Excerpts from The Intelligence Investor by Benjamin Graham

The Intelligent Investor (4th edition) by Benjamin Graham and commentary by Jason Zweig:

1. Preface by Warren Buffet - buffet hits the nail on its head straightaway - Investment framework + Emotional Discipline leads to large investment success.

2. Walter Lipman on Financial analysis journal - men who plant trees that other men will sit under. Ben Graham was such a man.

3. Jason Zweig in his front note - Sooner or later, all bull markets must end badly.

4. Humiliation is essential for success. Overpay leads to risk of loss. Future value of every investment is a function of its present price. The higher the price you pay, the lower your return will be.

5. The secret to your financial success is inside yourself. So philosophical that anything and everything lies on the individual and his efforts. It brings focus to what we can control than rely on outside on anything.

6. 1st chapter - he sets the tone in the first line itself that the book intends to provide a policy than to provide a technique on investment analysis. Advocates that the investor attitude and principles matter in the long run.

7. Expecting that the stock will still go higher though by paying any price, leads to disaster. Enterprising never helps while discipline does!

8. Nothing is permanent - never believe that an industry will forever perform well.

9. Cites IBM of 70s- contrary to common belief that anyone who owns it will be profitable, investing funds played it other way because of the high growth and high price associated with it is untenable in future that they held very low quantity, leading to a missing opportunity.

10. Obvious prospects of business growth doesn’t translate into obvious growth in stock prices. Experts do not have dependable ways of selecting and concentrating on the most promising companies in the most promising industries.

11. Often buyers forget to ask what’s the price I’m paying for a stock.

12. Many instances indicate - one time major loss leads investors not to come back to the market. Personal experience. As Daniel Kannan puts it - feel of failure outweighs the feel of success.

13. Speculative factor - it has to be part of the price being paid. This should be outweighed by the success so as to reap large reward.

14. Speculation and Investment scrips should be in different trading accounts to bring in clarity to thinking.

15. As of 1965 - at normal levels of the market, the investment should give 3.5 to 4.5 percent returns on the price. Together with appreciation of this scrip should give 7.5% for a conservative investor. Nevertheless, no loss with this kind of gain in the long run leads to huge appreciation of wealth.

16. Art of shrewd investment lies in the selection of issues that will give better results than the general market.

17. Enterprising investor - start will clear conception as to which courses of action offer reasonable chances of success and which do not.

18. Investor must decide whether he can remain an enterprising one, considering his temperament and resources.

19. To enjoy reasonable success - the policy of the investor must be Sound and is Not popular on wall street.

20. By speculating instead of investing, you tend to lower your chance of success.

21. Investing in sum - though analysis of a company, deliberately protect again losses through margin of safety and must aspire to be adequate, not extraordinary, performance.

22. Profitability is impacted by - wages go higher than productivity, need for huge amounts of capital. Reminds me of Capital goods companies of 2008 era and startups of this era reversely.

23. Though stocks appreciate to very high levels as compared to their intrinsic value, it’s catastrophic to be a buyer at that level. So knowledge on the value of important, which comes from thorough analysis.

24. Inflation - so easily forgot by anyone, needs to be looked at to measure success.

25. Prudence suggests that - knowing stock market history helps. Relationship between price levels and earnings and dividends matter. Over the years, it can be understood greatly that market cycles is one of the significant factors that an investor can’t control on his own.

26. Reversing to mean - decadal figures suggest to even out large ups and downs.

27. Forecasting stock prices is highly difficult since it involves quite a few variables.

28. Investing is an art and rather than a quantitative subject.

29. Value of an investment is and always be a function of the price you pay for it.

30. Stock market performance depends on - real growth of companies, inflationary growth (in line with economic inflation) and speculative growth (fear or enthusiasm of investors).

31. Humility that we will be wrong someday will help maintaining the required discipline. Blessed is he who expects nothing, for shall he enjoy everything.

32. Rate of return is proportionate to rush taken and the intelligent effort put in.

33. Advocates to maintain stocks between 25% and 75% of one’s investing capacity. 34. Men who tends to operate against the market have been rewarded handsomely.

35. Dollar cost averaging- advocates buying common stocks through SIP for 20 years of time in equal sum. This will create good wealth one can’t imagine easily.

36. Conservative investor can put his funds on large companies- industry leader and large size to earn sizable returns.

37. Benjamin Franklin - human felicity is produced not so much by great pieces of good fortune that seldom happen, as by little advantages that occur every day. Applicable for stocks too.

38. Investors who can afford less time - work out a permanent autopilot portfolio to earn handsomely.

39. Familiarity breeds complacency.

40. Defensive investor runs and wins - the race by sitting still.

41. Ignorance- knowledge of how little you know about the future and the acceptance of such ignorance, is a defensive investor’s most powerful weapon.

42. Investor must be wary of convertible bonds and new issues (IPO).

43. Russian Rowlette - weigh if risk outweighs reward then don’t move forward.

44. Depression is friend and gives opportunity to improve.

45. Price collapse - heedlessness of public and willingness of selling organizations to sell whatever may be profitably sold leads to it.

46. The punches that you miss are the ones that wear you out.

47. Companies with varying earnings across years show reverse trend in terms of PE ratio- high PE when the earnings are less and otherwise when earnings are high.

48. Advocates considering future earnings, we can interpret this as DCF.

49. Courage during depression- not just by experience but by plausible value analysis. 50. Advocates to take advantage of cyclical nature of industries.

51. Stability of earnings is important.

52. Low stock price may be because of inability of market to recognize earnings of company.

53. Net working capital = current assets (cash+marketable securities+investments) - total liabilities (Liabilities incl. preferred stock and long term debt).

