Intelligent Investor (Summary)

The first concept I would like to explain to you is,

Aggressive vs defensive

Imagine there are two friends, Alan and Dave.

One of them is aggressive when it comes to investing and that is Alan. The other one is very defensive when it comes to investing, that’s right, it is Dave. Let’s draw a small chart to find out their differences.

Alan [Aggressive Investor]Dave [Defensive Investor]
More RiskLess Risk
More RewardLess Reward

One day the two friends decided to compare each other’s prize ranges. Here are the results:

Alan’s resultsDave’s results
50%5%
60%2%
5%12%
10%20%

2% profit                                8.75% profit

So now we know that Dave’s defensive investing is much more preferable then Alan’s aggressive investing. Let’s move on to the second concept to intelligent investing,

Mr. Market

One of the most interesting concepts explained by Benjamin Graham in this book is the ‘Mr. Market’ concept.

This concept involves some imagination and a little bit of logical thinking. Think yourself as a business owner, your partner is Mr. Market. Everyday he comes over to your house with lots of opportunities of selling your stocks to him or buying stocks for yourself.  Mr. Market is an extremely emotional person when it comes to investing.

Let’s say that your business intrinsic value is, 1000 Rs Mr. Market agrees to this and buys your stock, but that is only possible if he has been having a normal day and is in a normal mood. If his mood is miserable, he will refuse to but your stock even if you decrease the price to 500 Rs. When his mood is good, he will agree to but a stock of 1000rs for 2000rs too.

Mr. Market = The Stock Market.

Mr. Market doesn’t like to always choose the logical way so there is no exact proven answer till now that has hacked Mr. Market’s absurd mind. At times he chooses emotions above logic. So, what should we do when Mr. Market’s mood is changing?  I hope this is the question that has popped out of your mind because if I am right that means you are on the correct path to becoming an Intelligent Investor. You must buy when less then value and sell when more then value.

Defensive investor

Also known as passive investor. This is very important and must be followed. Defensive investors are known to be investing in less traits. Benjamin Graham always recommends that you become a defensive investor instead of an aggressive one. A defensive investor researches about the company he is looking forward to investing in and then decides to choose what he believes is right. We can say that defensive investing is the correct type of investing. Lets discuss 9 fundamentals to correctly investing.

  1. Divide your portfolio into half.

This means: you have 1000rs to invest

   500 on stocks    500 on bonds/cash

[or other investment]  

Imagine you got a 10% profit on stocks and now you have an imbalance of 60% on stocks and 40% on investment. Try to stay on track by taking that 10% you have earned on your stocks and placing it into your investment source. This may sound hard or confusing but it is important that you follow. By doing so, your risks will decrease, do this when you first get your salary at the start of the month.

Dollar Average Concept

  • Diversification- That means investing in 10-30 different companies.
  • Large companies- Invest in well established companies
  • Conservatively financed- Invest in companies whose assets>liabilities
  • Dividend history-Invest in companies that have been giving dividends  for 10-20 year.
  • Earning history- invest in companies that have no earning defecits
  • Growth-invest in companies that are growing by at least 3% every year, from last 10 years
  • Cheap assets-invest in companies that have their stock price more then their net asset value [should not be more then 1.5 times ]
  • Cheap earning- don’t give money for earning. Companies who have their p.e. ratio less then 15 [buy it]

Our fourth concept is

Enterprising investor

You see there are three types of investors, as we’ve learnt- aggressive, defensive and the one we’re about to learn enterprising. An enterprising investor, is like an aggressive investor and also like a defensive investor. He is not interested when it comes to average profit like a defensive investor nor does he illogically speculate like an aggressive investor. Enterprising investors research on their stocks and then plan on buying them. They are very active people. Usually successful. To become an Enterprising investor you need discipline, patience, eagerness and lots of time. Not everyone can become an Enterprising investor, therefore Benjamin Graham recommends to becoming a defensive investor. If you still want to become an Enterprising investor you must follow four rules-

  1. Go against the market- This means, buying when everyone is selling, when the market is down and selling when everyone is buying, when the market is high. Do this with 25%-75% of your money.
  2. Buying growth stocks- Buying companies that are big but not popular.
  3. By buying bargain stocks- These stocks are the ones that have their value less then the intrinsic value. Try these companies who are cheap but well established.
  4.  Buying special cases- This means buying small stocks that are going to be acquired by big companies.

Margain of Safety

Imagine that a ship maker has been told to make a ship that can carry 50 people and their luggage, but he makes a ship that can hold 50-100 people just in case, he has used the MARGAIN OF SAFETY concept. You must remember the same when you invest in the stock market, we all know that the stock price is never the same as the real value. That means don’t give more then 2/3 of the real value. Usually people buy stocks that have their real value as 50 and also the stock value as 50 hoping that the value will increase in the future. An intelligent investor buys stocks that are worth the stock price as 50, and then buys the stock at 50.

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