বিবিয় োগ িিোম ফটকো – প্রথম অধ্যো

সিয়েয় গুরুত্বপুর্ ও
ণ মমৌবিক বিবধ্র একটট হয়িো বিবিয় োগ এিং ফটকো
কোরিোরয়ক সম্পুর্ আিোদো
ণ রোখয়ে হয়ি। এগুয়িোয়ক আিোদো একোউন্ট
কয়র রোখয়ে হয়ি এিং ময়ির ময়ধ্য আিোদো কম্পোটণ য়মন্ট কয়র রোখয়ে

হয়ি।যবদ আপিোয়ক ফটকো কোরিোয়র মযোগ বদয়েই হয়ি েয়ি গ্রোহোম

িয়িি মসটো যোয়ে আপিোর বিবিয় োয়গর ১০% এর মিবি িো হ ।

মযমি আয়ে ইয়ন্টবিয়েন্ট বিবিয় োগ মেমবি রয় য়ে ইয়ন্টবিয়েন্ট

ফটকো। ইয়ন্টবিেন্ট বিবিয় োয়গর ময়ধ্য আয়েেঃ ১। একটো বিেয়িয়সর

মমৌবিক বিষ গুয়িো বিয়েষি কয়র মদখো ২। মোরোত্নক মকোি মিোকসোি

মরোধ্ করয়ে বহসোি করো পবরকল্পিো বিয়ে হয়ি এিং ৩। মযৌক্তিক বরটোয়িরণ
বদয়ক ধ্োবিে হয়ে হয়ি।
ফটকো কোরিোর বির্ণর কয়র িোেোয়র বিদযমোি দোয়মর উপর। এখোয়ি আিো
করো হ হ য়েো আগোমীয়ে আপবি অয়িক মিিী দোম পোয়িি। আপবি

বিবিয় োগ ময়ি কয়র ফটকো িযিসো করয়ি আিইয়ন্টবিয়েন্ট

মেকুয়িিি ঘয়ট থোয়ক। সটিকর্োয়ি কোে সম্পোদয়ির জ্ঞোি ও দক্ষ
ফটকো কোে এিং টোকো মিয ফটকো কোে কোরিোয়র আপিোর ময
মিোকসোি হয়ি েো আর পুরি করয়ে পোরয়িি িো।

ও োি বিয়ট অয়িয়কই মেকুয়িিিয়ক প্রয়মোট কয়র কোরি এয়ে

ইণ্ডোবিয়ে অথ আয়স।
ণ অেীয়ের পোরফরয়ময়ের বর্বিয়ে মেন্ড এিং

স্টক বপবকং বসয়স্টম সম্পয়কণ প্রেোরিো েোিোয়িো হ । এগুয়িো বকেুবদয়ির

েিয কোে করয়েও পোয়র বকন্তু বির্ণরয়যোগয প্রমোবর্ে হও োর আয়গই
হোবরয় যো ।

েোর মোয়ি একেি সফি মেকুয়িটর সোম্প্রবেক মেন্ড এর আয়গ আয়গ

সিসময় অিস্থোি বিয় থোয়কি। এটট ইয়ন্টবিয়েন্ট ইিয়র্স্টয়ময়ন্টর

বিপরীে যোর ময়ধ্য মমৌবিক বিয়েষি রয় য়ে এিং যো বিগে মেন্ড মথয়ক
উিোিোমো কয়র িো।

িটম িোইয়ি িিো যো ময মকোি মেকুয়িিি এর েিয আপিোর ফোয়ন্ডর

মেোট এিং আিোদো একটট অংি বরেোর্ণ রোখয়ে হয়ি ( যো ১০% এর মিিী
ি )। এই আিোদো করি বিবধ্
The bottom line is that any speculation should be reserved for a small
and separate portion of your funds (no more that 10%). This rule of
separation protects your investment funds from catastrophic losses
caused by speculation.

The Investor and Inflation – Chapter 2

Inflation must be a concern for investors because it lowers real wealth as

it erodes the purchasing power of profits and principal. As the cost of
living rises it especially hurts the principal of fixed income securities.
One of the benefits of equity investments is the possibility that dividends
and capital gains can redeem the lost purchasing power. This is not to
say there is a close connection between inflationary and deflationary
conditions and stock prices. Graham is just pointing out that good
quality companies have the ability to continue to grow and pay higher
dividends versus a bond with a fixed payout.
Investors must be vigilant for the unanticipated. That means there is
never a perfect time to be in only one asset category (don’t put all your
eggs into one basket). The intelligent investor must minimize risk by
anticipating the unforeseen. Diversification is the foundation of such a
strategy.
In the commentary, Jason Zweig noted two relatively new investment
options are available. Real Estate Investment Trusts (REITs) and
Treasury Inflation Protected Securities (TIPS) provide some protection
against inflation. Within a diversified portfolio, both of these may be
appropriate for the intelligent investor concerned about inflation.