54. Secondary companies- companies at 2nd level in an industry.

55. Undervaluation can happen due to - substantial dividends return, reinvested earnings of co is high, grace of bull market, reverse to mean even in normal conditions, new scenario arises and management changes. All these lead to sudden undervaluation, meaning higher rise in price as against what’s invested.

56. Interest rate and stock price are inversely proportional.

57. Special situation - can be known by keen observation combined with experience in a sector.

58. Lawsuits affect prices - when applied to advantage, creates wealth.

59. Half business knowledge can’t give half the normal value of return.

60. Market rates a secondary stock very poorly in general. It’s like winner takes all.

61. Fortune- as Nathan Mayer Rothschild puts it - it requires a great deal of boldness and caution to make a fortune. Once got, it requires ten times as much wit to keep it.

62. Really great fortunes were made by one who put all his money into one scrip.

63. Advises foreign investment to alleviate risk.

64. Take advantage of pendulum swings of market prices.

65. Timing - buy and hold when future course is deemed to be upward. Sell or refrain from buying when the course is downward.

66. Declares that the more a participant speculates, he shall end up with poor returns of a speculator.

67. Bull market characteristics (similar to 2023) - historically high stock prices, high PE, low dividend yields against bond yields, speculative margin, new IPOs of poor quality. 68. Buy low sell high formula runs the danger of behaviorally sending investors to go out, never to return.

69. Mild action while being inactive is essential.

70. Grahamian value principle- concentrate on issues those sell as compared to their intrinsic value.

71. Investor should not watch his portfolio like hawk, but timely monitoring is required. 72. Price fluctuations provide opportunities for the investor.

73. Happiness of the wise grows out of their own acts - Marcus Aurelius.

74. Think for yourself- don’t follow market blindly.

75. Investing is not about beating others in their game, but by about controlling yourself in your own game. Only investing?

76. Macro predictions are generally worthless- focus on individual companies . It is applicable even in data science. There is no point in predicting macro KPIs. Focus on micro things those can be controlled.

77. Mutual fund- winners with good past returns are unlikely to remain at that level for long.

78. MF - a fund can provide a great economical way to diversify your holdings and by freeing up your time for all other things you would rather be doing than stock picking. 79. MF - extra ordinary growth in a short period leads to producing laggards as the manager can’t find opportunities so quickly.

80. Index funds will beat most active funds in the long run.

81. MF choosing criteria - expense ratio, risk, reputation of manager, past performance. 82. If you can’t stay invested with a fund for at least 3 years, better not to invest in it. Patience is the fund investor’s single most powerful ally.

83. Investment advisors- if an investor chiefly relies on advisors, then he and the advisor stay within the standard, conservative, and unimaginative forms of investment or he must know his advisor thoroughly.

84. Value of growth stock = Current (normal earnings) X (8.5 plus twice the expected annual growth rate).

85. Sources of growth and profit- brand value, marathon company, not sprinter, invests in R&D, reasonable salaries as compared to peers, sticking to core business and not on investing.

86. Financial strength and capital structure- generating more cash than consumes.

87. Owner earnings- should subtract from reported net income any stock options, any unusual and non occurring charges and income from pension fund.

88. No hit back at higher stock price levels.

89. Don’t take single year’s earnings seriously.

90. Corporate accounting is generally tricky.

91. Suggests to look at consistency in accountability and dependability since corporate accounting is difficult to crack.

92. Proforma earnings commentary- ignore.

93. Whatever out of the way earnings is - just avoid.

94. Portfolio strategy for defensive investing- DJIA type cross section of companies - growth companies with high multiple and less popular and less expensive enterprises. Adequate size, strong financial condition, earnings stability, dividend record, earnings growth, moderate PE, moderate Price to Assets.

95. Public utilities- price / book at moderate levels and dividend focused.

96. Gaps in Investing gains is ironed out between financial and non financial companies get ironed out over long periods of time.

97. Convergence by analysts on a stock leads to esoteric level price rises.

98. For common investors- protection > predictions. Quant analysis is protective and Qualitative is predictive.

99. Focus on certainty and steadily growth to great heights , be adventurous to go ashtray - sir Francis Bacon.

100. Diversified basket of => current assets = 2 X current liabilities and long term debt < working capital.

101. Steel industry- rags to riches and back. Other industries it’s mostly because of poor management.

102. Natural to have your own methods - approach that’s sound but unpopular.

103. Enthusiasm to buy or sell leads to disaster.

104. Stocks those beat indices in general- industrial companies of high quality, large companies, very high PE of some stocks.

105. Goodwill is a major factor that plays out in the price of a stock.

106. Most of really undervalued stocks tend to rise very fast , as per the experience of Ben Graham.

107. ROIC = Owner’s earnings / invested capital.

108. The order of investments can be => index funds, active funds, individual stocks with quant characteristics and then individual stocks with qualitative characteristics. This order is based on risk and mostly vise versa in terms of reward.

109. Stocks those destroy value - highly priced, spends a lot, serial acquirer, too much advertising.

110. Negative sentiment is felt significantly higher than positive sentiment.

111. There are good and bad companies, but no such stocks. Only good or bad prices. 112. Growth companies generally give less dividends.

113. In the long term investors tend to pay less attention to the behavior of managers. 114. Cyclical transactions in a company and its affiliates generally are fraudulent.

115. Dividend is a good indicator that a company will perform at similar levels for next 4-5 years.

116. Share buybacks are generally good for investors, not practically. Shrewd managers take advantage and cheat them.

117. Margin of Safety- when you build a bridge, you insist it can carry 30k pounds, but you drive only 10k pounds across it.

118. Success of Technology companies in stock market even in 70s lead to mushrooming of them . Why not now?