The greatest investment advisor of the twentieth century, Benjamin Graham taught and inspired people worldwide. Graham's philosophy of "value investing" -- which shields investors from substantial error and teaches them to develop long-term strategies -- has made "The Intelligent Investor" the stock market bible ever since its original publication in 1949. Over the years, market developments have proven the wisdom of Graham's strategies. While preserving the integrity of Graham's original text, this revised edition includes updated commentary by noted financial journalist Jason Zweig, whose perspective incorporates the realities of today's market, draws parallels between Graham's examples and today's financial headlines, and gives readers a more thorough understanding of how to apply Graham's principles. For me, “The Intelligent Investor" is the most important book you will ever read on how to reach your financial goals. Just enjoy and learn from the quotes from my highlights, and then apply them to your life.
Podcast Version of the Intelligent Investor
Preface to the Fourth Edition, by Warren E. Buffett
To
invest successfully over a lifetime does not require a stratospheric IQ,
unusual business insights, or inside information. What’s needed is a sound
intellectual framework for making decisions and the ability to keep emotions
from corroding that framework.
A Note About Benjamin Graham, by Jason Zweig
How did Graham do it? Combining his extraordinary intellectual powers with profound common sense and vast experience. There is no exact record of Graham’s earliest returns, but from 1936 until he retired in 1956, his Graham-Newman Corp. gained at least 14.7% annually, versus 12.2% for the stock market as a whole—one of the best long-term track records on Wall Street history.
The intelligent investor is
a realist who sells to optimists and buys from pessimists. The future value of
every investment is a function of its present price. The higher the price you
pay, the lower your return will be. No matter how careful you are, the one risk
no investor can ever eliminate is the risk of being wrong. Only by insisting on
what Graham called the “margin of safety”—never overpaying, no matter how
exciting an investment seems to be—can you minimize your odds of error. The
secret to your financial success is inside yourself. If you become a critical
thinker who takes no Wall Street “fact” on faith, and you invest with patient
confidence, you can take steady advantage of even the worst bear markets. By
developing your discipline and courage, you can refuse to let other people’s
mood swings govern your financial destiny. In the end, how your investments
behave is much less important than how you behave.
Introduction: What This Book Expects to Accomplish
No
statement is more true and better applicable to Wall Street than the famous
warning of Santayana: “Those who do not remember the past are condemned to
repeat it.”
“The
fault, dear investor, is not in our stars—and not in our stocks—but in
ourselves….”
In
an article in a women’s magazine many years ago we advised the readers to buy
their stocks as they bought their groceries, not as they bought their perfume.
The really dreadful losses of the past few years (and on many similar occasions
before) were realized in those common-stock issues where the buyer forgot to
ask “How much?”
Commentary on the Introduction
In
short, if you’ve failed at investing so far, it’s not because you’re stupid.
It’s because, like Sir Isaac Newton, you haven’t developed the emotional
discipline that successful investing requires.
Being
an intelligent investor is more a matter of “character” than “brain.”
The
intelligent investor realizes that stocks become more risky, not less, as their
prices rise—and less risky, not more, as their prices fall. The intelligent
investor dreads a bull market, since it makes stocks more costly to buy. 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.
Never
add more money to this account just because the market has gone up and profits
are rolling in. (That’s the time to think of taking money out of your
speculative fund.)
To
enjoy a reasonable chance for continued better than average results, the
investor must follow policies which are (1) inherently sound and promising, and
(2) not popular on Wall Street.
“Buy
cheap and sell dear.”
Commentary on Chapter 1
All
of human unhappiness comes from one single thing: not knowing how to remain at
rest in a room. —Blaise Pascal
Graham
urges you to invest only if you would be comfortable owning a stock even if you
had no way of knowing its daily share price.
According
to the Motley Fool, you would have “trashed the market averages over the last
25 years” and could “crush your mutual funds” by spending “only 15 minutes a
year” on planning your investments. Best of all, this technique had “minimal
risk.” All you needed to do was this:
Take
the five stocks in the Dow Jones Industrial Average with the lowest stock
prices and highest dividend yields. Discard the one with the lowest price. Put
40% of your money in the stock with the second-lowest price. Put 20% in each of
the three remaining stocks. One year later, sort the Dow the same way and reset
the portfolio according to steps 1 through 4. Repeat until wealthy.
Commentary on Chapter 3
You’ve
got to be careful if you don’t know where you’re going, ’cause you might not
get there. —Yogi Berra
The
only thing you can be confident of while forecasting future stock returns is
that you will probably turn out to be wrong. The only indisputable truth that
the past teaches us is that the future will always surprise us—always! And the
corollary to that law of financial history is that the markets will most
brutally surprise the very people who are most certain that their views about
the future are right.
When
you leave it to chance, then all of a sudden you don’t have any more luck.
—Basketball coach Pat Riley
As
an old Turkish proverb says, “After you burn your mouth on hot milk, you blow
on your yogurt.” Because the crash of 2000–2002 was so terrible, many investors
now view stocks as scaldingly risky; but, paradoxically, the very act of
crashing has taken much of the risk out of the stock market. It was hot milk
before, but it is room-temperature yogurt now.