A Century of Stock Market History – Chapter 3

Every investor should have a satisfactory understanding of stock market

history. In order to analyze stock investments you must have
discernment pertaining to the relationship between stock prices and their
earnings, cash flow, and dividends.
Zweig notes in the commentary that market fluctuations will be
dependent upon real growth (increases of companies’ earnings and
dividends), inflationary growth, and the amount of speculation (increase
or decrease) the public is putting on stocks at the current moment.
Nobel Prize Laureate Robert Shiller was inspired by Grahams valuation
approach when he developed the Shiller PE 10. The PE 10 ratio
compares the current S&P 500 index price to an inflation adjusted
average of profits over the past 10 years. It has provided additional proof
that Graham was right on target that price is the biggest determinant of
your investment returns.
Looking Forward
In the coming chapter reviews you will learn about important Graham
concepts such as the defensive investor, the enterprising investor, Mr.
Market, and a margin of safety. Continue on to Part 2:
The Defensive Investor – The Intelligent Investor Book Review
(Chapters 4, 5, & 14)

by KenFaulkenberry | Value

The Defensive Investor

This is Part 2 of our book review of The Intelligent Investor, Revised

Edition, Updated with New Commentary by Jason Zweig (affiliate link).
Part 2 covers Chapters 4, 5, & 14 with the topic being The Defensive
Investor.
You may find the Introduction and relevant links at: The Intelligent
Investor Book Review in 30 Minutes

Who is the Defensive Investor?

The defensive investor is unwilling, or unable, to put in the time and

effort required to be an enterprising investor. Instead of an active
approach the defensive investor seeks a portfolio that requires minimal
effort, research, and monitoring.
An inactive approach means the defensive investor will seek
conservative investments that require little effort in portfolio
management, research, and selection of individual investments. Unlike
the enterprising investor he or she will not expand their potential
universe beyond stable conservative choices.

General Portfolio Policy: The Defensive Investor – Chapter 4

The popular view is that investors should tailor the amount of risk they
are willing to take to their risk tolerance. Graham has a different
outlook: the amount of risk one should accept should depend on the
amount of intelligent effort the investor is able and willing to expend.
In other words, the defensive or passive investor, must be willing to
accept an average return. Greater returns can be achieved by the
enterprising investor who makes the additional effort to intelligently
manage his portfolio and select individual investments.
The defensive investor can divide his portfolio equally between stocks
and bonds/cash. Portfolio rebalancing can be reserved for times when
valuations bring asset allocations significantly out of the 50-50 target.
Graham uses the example of rebalancing when values shift to 55-45 or
greater. For example, if stocks increase by 10 % and are now 55%, you
would sell 5% of your stocks and buy 5% more bonds to achieve the
desired 50-50 split.
There are two main questions concerning bonds: Taxable or tax-free,
and short or long maturities? The tax question is basically a
mathematical calculation based on the investors tax bracket. The
question of maturity should be based on the investors perceived need for
yield and risk/opportunity of a change in principal value.
In the commentary, Jason Zweig notes Graham never mentions the word
age when discussing asset allocation. The amount of risk you assume
should have nothing to do with your age.

The Defensive Investor and Common Stocks – Chapter 5

The two main advantages of stocks are that they provide protection
against inflation and offer a higher rate of return than bonds/cash in the
long run. These advantages can be squandered if the investor pays too
high a price for his stock.
Graham suggested four rules for the defensive investor:
1. Adequate diversification
– Graham suggested between 10 and 30 different issues
2. Stick to large, outstanding (top 1/3 of industry group), conservative
companies.
3. Each company should have 20 years of continuous dividend
payments.
4. Limit the price you are willing to pay to
– 25 times average earnings over the last 7 years and
– 20 times earnings for last 12 month period
The defensive investor will most likely have to abandon growth stocks.
Growth stocks will usually be too expensive; and consequently,
excessively risky for the defensive investor.
The beginning investor should not try to beat the market, but instead
concentrate on learning the difference between price and value with
small sums of money. In the long run an investor’s rate of return will be
determined by his or her knowledge, discipline, and skill in paying a
reasonable price for investments.

Stock Selection for the Defensive Investor – Chapter 14

In Chapter 14, Graham provides a set of standards by which a defensive

investor can obtain quality and quantity.
1. Adequate Size of the Enterprise
– approximately 2 billion in current dollars
2. Strong Financial Condition
– current assets should be at least twice current liabilities
– long term debt should be less than working capital
3. Earnings Stability
– 10 years of positive earnings
4. Dividends
– 20 consecutive years of dividend payments
5. Earnings Growth
– At least a 33% gain of earnings over the past 10 years using three-year
averages.
6. Moderate Price/Earnings Ratio
– not more than 15 times average earnings of past 3 years
7. Moderate Ratio of Price to Assets
– price to book value should be less than 1.5 or
– price/earnings ratio times 1.5 should not exceed 22.5
Even the defensive investor should be willing to sell stocks that have
appreciated significantly and can be replaced with more attractively
valued securities.
The defensive investor should understand the difference between
prediction (qualitative approach) and protection (quantitative or
statistical approach). The risky approach is to try and predict or
anticipate the future. The protection approach measures the proportion
or ratios between price and relevant statistics (i.e. earnings, dividends,
assets, debt, etc.).
Continue to Part 3:
The Enterprising Investor (Chapters 6, 7, & 15)
The Enterprising Investor – The Intelligent Investor Book Review
(Chapters 6, 7, & 15)

by KenFaulkenberry | Value

The Enterprising Investor

This is Part 3 of our book review of The Intelligent Investor, Revised

Edition, Updated with New Commentary by Jason Zweig (affiliate link).
Part 3 covers Chapters 6, 7, & 15 with the topic being The Enterprising
Investor.
You may find the Introduction and relevant links at: The Intelligent
Investor Book Review in 30 Minutes

Who is the Enterprising Investor?

