The text reproduced here is the Fourth Revised Edition, updated by. Graham in . The goal of this revised edition of The Intelligent Investor is to apply. Graham's pubs/loamoliheartri.ml, loamoliheartri.ml, and www. The goal of this revised edition of The Intelligent Investor is to apply Graham's ideas pubs/loamoliheartri.ml, loamoliheartri.ml, and www. The Classic Text Annotated to Update Graham's Timeless Wisdom for Today's Market ConditionsThe greatest investment advisor of the twentieth century.
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Investor's Guide to Charting Analysis for the Intelligent loamoliheartri.ml INVESTOR A BOOK OF PRACTICAL COUNSEL REVISED EDITION BENJAMIN GRAHAM. Read Ebook [PDF] The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition) (Collins. While preserving the integrity of Graham's original text, this revised edition Download[pdf] the intelligent investor rev ed (collins business.
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During a market crash. During market euphoria. Because for me, I plan to refer back to this page often to revise the classic lessons that the father of value investing, Benjamin Graham has imparted to us through his book. And the well-written commentary by Jason Zweig. What does Graham meant by an"intelligent" investor? Patience, Disciplined, Eager to Learn, Harness our Emotions and Think for Ourselves He made it clear back in the first edition of the book that It simply means being patient, disciplined, and eager to learn; we must also be able to harness our emotions and think for ourselves.
Not Enough There is evidence that high IQ and education are not enough to make an investor intelligent. Most of the time, people who failed in investing is not because they are stupid. It's because they have not developed the emotional discipline that successful investing requires. What is important is that we keep the activities of investing and speculation totally separate. It is dangerous to think that we are investing when we are actually speculating.
Never mingle the money in our speculative account with what is in our investment accounts. Do not allow our speculative thinking to spill over into our investing activities. We have to know the difference between investing and speculation. Investing is an operation which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculations.
The intelligent investor never dumps a stock purely because its share price has fallen. The intelligent investor will always ask first whether the value of the company's underlying businesses has changed.
As Graham never stops reminding us, stocks do well or poorly in the future because the businesses behind them do well or poorly - nothing more, and nothing less.
Twenty years ago, it took two people to carry ten dollars' worth of groceries. What this means is that cash is a terrible investment. We need to make use of the cash. To get more cash.
To beat inflation. Investors often overlooked the importance of understanding inflation. Psychologists called this the "money illusion". How can the intelligent investor guard against inflation? Invest in stocks A standard answer would be to "download stocks".
But as common answers so often are, it is not entirely true. From through , when the prices of consumer goods and services fell, stock returns were terrible too. A mild amount of inflation allows companies to pass increased cost of raw goods to consumers. But high inflation forces consumers to stop downloading.
And this results in bad business results and therefore bad stock market returns. There are many types of REITs. Such as commercial and residential properties REITs.
These companies do a decent job of combating inflation. My note: So Graham says that stocks might not be a good investment when inflation runs high. But historically, stocks is definitely still a good investment for those who know what they are doing.
Which essentially are also stocks. The Stock Market A Century of History - Chapter 3 The most important thing that we can learn so far from one hundred years of stock market history is that the intelligent investor must never forecast the future of the stock market simply by extrapolating based on the past. The stock market will not go up indefinitely. We have to always be careful and keep in mind that when stock prices rise, it becomes riskier, not less.
Benjamin Graham asks 3 simple questions: Why should the future returns of stocks always be the same as their past returns? If every investor comes to believe that stocks are guaranteed to make money in the long run, won't the market end up being wildly overpriced?
And once that happens, how can future returns possibly be high? Not Only Depending on the Degree of Risk You can Take It is a common belief that those who cannot take risks should be contented with a relatively low return on their invested funds.
Hence, it is also the common belief that the rate of return which an investor should aim for is more or less proportionate to the degree of risk he or she is ready to go for. But The Intelligent Investor has a different view. To Be Passive or Active Investor? Graham says that the rate of return an investor should expect to receive is according to the amount of intelligent effort the investor is willing and able to bring to bear on his or her task. The minimum return is to the passive or defensive investor who wants both safety and freedom.
The maximum return would be to the active or enterprising investor who exercises maximum intelligence and skill.
The Intelligent Investor, Rev. Ed
She already has plenty of income, and her grandchildren who will eventually inherit her stocks have decades of investing ahead of them. On the other hand, a year-old who is saving for his wedding and a house down payment would be out of his mind to put all his money in stocks. To determine the amount of risk you can take, ask yourself: Are you single or married? What does your spouse or partner do for a living?
