The Intelligent Investor by Benjamin Graham is often cited as one of the best books on investment, most notably by Warren Buffet.
Graham lays the foundation for laymen by giving a sound approach to investment, written with simple language that is easy (albeit dated) to understand. You are presented with Graham’s personal investment philosophy and other potential investment philosophies based on the type of risk you are willing to tolerate.
For example, he doesn’t believe in speculation. Many people think about the stock market as a casino, where they can make money quickly by buying low and selling high. Graham thinks that this is the wrong approach. You don’t make money (sustainably) from buying and selling but from owning and holding securities, earning dividends and interest, and benefitting from their increase in value over many years.
Your main goal in investing should not be to make money, but to avoid losing money. That is the difference between an investor and a speculator.
Factors to consider when picking stocks
PE ratio is a measure of the valuation of a company’s stock. It has price in the numerator and earnings in the denominator. The higher the PE ratio, the more expensive the stock
PB ratio compares the price of the stock with its book. The higher the PB ratio, more expensive is the stock and vice-versaSource
Trailing P/E should be less than 15 and P/E * P/B should be less than or equal to 22.5.
When considering what stock to buy, don’t simply buy cheap companies.
Consider the following indicators:
- Earnings per share (growth > 30% over 10 years prior is a good sign).
- Current ratio (Current Assets/ Current Liabilities) > 2.
- Company offers dividends, with consistent dividend growth.
- Avoid companies with negative earnings per share previous 3 years.
- Speculate the right way: Buy low and sell high. Avoid the herd instinct to start buying more when stocks are at record highs. See financial crashes as opportunities to buy for cheap.
Chapter 1: Investment Versus Speculation
Keep investments and speculation separate. If you must speculate, make sure it is no more than 10 percent of investment funds.
Chapter 2: The Investor and Inflation
Inflation is an investment concern because it depletes real wealth, and the purchasing power of profits and principal. Fixed income securities are usually most hard hit.
Chapter 3: A Century of Stock Market History
It is important to learn about the history of the stock market, so that you understand how stock prices are related to earnings, cash flow, and dividends.
Chapter 4: General Portfolio Policy: The Defensive Investor
The conventional wisdom is that the investor should match the amount they risk with their risk tolerance.
Chapter 5: The Defensive Investor and Common Stocks
As long as the stock is not overpriced, buying them could protect against inflation and offer a higher return than bonds or cash in the long run.
Chapter 6: Portfolio Policy for the Enterprising Investor: Negative Approach
Unless lower rated bonds and preferred stock have a huge upside, enterprising investors should avoid them. Lowe rated securities usually collapse in adverse markets.
Chapter 7: Portfolio Policy for the Enterprising Investor: Positive Approach
An enterprising investor wants to achieve a higher than average rate of return. There are 4 ways in which this type of investor can go beyond the defensive investor.
Chapter 8: Mr. Market and Fluctuations
Mr. Market is the analogy given for the market. Imagine that you co-owned a company with Mr. Market.
Chapter 9: Investing in Investment Funds
Investment funds are vehicles provide a convenient means for saving and investment, and potentially protecting investors from themselves.
Chapter 10: The Investor and His Advisers
Most investors are novices and make many mistakes. Drawdowns, high fees and expense ratios, and improper diversification are all common problems they face.