Graham differentiated between the Defensive Investor and the
Enterprising Investor. The main difference being the investors
willingness to make the required effort to invest more aggressively.
The Enterprising Investor has the time and experience (or proper
guidance) in investing to expand the possible universe of opportunities
beyond conservative investments. It is an active approach that requires
constant attention and monitoring. He or she are willing to put forth the
extra effort required for dynamic portfolio management, research, and
selection of individual investments.

Portfolio Policy for the Enterprising Investor: Negative Approach –

Chapter 6

Graham first addresses the enterprising investor by giving him a list of

“don’ts”. When the enterprising investor is willing to step beyond the
scope of the defensive investor he should have an astute rationalization
for the departure.
He advises investors to avoid lower rated bonds and preferred stock
unless there is substantial upside potential in the price of the securities.
Lower rated securities have a tendency to plummet in adverse markets.
The small additional annual income you receive form lower rated
securities is not worth the risk unless there is the possibility of large
capital gains. In other words, you should not be buying lower rated
issues at a price close to Par (100). A bond selling at 66 has the
potential of a 50% capital gain versus no capital gains for a bond bought
at 100.
He also thought it was imprudent to buy new issues. He noted there are
always exceptions to the rule. However, generally new issues are
brought to market when it’s favorable for the company and with great
hype and sales promotion; and therefore, probably not a bargain price
for the investor.
Graham didn’t like foreign bonds because of their poor investment
history. Zweig points out in the commentary that some of Graham’s
criticisms have been mitigated with the advent of exchange traded funds
(ETFs) and mutual funds that specialize in lower-rated securities and
foreign bonds.

Portfolio Policy for the Enterprising Investor: Positive Approach –

Chapter 7

The goal of the enterprising investor is to achieve a higher than average

rate of return. Graham laid out four activities where the enterprising
investor can go beyond the defensive investor. These are buying in low
priced markets and selling in high priced markets (tactical asset
allocation), buying growth stocks, buying bargain issues, and buying
“special situations”.
Where the defensive investor would stick close to a 50% stock, 50%
bond or cash plan, the enterprising investor has more leeway to take
valuation into account. Portfolio reblancing can be adjusted based on the
attractiveness of an asset’s valuation. Graham sets an equity allocation
minimum of 25%, maximum of 75%, based on the attractiveness of
valuations.
For the enterprising investor to buy a growth stock, he will usually have
to find a larger company that is currently unpopular. The price of a
growth stock usually reflects the expected growth, and that growth is,
many times, over estimated by the markets. That means the enterprising
investor must be extra careful when picking growth stocks.
Buying bargain issues means finding stocks that are selling for less that
their intrinsic value. A stock may be undervalued due to disappointing
earnings or general disfavor. The best bargain would be a well
established company priced well below its average historical price and
it’s past average price/earnings ratio.
The last activity for the enterprising investor would be searching for a
“special situation. This would involve cases where a small company
would be a good fit for a large company to acquire. Graham notes that
only a small percentage of enterprise investors might engage in this
activity.
Graham ends the chapter by emphasizing the importance of choosing to
be a defensive or enterprising investor. There is no in-between. The
enterprising investor must have the training and judgement (or guidance)
to both measure and maintain a margin of safety standard. If you are not
willing to make the effort you should be a defensive investor.

Stock Selection for the Enterprising Investor – Chapter 15

Graham contends that large portions of the stock market are out of favor
because investors concentrate on investments with the best growth
prospects. They ignore valuation and essentially pay whatever price the
market is currently asking for the perceived future growth.
The result is many sound companies, with more modest or moderate
prospects, are ignored and left out of favor. It is the intelligent investor
who will attempt to take advantage of this phenomenon by identifying
companies whose share prices do not fully reflect the real value of the
company.
The enterprising investor can begin his search by looking for companies
that meet the following criteria. Unlike the defensive investor, the
enterprise investor has no minimum limit on the size of the company.
1. Strong Financial condition:
– current assets at least 1.5 times current liabilities
– total debt to net current assets ratio less that 1.1
2. Earnings Stability
– positive earnings for at least 5 years
3. Currently pays a dividend
4. Current earnings greater than years ago
5. Stock price less than 120% of net tangible assets
(Benjamin Clark at ModernGraham.com does an excellent job of
analyzing several hundred stocks to examine whether they meet the
criteria for the defensive or enterprising investor.)
In addition, Graham offered two simple alternative methods for
choosing high probability stocks. One: purchase stocks with a low
price/earnings ratio from a quality list (i.e. Dow Jones Industrial
Average List), and two: purchase a diversified group of stocks selling
under their working capital value (Net Net Stocks).
The common principle for the enterprising investor is finding bargains.
You should avoid lower tier issues unless they are validated as bargains.
In the commentary, Jason Zweig provides excellent content on Return
On Investment Capital (ROIC) and how it can be used to compare one
company to another. He also points out that successful investors have
two things in common: First, they are disciplined and consistent, and
second, they put a great deal of thought into their process, but give little
thought to what the market is doing.
Continue to Part 4:
Mr. Market & Fluctuations – The Intelligent Investor Book Review
(Chapter 8)
Mr. Market & Fluctuations – The Intelligent Investor Book Review –
Chapter 8

by KenFaulkenberry | Value

Mr. Market

This is Part 4 of our book review of The Intelligent Investor, Revised

Edition, Updated with New Commentary by Jason Zweig (affiliate link).
Part 4 covers Chapter 8, The Investor and Market Fluctuations.
You may find the Introduction and relevant links at: The Intelligent
Investor Book Review in 30 Minutes

