is focused on quick profits and takes advantage of market fluctuations. It’s the equivalent of trying to time the market, and it’s a risky approach to investing.
On the other hand, long-term investment is a strategy that focuses on building wealth over an extended period, often several years or more.
So why is long-term investing the way to go?
For starters, it takes the emotion out of the equation. When you have a long-term perspective, you’re less likely to make impulsive decisions based on short-term market movements.
Instead, you can focus on the fundamentals of the companies you’re investing in, and you’re more likely to achieve your investment goals.
Another advantage of long-term investing is compounding. Compounding is the process where the returns on an investment are reinvested, leading to exponential growth over time. The longer you hold on to your investments, the more time compounding has to work its magic.
In other words, a small investment made today can grow into a substantial amount over several years (provided you made the right choice).
In addition, long-term investing allows you to weather market volatility. The stock market is inherently volatile, and short-term investors are often discouraged by sudden drops in the market.
However, with a long-term perspective, you can view these fluctuations as temporary. And you’re more likely to hold onto your investments through the ups and downs.
⓹ The continued relevance of “The Intelligent Investor”
So, you may be thinking, “This book was written over 70 years ago, can its principles still be applied to modern investing?”
Despite the advancements in technology and the changes in the investment landscape, the principles outlined in “The Intelligent Investor” remain as relevant today as they were when the book was first published.
The book provides a timeless framework for investing that emphasizes the importance of discipline, patience, and a focus on value.
One of the key principles of the book is fundamental analysis. Fundamental analysis is the process of evaluating a company’s financial health and future growth potential.
This principle remains as relevant today as it was in Graham’s time. In fact, with the abundance of financial data available, it’s easier than ever to perform a thorough fundamental analysis of a company.
Another principle emphasized in the book is the margin of safety. This principle states that an investor should only invest in a stock when it’s trading at a price that provides a margin of safety.
In other words, the investor should only invest when the stock is undervalued, providing a buffer against potential losses.
Finally, the book also highlights the importance of diversification. Diversification is the process of spreading your investments across different asset classes and industries to reduce your risk. This principle remains as relevant today as it was in Graham’s time, and it’s essential to ensure a well-rounded investment portfolio.
⓺ Active vs passive investor
Have you ever heard someone say, “Why bother trying to pick individual stocks when you can just put your money into an index fund and let the market do the work for you?”.
That’s the basic idea behind passive investing.
On the other hand, active investing involves actively picking and choosing individual stocks in an attempt to beat the market.
Now, let’s see what Benjamin Graham had to say about these two approaches. In “The Intelligent Investor”, Graham emphasized the importance of a long-term investment approach and advocated for a passive strategy.
He believed that the majority of individual investors would be better off investing in a diversified portfolio of low-cost index funds, as trying to beat the market through active investing was a difficult and often fruitless task.
However, Graham recognized that there were exceptions to this rule and that some investors, particularly those with a strong understanding of fundamental analysis, could benefit from an active approach.
He emphasized that an active investor must have a margin of safety, a clear understanding of their investment thesis, and the discipline to stick to their strategy even in the face of market volatility.
⓻ Defensive vs enterprising investor
In the book, Graham introduces two different investment approaches for investors — the defensive investor and the enterprising investor.
The defensive investor focuses on investing in low-risk, high-quality stocks and bonds with a long-term focus. This approach is ideal for those who seek stability and preservation of capital.
On the other hand, the enterprising investor is willing to take on more risk and looks for undervalued stocks with growth potential.
This approach is best suited for those who are looking to generate higher returns and are willing to put in the time and effort to find and analyze investment opportunities.
It’s worth noting that both the defensive and enterprising investment approaches are relevant in today’s investment landscape. In fact, they are related to the distinction between active and passive investment strategies (described above).
Passive investing involves buying low-cost index funds or ETFs that track the market, while active investing involves taking a more hands-on approach (like picking individual stocks).
Graham’s ideas and principles continue to shape investment thinking and are still widely discussed and debated by investors today.
⓼ Additional tips to consider
In addition to the five key takeaways discussed in this article, there are several other important tips that can be obtained from reading “The Intelligent Investor”. These include:
Diversification: Graham emphasizes the importance of diversification in creating a well-rounded investment portfolio.
By spreading your investments across different types of stocks, bonds, and other assets, you can reduce the risk of your portfolio being negatively impacted by the failure of a single investment.
Avoiding common investor traps: Graham also warns against several common investor traps (such as market timing and herd mentality).