No
matter how defensive an investor you are—in Graham’s sense of low maintenance,
or in the contemporary sense of low risk—today’s values mean that you must keep
at least some of your money in stocks.
Becoming
more familiar with a subject does not significantly reduce people’s tendency to
exaggerate how much they actually know about it. That’s why “investing in what
you know” can be so dangerous; the more you know going in, the less likely you
are to probe a stock for weaknesses.
Will
health-care stocks make high-tech stocks look sick? “I don’t know and I don’t
care”—you’re a permanent owner of both. What’s the next Microsoft? “I don’t
know and I don’t care”—as soon as it’s big enough to own, your index fund will
have it, and you’ll go along for the ride.
Commentary on Chapter 5
By
enabling you to say “I don’t know and I don’t care,” a permanent autopilot
portfolio liberates you from the feeling that you need to forecast what the
financial markets are about to do—and the illusion that anyone else can.
Commentary on Chapter 6
The punches you miss are the ones that wear you out. —Boxing trainer Angelo Dundee
The
intelligent investor should conclude that IPO does not stand only for “initial
public offering.” More accurately, it is also shorthand for: It’s Probably
Overpriced, Imaginary Profits Only, Insiders’ Private Opportunity.
Commentary on Chapter 7
It
requires a great deal of boldness and a great deal of caution to make a great
fortune; and when you have got it, it requires ten times as much wit to keep
it. —Nathan Mayer Rothschild
A
great company is not a great investment if you pay too much for the stock. The
more a stock has gone up, the more it seems likely to keep going up. But that
instinctive belief is flatly contradicted by a fundamental law of financial
physics: The bigger they get, the slower they grow. A $1-billion company can
double its sales fairly easily; but where can a $50-billion company turn to
find another $50 billion in business?
If you live in the United States, work in the United States, and get paid in U.S. dollars, you are already making a multi layered bet on the U.S. economy. To be prudent, you should put some of your investment portfolio elsewhere—simply because no one, anywhere, can ever know what the future will bring at home or abroad. Putting up to a third of your stock money in mutual funds that hold foreign stocks (including those in emerging markets) helps insure against the risk that our own backyard may not always be the best place in the world to invest.
Commentary on Chapter 8
Recognize
that investing intelligently is about controlling the controllable. You can’t
control whether the stocks or funds you buy will outperforms the market today,
next week, this month, or this year; in the short run, your returns will always
be hostage to Mr. Market and his whims. But you can control: your brokerage costs, by trading rarely,
patiently, and cheaply your ownership costs, by refusing to buy mutual funds
with excessive annual expenses your expectations, by using realism, not
fantasy, to forecast your returns7your risk, by deciding how much of your total
assets to put at hazard in the stock market, by diversifying, and by
rebalancing your tax bills, by holding stocks for at least one year and,
whenever possible, for at least five years, to lower your capital-gains
liability and, most of all, your own behavior.
Investing
isn’t about beating others at their game. It’s about controlling yourself at
your own game. The challenge for the intelligent investor is not to find the
stocks that will go up the most and down the least, but rather to prevent
yourself from being your own worst enemy—from buying high just because Mr.
Market says “Buy!” and from selling low just because Mr. Market says “Sell!”
If
your investment horizon is long—at least 25 or 30 years—there is only one
sensible approach: Buy every month, automatically, and whenever else you can
spare some money. The single best choice for this lifelong holding is a total
stock-market index fund. Sell only when you need the cash. To be an intelligent investor, you must also refuse to judge your
financial success by how a bunch of total strangers are doing. You’re not one
penny poorer if someone in Dubuque or Dallas or Denver beats the S&P 500
and you don’t. No one’s gravestone reads “HE BEAT THE MARKET.”
If, after checking the value of your stock portfolio at 1:24 P.M., you feel compelled to check it all over again at 1:37 P.M., ask yourself these questions:
Did I call a real-estate agent to check the market price of my house at 1:24 P.M.? Did I call back at 1:37 P.M.? If I had, would the price have changed? If it did, would I have rushed to sell my house? By not checking, or even knowing, the market price of my house from minute to minute, do I prevent its value from rising over time?
The only possible answer to these questions is of course not!
Index
funds have only one significant flaw: They are boring. You’ll never be able to
go to a barbecue and brag about how you own the top-performing fund in the
Commentary on Chapter 9
You’ll never be able to boast that you beat the market, because the job of an
index fund is to match the market’s return, not to exceed it. Your index-fund
manager is not likely to “roll the dice” and gamble that the next great
industry will be teleportation, or scratch-’n’-sniff websites, or telepathic
weight-loss clinics; the fund will always own every stock, not just one
manager’s best guess at the next new thing. But, as the years pass, the cost
advantage of indexing will keep accruing relentlessly. Hold an index fund for
20 years or more, adding new money every month, and you are all but certain to
outperforms the vast majority of professional and individual investors alike.
Late in his life, Graham praised index funds as the best choice for individual
investors, as does Warren Buffett.
Yesterday’s
winners often become tomorrow’s losers.
