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7 Lessons I Learned from The Intelligent Investor

The Intelligent Investor Book Review

Considered one of the best books on investing of all time, The Intelligent Investor is a must-read for any would-be investor.

The principles extolled by Benjamin Graham some 90 years ago still hold true to this day, so much so that the Oracle of Omaha, Warren Buffett, espouses the teaches he learned from his mentor.

If you haven’t yet picked up a copy of this book, you need to do so and learn the ins and outs of value investing.

The Intelligent Investor was one of the top two most influential investing books that I have ever read. So today I want to provide you the 7 lessons taught to me by Ben Graham’s The Intelligent Investor.

The Intelligent Investor

Top 7 Lessons Taught By The Intelligent Investor

Lesson #1: Investing > Speculation

Ben Graham begins his masterpiece by detailing the difference between speculators and investment operations.

Here he defines the main difference between the two:

  • Investment: “an operation which, upon thorough analysis promises the safety of principal and an adequate return.”
  • Speculation: “anything which does not meet the criteria for an investment operation.”

What does this mean for modern-day investors? Simple: investors do their homework on each stock they are considering deploying capital into. So to ensure that their entry point provides solid value and an adequate return.

Speculators, on the other hand, invest because everyone else is investing, or invest because they think that the stock is going to go up to a certain level. Speculators do not focus so much on value as they do on growth; they would rather see monstrous returns than solid and safe gains.

However, even though Graham adhered to value investing throughout his own career, he did not discount the importance of speculators to the market as a whole.

In fact, he argues for the importance of speculators. Because without speculators, the market would cease to function as we know it. Speculators allow for investments in new, untested companies, that eventually go on to dominate the markets as a whole (i.e. Amazon, Uber, etc.).

The main point that Graham wants to convey via The Intelligent Investor is to know whether or not the strategy is an investment operation, speculation, or a combination of the two.


TAKEAWAY QUESTIONS:

  • How do you value stocks?
  • Do you consider yourself an investment operation or a speculator? Or do you engage in both forms of investing?
  • How much of your portfolio is value investments and how much is speculation? See if you can find a solid number or percentage breakout.

Lesson #2: Are You an Active/Enterprising or Passive/Defensive Investor?

The second most important decision that Graham asks investors to make is if they want to be Enterprising (Active) or Defensive (Passive investors)?

Here is the main difference between the two:

Enterprising/Aggressive/Active Investors

This type of investor is willing to put in extra, active work into identifying stocks that are ripe for investment. They are more likely to trade in the market on future earnings potential and general market trends.

Here the intelligent enterprising investor has two main goals for success:

  • To engage in strategies that are sound and promising.
  • Deploy capital into industries and stocks that are not popular on Wall Street.

The above points seem self-evident enough, though they are challenging in actuality. Active investors are not only charged with finding financially sound investment opportunities with good growth outcomes, but they need to identify industries and companies that are not popular on Wall Street.

This can be a very difficult proposition for an individual or small company that is battling against companies and traders in multi-billion dollar corporation.

In today’s age, we also have to combat algorithmic trading operations as well, which move markets in the blink of an eye on news half-way around the world.

This isn’t to say that active investing cannot be done; it is just that the investor needs to be committed to the strategy on a daily basis and find a system that performs well in day-to-day markets.

Defensive/Passive Investors

This type of investor is interested chiefly in safety and freedom from bother.

The intelligent defensive investor has two main goals:

  • Do not lose principal balance.
  • Maintain a 75/25% allocation between stocks/bonds. In some cases, this can even be set at 50/50%.

Graham argues that when investors allocate a certain portion of their holdings to stocks and a certain portion to bonds, market fluctuations will be ‘normalized’ through stocks being up when bonds are down and vice versa.

By maintaining a 75/25% or 50/50% split, investors can expect to obtain a 7-8% return on investment, and maybe the most important point, be ‘free from bother’ through having a well-diversified portfolio.

A key note for defensive investors: stocks must be allocated to solid companies with a good history of long-term profitable operations. By doing this and avoiding speculative investment plays, defensive investors will typically lock in a steady (though lower) return.