The Investor and Market Fluctuations – Chapter 8

The stock market is prone to wild fluctuations. Investor do not always
focus on the value of a stock like a business owner, but instead allow
their emotions to affect buy and sell decisions.
Many investors focus on timing the market. In other words, they try to
predict the market through direction, momentum, or various other
indicators they believe predict the future. Mr. Graham contends “it is
absurd to think that the general public can ever make money out of
market forecasts”.
Through out The Intelligent Investor, Graham demonstrates that the
investor should use pricing to make buy and sell decisions. We want to
buy stocks when they are priced below their fair value and sell stocks
when they advance above fair value.
If every investor did their research and only bought stocks with a
margin of safety below the intrinsic value of the company, the market
would be efficient and fairly stable. But we know that this isn’t true. The
market swings wildly from day to day and takes large swings in
valuation over periods of euphoria and pessimism.
Graham used a parable with an imaginary investor named Mr. Market to
illustrate how an intelligent investor should take advantage of market
fluctuations. This is a parable about greed and fear, price and value, and
how the intelligent investor will react.

The Parable of Mr. Market

Graham illustrated his lesson by asking us to imagine we own a share of
a company. We have an imaginary partner in the business named Mr.
Market who offers us a price every day at which we can buy from or sell
to him our share of the company.
Mr. Market is an emotional man who lets his enthusiasm and despair
affect the price he is willing to buy/sell shares on any given day. The
fortunate aspect of this parable is that Mr. Market does not care if you
take advantage of him. He shows up everyday with a price he is willing
to buy or sell shares.
Sometimes he is exuberant and sets the price above the fundamental
value of the business. Some days he is pessimistic and fearful, so he sets
the price below the fundamental price of the business. On occasion, at
emotional extremes, the difference between the price and the value can
be extreme.
The intelligent investor has done his homework. He knows the
fundamental value of his interest. When Mr. Market wants to sell at
prices far below intrinsic value the intelligent investor may choose to
buy from him. When Mr. Market is willing to purchase an interest for
more than its fundamental value the intelligent investor may choose to
sell to him.
I love this story because it is simple and yet profound in its real life
application. It’s a mindset of looking for opportunities based on value
and price, not on emotion or timing. It’s the discipline of avoiding
owning assets that are priced above their real value.
The intelligent investor will attempt to take advantage of Mr. Market by
buying low and selling high. There is no need to feel guilty for ripping
off Mr. Market; after all, he is setting the price. As an intelligent
investor you are doing business with him only when it’s to your
advantage; that’s all.
It is important to be prepared for the inevitable market fluctuations with
your finances and your intellect. In other words, you should be prepared
financially and emotionally to to benefit from prices that are
disconnected from their real values.
As an investor you should stop comparing yourself to others. Intelligent
investing is not whether you can beat the market or not. It’s about
sticking with your discipline and meeting your own investing goals.
Avoid allowing Mr. Market to influence your behavior, but instead take
advantage of his irrational behavior by buying when he is despondent
and selling when he is euphoric. If you concentrate on owning sound
businesses at reasonable prices the results will take care of themselves.
Continue to Part 5:
Investment Funds & Advisors – The Intelligent Investor Book Review
(Chapters 9 & 10)
Investment Funds & Advisors – The Intelligent Investor Book Review –
Chapters 9 & 10

by KenFaulkenberry | Value

This is Part 5 of our book review of The Intelligent Investor, Revised

Edition, Updated with New Commentary by Jason Zweig (affiliate link).
Part 5 covers Chapters 9 & 10.
You may find the Introduction and relevant links at: The Intelligent
Investor Book Review in 30 Minutes

Investment Funds & Advisors

Investing in Investment Funds – Chapter 9

The defensive investor may choose to invest in investment funds. These

investment vehicles provide a convenient means for saving and
investment, and possibly preventing individuals from making costly
blunders.
However, the investor should expect no more than average results. It is
important to be cognizant of high fees, excessive trading, and erratic
fluctuations in performance. Check the performance for at least the last
five years.
Be skeptical of any significant outperformance. Outperformance in
rising markets may indicate speculative behavior on the part of the
portfolio manager. Usually these funds end up with large losses.
The benefit of an investment fund is because it is a cost effective means
to diversify your portfolio with little effort on your part. It is those
investors that are not satisfied with average returns from their fund that
subject themselves to undue risk through speculative behavior, or
succumb to outright fraudulent schemes. In other words, the defensive
investor should probably be satisfied with an index fund and/or closed-
end fund selling at a discount.
Finding closed-end funds selling at discounts can be much more
profitable than open-end funds (particularly when sales charges are
included). Buying at a discount changes the return on investment
calculations significantly.