One
thing is almost certain: Yesterday’s losers almost never become tomorrow’s
winners. So avoid funds with consistently poor past returns—especially if they
have above-average annual expenses.
“If
you’re not prepared to stay married, you shouldn’t get married.” Fund investing
is no different. If you’re not prepared to stick with a fund through at least
three lean years, you shouldn’t buy it in the first place. Patience is the fund
investor’s single most powerful ally.
Commentary on Chapter 11
The
most basic possible definition of a good business is this: It generates more
cash than it consumes. Good managers keep finding ways of putting that cash to
productive use. In the long run, companies that meet this definition are
virtually certain to grow in value, no matter what the stock market does.
In
investing, as with life in general, ultimate victory usually goes to the doers,
not to the talkers.
Commentary on Chapter 12
In
short, pro forma earnings enable companies to show how well they might have
done if they hadn’t done as badly as they did. As an intelligent investor, the
only thing you should do with pro forma earnings is ignore them.
Commentary on Chapter 15
Most
leading professional investors want to see that a company is run by people who,
in the words of Oakmark’s William Nygren, “think like owners, not just
managers.” Two simple tests: Are the company’s financial statements easily
understandable, or are they full of obfuscation? Are “nonrecurring” or
“extraordinary” or “unusual” charges just that, or do they have a nasty habit
of recurring?
Successful
investing professionals have two things in common: First, they are disciplined
and consistent, refusing to change their approach even when it is
unfashionable. Second, they think a great deal about what they do and how to do
it, but they pay very little attention to what the market is doing.
Commentary on Chapter 18
The
cheap stocks may later become overpriced; the expensive stocks may turn cheap.
At some point in its life, almost every stock is a bargain; at another time, it
will be expensive. Although there are good and bad companies, there is no such thing
as a good stock; there are only good stock prices, which come and go.
It’s
well established that people often assign a mental value to stocks based
largely on the emotional imagery that companies evoke. But the intelligent
investor always digs deeper.
Once
a company becomes a giant, its growth must slow down—or it will end up eating
the entire world. The great American satirist Ambrose Bierce coined the word
“incompossible” to describe two things that are conceivable separately but
cannot exist together. A company can be a giant, or it can deserve a giant P/E
ratio, but both together are incompossible.
If
you buy a stock purely because its price has been going up—instead of asking
whether the underlying company’s value is increasing—then sooner or later you
will be extremely sorry. That’s not a likelihood. It is a certainty.
Commentary on Chapter 19
The
most dangerous untruths are truths slightly distorted. —G. C. Lichtenberg
In
short, most managers are wrong when they say that they can put your cash to
better use than you can. Paying out a dividend does not guarantee great
results, but it does improve the return of the typical stock by yanking at
least some cash out of the managers’ hands before they can either squander it
or squirrel it away.
Commentary on Chapter 20
The
people who take the biggest gambles and make the biggest gains in a bull market
are almost always the ones who get hurt the worst in the bear market that
inevitably follows. (Being “right” makes speculators even more eager to take extra
risk, as their confidence catches fire.) And once you lose big money, you then
have to gamble even harder just to get back to where you were, like a racetrack
or casino gambler who desperately doubles up after every bad bet. Unless you
are phenomenally lucky, that’s a recipe for disaster. No wonder, when he was
asked to sum up everything he had learned in his long career about how to get
rich, the legendary financier J. K. Klingenstein of Wertheim & Co. answered
simply: “Don’t lose.”
The
Nobel-prize–winning psychologist Daniel Kahneman explains two factors that
characterize good decisions: “well-calibrated confidence” (do I understand this
investment as well as I think I do?) “correctly-anticipated regret” (how will I
react if my analysis turns out to be wrong?)
What is the typical track record of other people who have tried this in the past? If I am buying, someone else is selling. How likely is it that I know something that this other person (or company) does not know? If I am selling, someone else is buying. How likely is it that I know something that this other person (or company) does not know? Have I calculated how much this investment needs to go up for me to break even after my taxes and costs of trading? Next, look in the mirror to find out whether you are the kind of person who correctly anticipates your regret. Start by asking: “Do I fully understand the consequences if my analysis turns out to be wrong?” Answer that question by considering these points: If I’m right, I could make a lot of money. But what if I’m wrong? Based on the historical performance of similar investments, how much could I lose? Do I have other investments that will tide me over if this decision turns out to be wrong? Do I already hold stocks, bonds, or funds with a proven record of going up when the kind of investment I’m considering goes down? Am I putting too much of my capital at risk with this new investment? When I tell myself, “You have a high tolerance for risk,” how do I know? Have I ever lost a lot of money on an investment? How did it feel?
Am
I relying on my willpower alone to prevent me from panicking at the wrong time?
Or have I controlled my own behavior in advance by diversifying, signing an
investment contract, and dollar-cost averaging? You should always remember, in
the words of the psychologist Paul Slovic, that “risk is brewed from an equal
dose of two ingredients—probabilities and consequences.” Before you invest,
you must ensure that you have realistically assessed your probability of being
right and how you will react to the consequences of being wrong.
No
matter what Mr. Market throws at you, you will always be able to say, with a
quiet confidence, “This, too, shall pass away.”
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