TAKEAWAY QUESTIONS:

  • Do you adhere to more of an enterprising or defensive investing mindset?
  • What stocks make up your portfolio? Go through it and look to identify which stocks would fit a defensive investor mindset and which stocks would fit an enterprising mindset.
  • What is your split between stock/bonds? What other investments are in your portfolio? If you can, lay out the % in each category.

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Lesson #3: The Intelligent Investor Views Stocks as Ownership

I might have gotten this lesson more from the legendary Warren Buffett than Ben Graham, but since Buffett attributes much of his success to Graham and his reading of The Intelligent Investor, I have to mention it here.

For many individuals, it is easy to see common stocks as meaningless numbers that go up and down with little-no reasoning behind the fluctuations.

But intelligent investors know otherwise.

In fact, the stock market presents opportunities to have ownership in some of the most amazing companies the world over. This is such an exciting time for every entrepreneur and Financial Freedom seeker everywhere!

Warren Buffet often says:

“Buy your stocks as if the market will shut down tomorrow with no set date for reopening.”

In other words, so long as we’re buying in at great price points, the best strategy for investors is to buy and hold for the long-term.

Instead of trying to time the market by predicting trends, we own the stocks as mini-owners that share in the gains and progress the company makes moving forward.

I find that this type of ‘set-it-and-forget-it’ mentality helps me to continue deploying capital into companies and celebrating when I see those companies succeeding, even if short-term market fluctuations are rising and falling daily due to Mr. Market’s idiosyncracies.


TAKEAWAY QUESTIONS:

  • Look around you as you go about your day. How many companies that you own in your portfolio are thriving today?
  • Go look up a YouTube presentation that Warren Buffett has given on the topic of investing and life in general. What did you learn?
  • Are you buying companies or stocks? Check to see what your mindset is.

Lesson #4: The Value of an Investment is in the Price You Pay

This lesson might be the most important of all presented within The Intelligent Investor.

Graham is adamant about the idea that while stocks can be bought for any price, that doesn’t mean an investor is always obtaining a good value for doing so.

Consider this real-life example outside of stocks: many individuals believe in the power of homeownership.

You can say that attaining this homeownership is akin to living out the American Dream.

While home values will vary across the US and the world at large, there becomes a point where one is simply paying too much for a home.

I live in the Midwest. An average entry-level home with 2-3 bedrooms and 1-2 baths will typically cost an investor anywhere from $150-250k. While this has risen with inflation and will continue to do so, this is near the acceptable norms that one expects to pay for a house.

If this home value suddenly shot up to $1mm or $10mm, then no one in the right mind would purchase this house as it is overvalued. That’s not to say individuals couldn’t purchase the house if they so desired, it’s just that they would be radically overpaying for doing so.

Stocks are no different. The challenging part for most investors is understanding when stocks are expensive vs. when they are cheap.

To develop these metrics and analysis process can take many years to hone and develop, but the principle holds the same; stocks can be overvalued from time-to-time, and it takes a solid investment process to understand when one is paying too much for a holding.

This is the essence of Graham’s point; you can pay any price you want to obtain a stock, but at some point, the return is no longer worth the cost of investment.

The Intelligent Investor has a process in place to identify when stocks have become too expensive to continue investing, and thus waits until values return.


TAKEAWAY QUESTIONS:

  • How do you value stocks? Do you have well-developed criteria?
  • Are you buying in at well-valued price points or are you trying to time the market?

Lesson #5: Markets Will Fluctuate (aka Mr. Market)

When asked what the markets would do on a particular day, JP Morgan famously stated:

“It will fluctuate.”

Nothing is truer. It was Ben Graham who made up the character, “Mr. Market” to describe the erratic and often wild market swings that are presented in the everyday markets.

One day a stock will be up, the next day it will be down, sometimes based on very little rationale at all.

The most important thing for intelligent investors is to realize that these fluctuations will occur. So long as the investor is buying in companies at solid price points, these day-to-day fluctuations can largely be ignored in favor of longer-term trends.