Do you or will you have children? When will the tuition bills hit home? Will you inherit money, or will you end up financially responsible for aging, ailing parents?
What factors might hurt your career? If you work for a bank or a homebuilder, a jump in interest rates could put you out of a job. If you work for a chemical manufacturer, soaring oil prices could be bad news. If you are self-employed, how long do businesses similar to yours tend to survive? Do you need your investments to supplement your cash income?
Given your salary and your spending needs, how much money can you afford to lose on your investments? If after considering all these factors and we feel that we can take a higher risk, we can own more stocks and be an enterprising investor. If not, we should be a defensive investor.
My note: Take a deep look into yourself. Reflect well. And analyze if you are currently more suitable to be a defensive or enterprising investor. For the defensive investor - high-grade bonds and common stocks The defensive investor should divide his funds between high-grade bonds and high-grade common stocks. The standard division should be equal ones of between stock and bonds. A sound reason to increase the percentage in common stocks is when there are more stocks in a bear market at a bargain price.
Stock selection for the defensive investors: Adequate size of the enterprise Graham idea is to exclude small companies that are more volatile. A sufficiently strong financial condition Current assets should be at least twice of current liabilities for industrial firms.
Long-term debt should not be more than net current assets. For public utilities, the debt should not exceed twice the equity. Earnings stability Positive earnings for each of past 10 years. Dividend record Uninterrupted for past 20 years. Earnings growth A minimum increase of at least one-third in per-share earnings in the past ten years using three-year averages at the beginning and end. Moderate price to earnings ratio No more than 15 times average earnings of the past 3 years.
A moderate ratio of price to assets Should not be more than 1. However, a low pe ratio below 15 can justify a higher price to book value. PE ratio x PB ratio should not be more than Graham has 4 rules for the portfolio of the defensive investors: It should contain a minimum of 10 stocks and a maximum of 30 Each company should be large, prominent and conservatively financed. Each company should have a long record of continuous dividend payments.
The defensive investors should impose some limit on the price they will pay for the company over its average earnings of 7 years. Not more than 25 times the average. And not more than 20 times of the earnings of the last 12 months. Rule no 4 above would exclude almost the entire category of " growth stocks. Graham says that if the list of stocks for the defensive investor has been competently selected in the first place, there should be no need for frequent or numerous changes.
It is important for defensive investors to note that they should not have the belief that they can pick stocks without doing any homework.
It is crucial that they do their research beforehand. Image source: TheStreet. Earnings stability: no deficit in the last five years. Dividend records: Some current dividend.
Earnings growth: Last year's earnings more than those of It is important to note that many of the best professional investors first get interested in a company when its share price goes down, not up. Looking at the daily list of the new week lows can be 1 way to get started. We can also use websites that are able to screen stocks with the statistical figure suggested by Graham.
My note: We need to think in today's context too with the above stock selection policy for enterprising investor. Especially number 4 on the criteria of earnings being more than those in We can probably adjust it to earnings being more than the average of 3 or 5 years ago. In chapter 11 below, we will go more in detail on how Graham analyzes stocks. Buffett likes to snap up a stock when a scandal happens.
Like when he bought Coca-Cola as soon as the disastrous rollout of "New-Coke. Warren also looks for managers who set and meet realistic goals; build their businesses from within rather than through acquisition.
Allocate capital wisely. And do not overpay themselves in stock options. There are no sure and easy paths to riches on Wall Street or anywhere else.
It may be well to point up what we have just said by a bit of financial history—especially since there is more than one moral to be drawn from it.
In the climactic year John J. If the General Motors tycoon was right, this was indeed a simple road to riches. How nearly right was he? Most of these people are guided by charts or other largely mechanical means of determining the right moments to download and sell. He also served as national chairman of the Democratic Party and was the driving force behind the construction of the Empire State Building.
We shall illustrate what we have just said—though, of course this should not be taken as proof—by a later brief discussion of the famous Dow theory for trading in the stock market. In updating the current version we shall have to deal with quite a number of new developments since the edition was written. These include: 1. An unprecedented advance in the interest rate on high-grade bonds.
This was the highest percentage decline in some 30 years. Countless issues of lower quality had a much larger shrinkage. The U. Securities and Exchange Commission cracked down on this abuse in , and it is no longer a concern for fund investors. Stock-option warrants are explained in Chapter Introduction Bankruptcy of our largest railroad, excessive short- and longterm debt of many formerly strongly entrenched companies, and even a disturbing problem of solvency among Wall Street houses.
These phenomena will have our careful consideration, and some will require changes in conclusions and emphasis from our previous edition.