The Investor and His Advisers – Chapter 10

Most investors are novices, prone to making mistakes. Large

drawdowns, high fees and expense ratios, and lack of proper
diversification are examples of mistakes that cause investors to endure
long term returns that are below average.
Investors should look for advisors with the utmost highest character,
who are conservative, guarded, and proficient in the investment field.
Mr. Graham states “Much bad advice is given free”. How true is that!
Investors should expect to pay a fee. However, the advisor should be
compensated in a way that does not incentivize speculative behavior or
active trading. In the commentary, Mr. Zweig offers an absolute annual
limit of 1% of your investment assets as advisory fees.
The most important objective of the advisor may be to save you from
your own worst enemy, YOU. A good advisor will help you keep your
emotions in control, especially at important moments. Instead of panic
selling, are you going to be prepared to buy when prices have fallen?
Instead of following the crowd, who might be buying at prices far above
intrinsic value, are you going to look elsewhere for better values?
For most investors, an advisor is a worthwhile engagement. Be sure your
advisor cares about their clients, understands the fundamentals of value
investing, and has a satisfactory amount of education and experience in
investing.
Continue to Part 6:
Investment Selection – The Intelligent Investor Book Review (Chapters
11, 12, & 13)
Investment Selection – The Intelligent Investor Book Review (Chapters
11, 12, & 13)

by KenFaulkenberry | Value

Investment Selection: Emotion or Logic

This is Part 6 of our book review of The Intelligent Investor, Revised

Edition, Updated with New Commentary by Jason Zweig (affiliate link).
Part 6 covers Chapters 11, 12, and 13.
You may find the Introduction and relevant links at: The Intelligent
Investor Book Review in 30 Minutes.

Security Analysis for the Lay Investor – Chapter 11

In investment selection, it is most accurate to be able to make judgments

based on past performance. The greater the amount of assumptions that
have to be made about the future, the greater the possibility of
misjudgment or error.
In bond analysis the most reliable benchmark for safety is the earnings-
coverage test. How often, and by how much, has the company earnings
covered interest charges over a considerable period of time
(Graham uses 7 years). In addition, you want to consider the size of
the enterprise, the stock/equity ratio, and bond security (assets).
In common stock analysis the valuation of the company is compared
to the current price to determine whether the stock is an inviting
purchase. Of course an investor should seek a margin of safety. In
other words: purchase the stock for less than its real value.
The average future earnings should be the biggest consideration of
value. However, investment selection should also take into account a
required rate of return (capitalization rate).
The capitalization rate may differ depending on the quality of the
investment. Graham lays out five elements for the security analyst to
consider: general long term prospects, competence of management,
financial strength and capital structure, dividend record, and
current dividend rate.
Making assumptions about the future creates greater risk. The more
an investor relies on future expectations, the greater the margin of
safety he must require. But there is risk in only looking at past
results too.
In order to mitigate this problem, Graham recommends a two-part
appraisal process. First, establish a “past-performance value” based
solely on history. Then contemplate how much of an adjustment
needs to be made to valuation based on future assumptions.
In the commentary, Jason Zweig adds modern illustrations of
Grahams points. He provides interesting examples of problems to
watch for, as well as good signs to be observant of.

Things to Consider About Per-Share Earnings – Chapter 12

Graham is adamant about not putting any importance in short term

earnings. The more an analyst relies on short term results, the
greater the risk, and the more due diligence that is required.
Earnings that are averaged over a long period of time (Graham uses
7 – 10 years) provide a more reliable indicator of the future health
of a company than short term earnings. The shorter the time period
of analysis the greater the scrutiny required of special charges,
income tax anomalies, dilution factors, depreciation changes, etc.
Jason Zweig, in the commentary, laments that even Graham would
be shocked at the size and degree that corporations pushed the
limits of fraudulent accounting in recent years. He provides great
examples and pointers for avoiding these kinds of companies.

A Comparison of Four Listed Companies – Chapter 13

Graham uses this chapter to provide historical examples of

investment selection in action. He details fundamental ratios that
shed light on performance and price. The leading factors of
performance are profitability, stability, growth, financial position,
dividends, and price history.
The attitude of the investor is important in common stock
investment selection. A value approach will be more skeptical of
high multiple valuations based on expected high future growth or
short term earnings. Many times the lower multiple valuation with
slower stable growth will be the long term winner.
Continue to Part 7:
Comparisons & Thoughts on Value – The Intelligent Investor Book
Review (Chapters 16, 17, 18, & 19)

Comparisons & Thoughts on Value – The Intelligent Investor Book

Review (Chapters 16, 17, 18, & 19)

by KenFaulkenberry | Value
Comparisons & Thoughts – The Intelligent Investor

This is Part 7 of our book review of The Intelligent Investor,

Revised Edition, Updated with New Commentary by Jason Zweig
(affiliate link). Part 7 covers Chapters 16, 17, 18, and 19.
You may find the Introduction and relevant links at: The Intelligent
Investor Book Review in 30 Minutes.

