11-19-2024 10:06am

The Intelligent Investor by Author Benjamin Graham

Ypsilanti PressLLC Editor

“Intelligence has nothing to do with IQ or SAT scores. It simply means being patient, disciplined, and eager to learn” - Benjamin Graham

Insights from The Intelligent Investor by Benjamin Graham

In the spring of 1720, Sir Isaac Newton owned England's hottest stock, the South Sea Company. Sensing the stock market was overheating, Newton sold his shares and made a 100% profit. But just a few months later, Newton got swept up in the market's wild enthusiasm and bought back in—this time at a much higher price. The stock soon crashed, and Newton ended up losing £20,000, which is equivalent to $3 million today. While Newton may be the most intelligent human being to have ever lived, he was far from an intelligent investor. He let the crowd's excitement override his own judgment, proving that intelligence alone does not make you a good investor. Intelligent investing is less about IQ and more about establishing a margin of safety and creating an investment contract with yourself.

Establish a Margin of Safety

A margin of safety is a buffer that protects you from substantial losses when things don't go as planned and gives you the best chance of making money in the long run.

Margin of Safety Strategy #1: Avoid Euphoric Markets

The first way to build a margin of safety is to avoid investing new money in an overheated market. When investor optimism is through the roof, great companies get priced for perfection, meaning everything has to go right for their stocks to keep climbing, and it takes just a little misstep for them to tank. You want to buy when everyone’s negative—usually after months of falling prices. A practical way to gauge the market mood is to check the CNN Fear and Greed Index before buying or look up the latest AAII survey to see if “bullishness” is near a one‐year high.

“The intelligent investor is a realist who sells to optimists and buys from pessimists.” – Benjamin Graham Margin of Safety Strategy #2: Conduct a Business Health Check

Another way to create a margin of safety is by investing in financially solid companies, as their stock prices have little room to drop. Here are six signs of a financially rock‐solid company:

Over $2 billion in annual revenue.
Current assets are at least double current liabilities.
Long‐term debt is less than working capital (current assets minus current liabilities).
Positive earnings every year for the past decade.
Earnings‐per‐share growth of 33% over 10 years (about 3% annually).
Price‐to‐earnings (P/E) ratio less than 15 (Note: Graham did not live to see big tech companies with incredible pricing power
and consistent double‐digit growth who have a reasonable P/E of 25, so take this last number with a grain of salt).

A company that checks all six boxes has reduced downside risk and is likely to recover quickly after a recession. So, before putting money

into a new company, use an AI chatbot to analyze its earnings reports and confirm that it’s close to meeting these six criteria.

Margin of Safety Strategy #3: Diversify

The third, and perhaps most effective way to create a margin of safety is through diversification. One simple way is to split the money you plan to invest between two assets that have low correlation over a one‐year period but have historically appreciated over a 20‐year period. Diversification works as a margin of safety because if one asset drops, the other can hold steady or rise, cushioning your portfolio and giving you a chance to rebalance—like moving funds from bonds to stocks after a market crash.

Sign an Investment Owner's Contract

Being down several thousand dollars is hard for anyone to stomach, but giving in to an overwhelming urge to sell and stop the bleeding is the biggest mistake a long‐term investor can make. As author Jason Zweig says, “The risk is not in our stocks but in ourselves.” Zweig, who wrote the commentary for The Intelligent Investor, insists that we all create an investment owner's contract with ourselves:

I, __________________, as an investor committed to long‐term wealth accumulation, understand the temptation to buy when markets rise and sell when they fall. I hereby declare that I will not let market trends or the actions of others dictate my financial decisions. I commit to holding the following ETFs or diversified portfolios:

_________________________

Through at least ______, 20__ (date is at least 10 years from the day the contract is made). Exceptions will only be made for urgent needs like a health emergency, job loss, or planned purchases such as a home or tuition. By signing below, I affirm my intent to follow this contract and review it if I'm ever tempted to sell.

Signed, ___________________

Type this contract into a Word document, print it, sign it, and then use your phone to take a picture of it. Then, the next time you want to panic sell your investments, look at the photo of your signed investment owner's contract. Seeing the commitment you've made should stop you from acting impulsively.

In this book summary video, you’ll discover what it takes to be an intelligent investor.

Book Summary Video

Favorite insight:

Being down several thousand dollars is hard for anyone to stomach, but giving in to an overwhelming urge to sell and stop the bleeding is the biggest mistake a long-term investor can make. As author Jason Zweig says, “The risk is not in our stocks but in ourselves.” Zweig, who wrote the commentary for The Intelligent Investor, insists that we all create an investment owner's contract with ourselves:

I, __________________, as an investor committed to long-term wealth accumulation, understand the temptation to buy when markets rise and sell when they fall. I hereby declare that I will not let market trends or the actions of others dictate my financial decisions. I commit to holding the following ETFs or diversified portfolios:

_________________________

Signed, ___________________

Have a productive week!

- Nathan