The Intelligent Investor by Benjamin Graham Summary

Instructor: Douglas Stockbridge

DJ Stockbridge is currently pursuing a Masters degree in Accounting.

In this lesson, you will learn about Benjamin Graham's book, ''The Intelligent Investor'' which provides ordinary investors with practical advice on how to make security investments. Today the book is famous for introducing two concepts into the investing profession: the allegorical Mr. Market and the concept of margin of safety.

Investment for Everyone

The Intelligent Investor, written by Benjamin Graham in 1949, provides layman investors (think ordinary, 'mom & pop' investors) with guidance on the adoption and execution of an investment policy. This lesson will summarize The Intelligent Investor in chronological order, highlighting significant chapters and the concepts they introduce.

Chapters 1-7 Investment Versus Speculation

In the early chapters, Benjamin Graham seems to be setting the foundation for the rest of the book. He does this by laying out the historical stock market returns (Ch. 3), and giving his own market commentary at the time of the book's issuance (Ch. 2). The early chapters are best known for Graham's definitions of 'investments', 'speculation', and 'enterprising' and 'defensive' investors. He spends the majority of the early chapters defining these terms and then giving portfolio policy recommendations for enterprising and defensive investors. Investment versus speculation is summed up nicely by Graham when he says, 'An investment operations is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.' That's the first 'fork in the road' that Graham wants the reader to consider. Are you a speculator or an investor? What have you been in the past? What would you like to be?

He then places investors into one of two 'buckets': defensive or enterprising. A defensive investor is generally passive. He/she is completely fine with adequate returns so long as little time/energy is spent investing. The enterprising investor, on the other hand, has the time, energy, and desire to put more work into their investment portfolio. They may spend time researching companies to invest in, for example. Again, Graham provides a description of both because he wants readers to decide for themselves which type of investor they are or would like to be.

Chapter 8 - 'The Investor and Market Fluctuations'

Chapter 8 deserves its own section. It, along with Chapter 20, contains one of the most famous and long-lasting ideas from The Intelligent Investor. In Chapter 8, Graham provides a thought-provoking parable. He says: 'Imagine that in some private business you own a small share that cost you $1,000. One of your partners, named Mr. Market, is very obliging indeed. Every day he tells you what he thinks your interest is worth and furthermore offers either to buy you out or to sell you an additional interest on that basis.' Some days his idea of value is believable, but on other days his excitement or fear influence his suggestion.

Graham challenges the reader: 'Will you let Mr. Market's daily communication determine your view of the value of the $1,000 interest in the enterprise?' Graham argues that you should use Mr. Market to your advantage. First, develop your idea of the enterprise's value and then buy interest from Mr. Market when he is too pessimistic and sell to Mr. Market when he is too optimistic. The changes in price allow an investor to buy when prices decrease and to sell when they rise.

Chapters 9 - 16 Advice for the Layman Investor

In the middle of the book, Graham spends time answering questions a layman investor may have, like what are investment funds? Are financial advisers helpful? He also delves into some higher-level financial concepts like convertible bonds and warrants. The book was intended as a reference guide for the layperson. It was not intended to be read like a novel, chronologically. If the reader has specific questions, they jump to those chapters. The remaining bulk of Chapter 9-16 deals with stock selection for the defensive and enterprising investor. Graham spells out specific criteria each investor should look for when they decide to buy or sell a specific stock.

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