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 last statement was put to the test during the writing of the present edition, the first draft of which was finished in January At that time the DJIA was in a strong recovery from its low of and was advancing toward a high of , with attendant general optimism.
As the last draft was finished, in November , the market was in the throes of a new decline, carrying it down to with a renewed general uneasiness about its future. We have not allowed these fluctuations to affect our general attitude toward sound investment policy, which remains substantially unchanged since the first edition of this book in What This Book Expects to Accomplish 5 els.
That was too good to be true. In the area of many secondary and third-line common stocks, especially recently floated enterprises, the havoc wrought by the last market break was catastrophic. This was nothing new in itself—it had happened to a similar degree in —62—but there was now a novel element in the fact that some of the investment funds had large commitments in highly speculative and obviously overvalued issues of this type.
Evidently it is not only the tyro who needs to be warned that while enthusiasm may be necessary for great accomplishments elsewhere, on Wall Street it almost invariably leads to disaster. The major question we shall have to deal with grows out of the huge rise in the rate of interest on first-quality bonds.
Since late the investor has been able to obtain more than twice as much income from such bonds as he could from dividends on representative common stocks. At the beginning of the return was 7. This compares with 4. It is hard to realize that when we first wrote this book in the figures were almost the exact opposite: the bonds returned only 2.
We must now consider whether the current great advantage of bond yields over stock yields would justify an all-bond policy until a more sensible relationship returns, as we expect it will. Naturally the question of continued inflation will be of great importance in reaching our decision here. A chapter will be devoted to this discussion. As of the beginning of , U.
Treasury bonds maturing in 10 years yielded 3. Note that this relationship is not all that different from the figures that Graham cites. The income generated by top-quality bonds has been falling steadily since His second aim will be freedom from effort, annoyance, and the need for making frequent decisions. The determining trait of the enterprising or active, or aggressive investor is his willingness to devote time and care to the selection of securities that are both sound and more attractive than the average.
Over many decades an enterprising investor of this sort could expect a worthwhile reward for his extra skill and effort, in the form of a better average return than that realized by the passive investor. But next year or the years after may well be different. We shall accordingly continue to devote attention to the possibilities for enterprising investment, as they existed in former periods and may return. It has long been the prevalent view that the art of successful investment lies first in the choice of those industries that are most likely to grow in the future and then in identifying the most promising companies in these industries.
For example, smart investors—or their smart advisers—would long ago have recognized the great growth possibilities of the computer industry as a whole and of International Business Machines in particular.
And similarly for a number of other growth industries and growth companies. But this is not as easy as it always looks in retrospect. To bring this point home at the outset let us add here a paragraph that we included first in the edition of this book.
Such an investor may for example be a downloader of air-transport stocks because he believes their future is even more brilliant than the trend the market already reflects. For this class of investor the value of our book will lie more in its warnings against the pitfalls lurking in this favorite investment approach than in any positive technique that will help him along his path.
Among the hottest mutual funds of that era were Aeronautical Securities and the What This Book Expects to Accomplish 7 The pitfalls have proved particularly dangerous in the industry we mentioned.
It was, of course, easy to forecast that the volume of air traffic would grow spectacularly over the years. Because of this factor their shares became a favorite choice of the investment funds. But despite the expansion of revenues—at a pace even greater than in the computer industry—a combination of technological problems and overexpansion of capacity made for fluctuating and even disastrous profit figures.
They had shown losses also in and The stocks of these companies once again showed a greater decline in —70 than did the general market. The record shows that even the highly paid full-time experts of the mutual funds were completely wrong about the fairly short-term future of a major and nonesoteric industry. Hence the effect of this excellent choice on their overall results was by no means decisive.
Furthermore, many—if not most—of their investments in computer-industry companies other than IBM appear to have been unprofitable. From these two broad examples we draw two morals for our readers: 1. Obvious prospects for physical growth in a business do not translate into obvious profits for investors.
The experts do not have dependable ways of selecting and concentrating on the most promising companies in the most promising industries. They, like the stocks they owned, turned out to be an investing disaster.
It is commonly accepted today that the cumulative earnings of the airline industry over its entire history have been negative. What then will we aim to accomplish in this book?
Our main objective will be to guide the reader against the areas of possible substantial error and to develop policies with which he will be comfortable. We shall say quite a bit about the psychology of investors. By arguments, examples, and exhortation, we hope to aid our readers to establish the proper mental and emotional attitudes toward their investment decisions.