Market timing refers to trying to predict when the market will go up or down (which is almost impossible to do consistently).
Herd mentality refers to following the crowd and investing in the same stocks as everyone else, rather than doing your own research and making independent investment decisions.
Continuous education: Graham emphasizes the importance of continuous education when it comes to investing. He believes that investors should constantly be educating themselves — about the market and investing — to make informed decisions.
Role of the stockbroker: Graham also has strong views on the role of the stockbroker in the investment process.
He believes that stockbrokers (and financial advisors) are often more interested in making a commission than in giving their clients good investment advice. So choosing a solid broker or trading app is key.
So it’s important for investors to do their own research and make their own investment decisions.
Independent mindset: Finally, Graham stresses the importance of having an independent mindset when it comes to investing.
This means not blindly following the advice of others. But instead, do your own research and make your own investment decisions (always based on your own goals and risk appetite).
⓽ Top 7 FAQ on “The Intelligent Investor”
What is “The Intelligent Investor” about?
“The Intelligent Investor” is a classic book written by Benjamin Graham that provides a framework for investing. It covers the principles of value investing and provides a guide to help investors make informed decisions and achieve long-term investment success.
Who should read “The Intelligent Investor”?
The book is suitable for both seasoned investors and beginners looking to build a successful investment portfolio. It provides a foundation for understanding the basics of investing and the importance of making informed decisions based on sound principles.
How does “The Intelligent Investor” differ from other investment books?
“The Intelligent Investor” stands out from other investment books as it emphasizes the importance of discipline, patience, and a focus on value. It provides a timeless framework for investing that has stood the test of time and remains relevant today.
What are the key principles of value investing outlined in “The Intelligent Investor”?
The key principles of value investing outlined in “The Intelligent Investor” include fundamental analysis, the margin of safety principle, and diversification. These principles provide a foundation for making informed investment decisions and reducing risk.
How does “The Intelligent Investor” emphasize the importance of emotional control in investing?
“The Intelligent Investor” emphasizes the importance of emotional control in investing by highlighting the dangers of emotional decisions and the importance of sticking to a disciplined investment approach.
The book provides guidance on how to avoid emotional investing mistakes and maintain a long-term investment perspective.
What is the significance of the long-term investment approach outlined in “The Intelligent Investor”?
The long-term investment approach outlined in “The Intelligent Investor” emphasizes the importance of patience and discipline.
By adopting a long-term investment perspective, investors can avoid the temptations of short-term speculation and focus on building a successful investment portfolio.
Can the principles outlined in “The Intelligent Investor” still be applied to modern investing?
Yes, the principles outlined in “The Intelligent Investor” remain as relevant today as they were when the book was first published.
Despite advancements in technology and changes in the investment landscape, the principles of value investing, fundamental analysis, the margin of safety principle, and diversification remain essential to successful investing.
Think of investing as a marathon, not a sprint. Just like marathon runners needs to pace themselves, so do investors. By following the principles outlined in “The Intelligent Investor,” you can build a solid investment foundation and achieve long-term investment success.
⓾ Top 10 quotes from “The Intelligent Investor”
“The stock market is filled with individuals who know the price of everything, but the value of nothing.”— Benjamin Graham
“The intelligent investor is a realist who sells to optimists and buys from pessimists.”— Benjamin Graham
“Price is what you pay, value is what you get.”— Benjamin Graham
“The future value of your investment is determined by the cash you expect to receive from it in the future.”— Benjamin Graham
“Investing is most intelligent when it is most businesslike.”— Benjamin Graham
“The true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation.”— Benjamin Graham
“The investor’s chief problem and even his worst enemy is likely to be himself.”— Benjamin Graham
“The four most dangerous words in investing are: ‘this time it’s different.”— Benjamin Graham
“The individual investor should act consistently as an investor and not as a speculator.”— Benjamin Graham
“In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”— Benjamin Graham
I like the importance of businesslike investing and the encouragement to adopt a rational and disciplined approach to investing as proposed in “The Intelligent Investor” by Benjamin Graham.
And this is what makes it a timeless classic in the world of investing.
Its principles and lessons continue to hold relevance in today’s investment landscape.
Personally, I prefer the long-term approach over any form of short-term trading (such as day trading or momentum trading).
Investing can be daunting as is. No need to make it even worse by staying glued to our screens all day.
Investing can be fun too (if done right).
So, whether you’re a seasoned investor or just starting out, “The Intelligent Investor” offers valuable insights and wisdom that can help you make smart investment decisions. And achieve financial success.
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