In fact, the beautiful part about a dividend investing strategy. By focusing on buying great companies at great prices and reinvesting the dividends received in accumulating more shares, investors can largely ignore day-to-day and year-to-year market fluctuations.

The investor’s main focus becomes continuing to buy solid companies and at solid prices, and monitoring current positions for a material decrease in valuation.


TAKEAWAY QUESTIONS:

  • Look at your last four trades. Were these trades made with Mr. Market or against Mr. Market?
  • What do the analysts say about your stocks? It’s not a bad thing if they see the stocks moving upward, but in value investing, we ideally want to have a good mix of stocks being out of favor with the current market.

Lesson #6: You Cannot Time the Market, but You Can Buy Values

In addition to the point above regarding market fluctuations, investors cannot know when the overall market will go up or when it will go down, as it is often based on events outside of the investor’s control.

Rather, it is the astute investor who does not time the market but rather buys stocks at adequate values and price points.

What is the difference?

Someone looking to time the market attempts to deploy capital in anticipation of the market going up and down. The hope is that they are investing at the right point to take advantage of certain facets of the current market conditions. This is sometimes referred to as momentum trading.

Now certainly this type of trading can work, especially for speculators that are aggressive/enterprising investors.

However, for most individuals and companies, this attempt to time the markets to buy on an up or downswing can spell doom.

If one wants to take the position to buy-in or short-sell a stock anticipating market movement, they are more than free to do so. But they should understand they are speculating and know the risks of doing so before investing.

What Graham does argue for, however, is that investors can always buy-in when proper valuation presents itself.

By buying stocks when value presents itself rather than when the market timing seems right, intelligent investors can be assured of better safety of principal and adequate return on investments.

How does one buy stocks based on value? There is certainly a high-level of objectivity to it, however, there is also subjectivity in every strategy. It took me many years to craft my dividend investing strategy, which plays right into Ben Graham’s idea of value investing.

The Dividend Investing Strategy has produced phenomenal results thus far, and I fully expect it to produce lasting results through any market condition. Keep in mind though that past results are never indicative of future returns!

Check out the Forward Dividend Calculator
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TAKEAWAY QUESTIONS:

  • Why are you buying stocks? Growth? Income? A mixture?
  • Have you tried a dividend investing strategy? Why or why not?

Lesson #7: Past Performance is Not Indicative of Future Gains

Last but not least, Graham goes on to point out how it is unwise to point to past performance as an indicator of the future.

He goes on to explain an example of how, in the past, stocks were viewed as an unwise and “speculative” investment. This often happened after large downswings in the markets, where investors were pummeled from all sides.

Flash forward to modern-day investors, where if one is not in the market, they are considered unwise indeed.

It is interesting to see how Graham describes the delicate balance toward investing.

If the equity markets become to overvalues, he argues, then it is time for the investor to sell assets and deploy into bonds.

When the markets become ‘right-sided’ and equities become well-valued again, it is then time to sell bonds and buy equities.

In either case, he makes the ultimate point that, even though stocks have performed well over the long-haul, it is not a sure-fire indicator that they will continue to do so.

Intelligent investors need to be prepared to react to market swings and deploy capital as necessary to take advantage of where the values happen to be.


TAKEAWAY QUESTIONS:

  • If markets head into a tailspin, what will be your reaction plan?
  • If markets continue an upward trend, what will be your reaction plan?

The Intelligent Investor: Summary

In summary, The Intelligent Investor is one of the greatest investing novels ever written. If you have not had the pleasure of reading this book, you need to ensure that you find the time to do so.

Better yet, you can buy the audio book and listen while you drive. There are a lot of charts though, so I recommend to get both the hardcopy book and the audible version so that you can reference the graphs and analysis when needed.

Good luck and happy investing!


Disclaimer:(1) All the information above is not a recommendation for or against any investment vehicle or money management strategy. It should not be construed as advice and each individual that invests needs to take up any decision with the utmost care and diligence. Please seek the advice of a competent business professional before making any financial decision.


(2) This website may contain affiliate links. My goal is to continue to provide you free content and to do so, I may market affiliates from time-to-time. I would appreciate you supporting the sponsors of MoneyByRamey.com as they keep me in business!

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