Convertible Issues and Warrants – Chapter 16

Wall Street has attempted to market convertibles as “the best of

both worlds”. For the investor, they tout the increased protection
over stocks, plus the hope of capital gains if the underlying stock
increases. In addition the issuing company has the advantages of a
lower cost of capital and the ability to get rid of debt obligations
through bond conversions.
Graham points out the fallacy of such an argument. The convertible
bond buyer is usually giving up yield and accepting greater risk in
exchange for the conversion right. The company is possibly giving
up common shareholders benefits of future growth.
The truth is, convertible issues must be evaluated individually, just
as any other form of security. The type of security, by itself, does not
make it worth your investment.
However, investors should be especially leery of new convertible
issues. This is because companies usually issue convertibles during
periods of time that are advantageous for the company; such as near
the end of bull markets. Most bargain convertible issues will be
found among older issues.
Zweig points out in the commentary that convertible bonds have
historically provided less total return, but more income, and less
risk than stocks. Compared to bonds, their total return is greater,
but provide less income with greater risk. In reality they have been
more correlated with stock prices than bond prices.

Four Extremely Instructive Case Histories – Chapter 17

I enjoyed the commentary of Jason Zweig more than Graham’s

analysis. This is only because he uses more current illustrations of
companies I was familiar with. Both provide instructive case
histories from which we can learn valuable lessons.
Graham and Zweig look at extreme cases of companies, bankers,
and investors making monumental mistakes that should have been
recognized and avoided. Basic security analysis of these companies
would have given investors the information they needed to recognize
the fraudulent behavior of a few companies and the gross
overvaluation of some stocks.

A Comparison of Eight Pairs of Companies – Chapter 18

One of the advantages of reading the revised version, with Jason

Zweig’s commentary, is having more recent examples in the
company comparisons. Since I was familiar with the companies,
Zweig’s analysis gave even greater meaning to Graham’s older
comparisons.
History continually repeats itself. The companies, participants, and
investors are different, but the outcomes remain the same. As Zweig
points out, “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”.
There are cases where investors get excited and pay exorbitant
prices for the stock of companies whose soundness is problematic.
These outcomes end unsatisfactorily. At the same time, you will find
companies whose stock is out of favor and whose price is below its
real worth. These outcomes, more often than not, eventually offer
satisfactory returns.
Many investors try to buy stocks with the best prospects based on
market actions or future earnings. Graham was skeptical about this
form of investing. He preferred to find find the minority of
opportunities where he was confident the price was well below the
real value of the company.

Stockholders and Managements – Chapter 19

Graham urged shareholders to take an active role in being owners

of the company. He thought management with good results should
be rewarded, and management with poor results should be
questioned and challenged.
He was particularly adamant about shareholders demanding a fair
portion of their earnings returned in dividends. This is because
much of the time companies squander past earnings. Just because
management does a good job with current operations doesn’t mean
they know the best use of excess company capital.
If every stockholder acted like an intelligent investor he would hold
company board members accountable. They should be required to
account for their management decisions, dividend policies, buy-back
programs, and overall commitment to looking out for the interests
of the shareholders.
Continue to Part 8:
Margin of Safety – Chapter 20 – The Intelligent Investor Book
Review

Margin of Safety – Chapter 20 – The Intelligent Investor Book

Review

by KenFaulkenberry | Value

Margin of Safety

Ben Graham called margin of safety “the secret of sound

investment” and “the central concept of investment”. He also
devoted a whole chapter to the concept and, I am confident, placed
it last because it is the most important.
Margin of safety is, as he put it, “the thread that runs through all
the preceding discussion of investment policy”. They are the 3 most
important words in The Intelligent Investor.
This is Part 8 of our book review of The Intelligent Investor,
Revised Edition, Updated with New Commentary by Jason Zweig
(affiliate link). Part 8 covers Chapter 20 – Margin of Safety as the
Central Concept of Investment.
You may find the Introduction and relevant links at: The Intelligent
Investor Book Review in 30 Minutes.

Exponentially Higher Returns

The margin of safety for an investment is the difference between the

real or fundamental value and the price you pay. The goal of the
value investor is pay less (hopefully, much less) than the real value.
The greater the margin the more leeway you have for negative
conditions before you lose money. On the other hand, if conditions
are as you expected or better, profits are exponentially higher the
greater the original margin.
Here is an example of exponentially higher returns. You have
estimated the fundamental value of a stock to be $50 and you
purchase it with a 20% margin of safety ($40). If your stock reaches
your fundamental value you have a 25% return ($50 divided by
$40). However if you purchased the stock with a 50% margin ($25),
you have a 100% profit ($50 divided by $25).

Function of Margin of Safety

Almost anyone, with a little knowledge and hard work, can analyze
the past. Mr. Graham demonstrates the importance of this exercise
throughout The Intelligent Investor. However, even the best analysts
are unable to consistently and accurately forecast the future.
The function of having a margin of safety is to make accurate
forecasts of the future unnecessary. In other words, having a safety
buffer allows for inaccurate forecasts. It gives you leeway for
conditions that are less than optimum because that is usually what
happens.

The Price Paid

The amount of safety is completely contingent upon the price paid.