The Intelligent Investor: The Definitive Book On Value Investing, Revised Edition
Additionally, we hope to implant in the reader a tendency to measure or quantify. For 99 issues out of we could say that at some price they are cheap enough to download and at some other price they would be so dear that they should be sold. The habit of relating what is paid to what is being offered is an invaluable trait in investment. This has now dropped to about 7.
Besides which, we repeat that both we and our readers must be prepared in advance for the possibly quite different conditions of, say, — What This Book Expects to Accomplish 9 We shall therefore present in some detail a positive program for common-stock investment, part of which is within the purview of both classes of investors and part is intended mainly for the enterprising group.
Strangely enough, we shall suggest as one of our chief requirements here that our readers limit themselves to issues selling not far above their tangible-asset value. Experience has taught us that, while there are many good growth companies worth several times net assets, the downloader of such shares will be too dependent on the vagaries and fluctuations of the stock market.
By contrast, the investor in shares, say, of public-utility companies at about their net-asset value can always consider himself the owner of an interest in sound and expanding businesses, acquired at a rational price—regardless of what the stock market might say to the contrary. The ultimate result of such a conservative policy is likely to work out better than exciting adventures into the glamorous and dangerous fields of anticipated growth. The art of investment has one characteristic that is not generally appreciated.
A creditable, if unspectacular, result can be achieved by the lay investor with a minimum of effort and capability; but to improve this easily attainable standard requires much application and more than a trace of wisdom.
If you merely try to bring just a little extra knowledge and cleverness to bear upon your investment program, instead of realizing a little better than normal results, you may well find that you have done worse. Among the elements not included in tangible assets are brands, copyrights, patents, franchises, goodwill, and trademarks.
Allied to the foregoing is the record of the published stock-market predictions of the brokerage houses, for there is strong evidence that their calculated forecasts have been somewhat less reliable than the simple tossing of a coin.
In writing this book we have tried to keep this basic pitfall of investment in mind.
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The virtues of a simple portfolio policy have been emphasized—the download of high-grade bonds plus a diversified list of leading common stocks—which any investor can carry out with a little expert assistance. The adventure beyond this safe and sound territory has been presented as fraught with challenging difficulties, especially in the area of temperament. Before attempting such a venture the investor should feel sure of himself and of his advisers—particularly as to whether they have a clear concept of the differences between investment and speculation and between market price and underlying value.
A strong-minded approach to investment, firmly based on the margin-of-safety principle, can yield handsome rewards. But a decision to try for these emoluments rather than for the assured fruits of defensive investment should not be made without much self-examination.
A final retrospective thought. When the young author entered Wall Street in June no one had any inkling of what the next half-century had in store. The stock market did not even suspect that a World War was to break out in two months, and close down the New York Stock Exchange.
Now, in , we find ourselves the richest and most powerful country on earth, but beset by all sorts of major problems and more apprehensive than confident of the future.
Yet if we confine our attention to American investment experience, there is some comfort to be gleaned from the last 57 years. Through all their vicissitudes and casualties, as earthshaking as they were unforeseen, it remained true that sound investment principles produced generally sound results. We must act on the assumption that they will continue to do so. Note to the Reader: This book does not address itself to the overall financial policy of savers and investors; it deals only with that portion of their funds which they are prepared to place in marketable or redeemable securities, that is, in bonds and stocks.
What This Book Expects to Accomplish 11 Consequently we do not discuss such important media as savings and time desposits, savings-and-loan-association accounts, life insurance, annuities, and real-estate mortgages or equity ownership. Now put the foundations under them. No truthful book can. Back in the boom years of the late s, when technology stocks seemed to be doubling in value every day, the notion that you could lose almost all your money seemed absurd.
But no matter how careful you are, the price of your investments will go down from time to time.
Back in the first edition of this book, Graham defines the term—and he makes it clear that this kind of intelligence 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.
Also see www. The worst market crash since the Great Depression, with U. Accusations of massive financial fraud at some of the largest and most respected corporations in America, including Enron, Tyco, and Xerox.
Allegations that accounting firms cooked the books, and even destroyed records, to help their clients mislead the investing public.
Charges that top executives at leading companies siphoned off hundreds of millions of dollars for their own personal gain. Proof that security analysts on Wall Street praised stocks publicly but admitted privately that they were garbage.Ultimately you have to know yourself well. Your bid amount: The reason for having a margin of safety is essentially to make an accurate forecast of the future less necessary. Do not know where your money go. In such an instance, you may want to be overweight in stocks.
When investing - diversify: ZIP Code: We need to make use of the cash.
And conversely so long as you keep enough cash on hand to meet your spending needs , you should welcome a bear market, since it puts stocks back on sale. That is why value investors welcome it.