Every investment (there are few exceptions) has a price where the
margin of safety would be sufficient for purchase. Determining what
your purchase price is, and having the discipline to only buy at or
below that price, is where the difficulty rests.
There is risk in paying too high a price for a good quality
investment. However, Graham noted that investors suffer more
often from buying low quality investments during times of economic
stability and growth.
Investors draw incorrect conclusions about the earnings and
viability of a company because of a few good years. A true safety
buffer requires making sufficient allowances for economic cycles
and the possibility the company is not on a permanent upswing.
In addition, Graham recognized a similar folly with buying growth
stocks. Investors seem to project future earnings of growth
companies at rates far above average and place a high multiple
(premium price) on these stocks. This leaves little room for error or
changes of conditions. Growth stocks should only be bought when
the price provides a margin of safety based on conservative
projections.
Almost any investment has a price point at which the margin of
safety is sufficient for purchase. However, these investments are
usually unpopular and out of favor with market. The key is to
require a safety buffer that is large enough to prevail against
adverse conditions.

Diversification

Diversification is a key companion of safety. Diversification is the

margin of safety for your portfolio as a whole.
First, we have put the odds heavily in our favor by requiring a
margin of safety on each individual investment. However, regardless
of how well we have done, some will fail to live up to our
expectations. Having a safety buffer improves our probability, but
some investments will still be losses.
The idea of diversification is that the combined gains will be much
higher than the losses. The more opportunities we find that meet our
safety requirement, the greater the probability that the portfolio will
have above average gains. Therefore diversification is an
important part of intelligent investing.
Your passion has probably increased to learn more from the father
of value investing. I highly recommend owning a copy of The
Intelligent Investor. I encourage you to highlight and underline as
you read. There is so much wisdom and practical application — my
collectors edition is well marked!
Related Reading: 74 Quotes From The Intelligent Investor Revised
Edition

Timeless Investing Quotes from The Intelligent Investor:

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. (pg. ix)
The sillier the market’s behavior, the greater the opportunity for the
business like investor. (pg. ix)
The intelligent investor is a realist who sells to optimists and buys
from pessimists. (pg. xiii)
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. (pg. xiii)
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. (pg. xiii)
The purpose of this book is to supply, in the form suitable for
laymen, guidance in the adoption and execution of an investment
policy. (pg. 1)
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”. (pg. 1)
We have not known a single person who has consistently or lastingly
make money by thus “following the market”. We do not hesitate to
declare this approach is as fallacious as it is popular. (pg. 3)
The defensive (or passive) investor will place chief emphasis on the
avoidance of serious mistakes or losses. His second aim will be
freedom from effort, annoyance, and the need for making frequent
decisions. (pg. 6)
The determining trait of the enterprising (or active, or aggressive)
investor is his willingness to devote time and care to the selection of
securities that are both sound and more attractive than the average.
(pg. 6)
The investor’s chief problem – and even his worst enemy – is likely
to be himself. (pg. 8)
For 99 issues out of 100 we could say that at some price they are
cheap enough to buy and at some price they would be so dear that
they would be sold. (pg. 8)
The distinction between investment and speculation in common
stocks has always been a useful one and its disappearance is cause
for concern. (pg. 20)
Never mingle your speculative and investment operations in the
same account nor in any part of your thinking. (pg. 22)
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. (pg. 31)
Speculative stock movements are carried too far in both directions,
frequently in the general market and at all times in at least some of
the individual issues. (pg. 31)
An investor calculates what a stock is worth, based on the value of
its businesses. (pg. 36)
A speculator gambles that a stock will go up in price because
somebody else will pay even more for it. (pg. 36)
People who invest make money for themselves; people who speculate
make money for their brokers. And that, in turn, is why Wall Street
perennially downplays the durable virtues of investing and hypes
the gaudy appeal of speculation. (pg. 36)
Confusing speculation with investment is always a mistake. (pg. 36)
The value of any investment is, and always must be, a function of
the price you pay for it. (pg. 83)
The most striking thing about Graham’s discussion of how to
allocate your assets between stocks and bonds is that he never
mentions the word “age”. (pg. 102)
The beauty of periodic rebalancing is that it forces you to base your
investing decisions on a simple, objective standard. (pg. 105)
We urge the beginner in security buying not to waste his efforts and
his money in trying to beat the market. Let him study security
values and initially test out his judgment on price versus value with
the smallest possible sums. (pg. 120)
There is no reason to feel any shame in hiring someone to pick
stocks or mutual funds for you. But there’s one responsibility that
you must never delegate. You, and no one but you, must investigate
whether an adviser is trustworthy and charges reasonable fees. (pg.
129)
Thousands of people have tried, and the evidence is clear: The more
you trade, the less you keep. (pg. 149)
We define a bargain issue as one which, on the basis of facts
established by analysis, appears to be worth considerably more that
it is selling for. (pg. 166)
In an ideal world, the intelligent investor would hold stocks only
when they are cheap and sell them when they become overpriced,
then duck into the bunker of bonds and cash until stocks again
become cheap enough to buy. (pg. 179)
In the financial markets, hindsight is forever 20/20, but foresight is
legally blind. And thus, for most investors, market timing is a
practical and emotional impossibility. (pg. 180)
A great company is not a great investment if you pay too much for
the stock. (pg. 181)
The intelligent investor gets interested in big growth stocks not
when they are at their most popular – but when something goes
wrong. (pg. 183)
It is absurd to think that the general public can ever make money
out of market forecasts. (pg. 190)
It should be remembered that a decline of 50% fully offsets a
preceding advance of 100%. (pg. 192)
Even the intelligent investor is likely to need considerable will power
to keep from following the crowd. (pg. 197)
Price fluctuations have only one significant meaning for the true
investor. They provide him with an opportunity to buy wisely when
prices fall sharply and to sell wisely when they advance a great deal.
(pg. 205)
The speculator’s primary interest lies in anticipating and profiting
from market fluctuations. The investor’s primary interest lies in
acquiring and holding suitable securities at suitable prices. (pg. 205)
Always remember that market quotations are there for convenience,
either to be taken advantage of or to be ignored. (pg. 206)
Never buy a stock because it has gone up or sell one because it has
gone down. (pg. 206)
The investor should be aware that even though safety of its principal
and interest may be unquestioned, a long term bond could vary
widely in market price in response to changes in interest rates. (pg.
207)
Nothing important on Wall Street can be counted on to occur
exactly in the same way as it happened before. (pg. 208)
Mr. Market does not always price stocks the way an appraiser or a
private buyer would value a business. Instead, when stocks are
going up, he happily pays more than their objective value; and,
when they are going down, he is desperate to dump them for less
than their true worth. (pg. 213)
The intelligent investor shouldn’t ignore Mr. Market entirely.
Instead, you should do business with him- but only to the extent that
it serves your interests. (pg. 215)
Mr. Market’s job is to provide you with prices; your job is to decide
whether it is to your advantage to act on them. You no not have to
trade with hime just because he constantly begs you to. (pg. 215)
Investing isn’t about beating others at their game. It’s about
controlling yourself at your own game. (pg. 219)
The best way to measure your investing success is not by whether
you’re beating the market but by whether you’ve put in place a
financial plan and a behavioral discipline that are likely to get you
where you want to go. (pg. 220)
Only in the exceptional case, where the integrity and competence of
the advisers have been thoroughly demonstrated, should the
investor act upon the advice of others without understanding and
approving the decision made. (pg. 271)
Before you place your financial future in the hands of an adviser,
it’s imperative that you find someone who not only makes you
comfortable but whose honesty is beyond reproach. (pg. 274)
If fees consume more than 1% of your assets annually, you should
probably shop for another adviser. (pg. 277)
The ideal form of common stock analysis leads to a valuation of the
issue which can be compared with the current price to determine
whether or not the security is an attractive purchase. (pg. 288)
The only thing you should do with pro forma earnings is ignore
them. (pg. 323)
High valuations entail high risks. (pg. 335)
Even defensive portfolios should be changed from time to time,
especially if the securities purchased have an apparently excessive
advance and can be replaced by issues much more reasonable
priced. (pg. 360)
A defensive investor can always prosper by looking patiently and
calmly through the wreckage of a bear market. (pg. 371)
The best values today are often found in the stocks that were once
hot and have since gone cold. (pg. 371)
It’s nonsensical to derive a price/earnings ratio by dividing the
known current price by unknown future earnings. (pg. 374)
Calculate a stock’s price/earnings ratio yourself, using Graham’s
formula of current price divided by average earnings over the past
three years. (pg. 374)
Avoid second-quality issues in making up a portfolio unless they are
demonstrable bargains. (pg. 389)
To see how much a company is truly earning on the capital it
deploys in its businesses, look beyond EPS to Return on Invested
Capital (ROIC). (pg. 398)
Wall Street has a few prudent principles; the trouble is that they are
always forgotten when they are most needed. (pg. 409)
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. (pg. 473)
In the short run the market is a voting machine, but in the long run
it is a weighing machine. (pg. 477)
The intelligent investor should recognize that market panics can
create great prices for good companies and good prices for great
companies. (pg. 483)
The secret of sound investment into three words: MARGIN OF
SAFETY. (pg. 512)
The margin of safety is always dependent on the price paid. It will
be large at one price, small at some higher price, nonexistent at
some still higher price. (pg. 517)
There is a close logical connection between the concept of a safety
margin and the principle of diversification. (pg. 518)
Diversification is an established tenet of conservative investment.
(pg. 518)
It is our argument that a sufficiently low price can turn a security of
mediocre quality into a sound investment opportunity — provided
that the buyer is informed and experienced and he practices
adequate diversification. For, if the price is low enough to create a
substantial margin of safety, the security thereby meets our
criterion of investment. (pg. 521)
Investment is most intelligent when it is most businesslike. (pg. 523)
Losing some money is an inevitable part of investing, and there’s
nothing you can do to prevent it. But to be an intelligent investor,
you must take responsibility for ensuring that you never lose most or
all of your money. (pg. 526)
By refusing to pay too much for an investment, you minimize the
chances that your wealth will ever disappear or suddenly be
destroyed. (pg. 527)
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. (pg. 529)
Successful investing is about managing risk, not avoiding it. (pg.
535)
At heart, “uncertainty” and “investing” are synonyms. (pg. 535)
Without a saving faith in the future, no one would ever invest at all.
To be an investor, you must be a believer in a better tomorrow. (pg.
535)