Contents:

Chapter One: The Art of Intelligent Investing… Pg 1

Chapter Two: The “Intelligent” criteria you need to look for in a stock to get the best profits Pg 3
Chapter Three: Two more valuable principles you can use to beat any market conditions Pg 5
Chapter Four: Graham’s four factors for selecting the right stock at the right price Pg 6
Chapter Five: The ultimate “safety net” every investor needs to know about Pg 9
Bonus Chapter: How to generate a R500,000 windfall starting with R10,000 using the
oldest wealth trick in the world Pg 11

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 The Wealth Secret of Columbia Room 305

Chapter one:

The Art of Intelligent Investing…

Just about everybody has heard of Warren Buffett, owner-manager of Berkshire Hathaway, and
the world’s most successful investor.
But did you know it was a professor who shaped Buffett’s investment strategy into one of the
most profitable strategies on Wall Street.
That professor was Benjamin Graham. Ben Graham was a child of the Great Crash. Born Benjamin
Grossbaum (1894) in London, he moved to New York City with his family when he was a year old.
Less than twenty years later, he was graduating from Columbia University and taking up a Wall
Street job.
By 1926, he was in partnership with fellow broker Jerome Newman, and when the Great Crash
came in 1929, he came close to losing everything.
But demonstrating an eagerness to bounce back from disaster, he turned his experiences of the
Depression to his advantage. Ben Graham went on to become one of the world’s most famous
investors and one of and a professor at Columbia University… one of his students was Warren Buffett.
Benjamin Graham was not only Buffett’s teacher and mentor, he was also a highly successful
investor in his own right, and he wrote what’s widely considered to be the finest book on investing
ever, ‘The Intelligent Investor’.
The Intelligent Investor: “By Far the best book on investing” – Warren Buffett
Buffett himself called it “by far the best book on investing ever written” and devoured the first
edition, published in 1949, when he was just nineteen years old.
Buffett was not alone. He cites the investment performance of nine separate, extremely successful
multimillionaire investors who went on to completely trounce the broad stock indices. What they
have in common is that they were all originally taught the principles of ‘value’ investing by Ben
Graham.
You’ve probably never heard of some of these investors before, but they used Benjamin Graham’s
most powerful secrets, principles and tools to make their multi-million dollar fortunes.
Example:
• In 1970, William J. Ruane started the Sequoia Fund. Using Benjamin Graham’s proven investment
secrets, he achieved a 17.2% return every year for 15 years. In fact R10,000 into the Sequoia Fund
from 1970 would’ve turned into a whopping R10,784,869 by June 2014.
• Using the secrets of Benjamin Graham’s proven investment strategy, Walter Schloss made
R190 million for his fund, in just one year!
• The most famous investor to have made a substantial fortune using Benjamin Graham’s
strategy is Warren Buffett – R58 billion to be exact.

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And now, you can join them…

By simply understanding and implementing Benjamin Graham’s proven investment strategy, while
you keep your emotions in check, you’ll be more likely to succeed in the stock market.
To be an “intelligent” investor you need to be patient, disciplined, and eager to learn. You must
also be able to harness your emotions and think for yourself.
According to Benjamin Graham, when it comes to portfolio construction, there are two ways to be
an intelligent investor:
1. Active/Enterprising approach – Continually researching, selecting, and monitoring a dynamic
mix of stocks, bonds, or mutual funds.
2.Passive/Defensive approach – Creating a permanent portfolio that runs on autopilot and
requires no further effort (and generates very little excitement).
I’m going to show you how you can be your own “Intelligent Investor” and profit just like Warren
Buffett, Walter Schloss, William J. Ruane and the many other investors who made a fortune being
an “Intelligent investor”.
You see, Benjamin Graham’s investment strategy offers you the best chance of following in the
footsteps of these legendary investors. These are simple, tried and tested philosophies for capital
preservation – and wealth creation.
And in this report, I’m going to show why Benjamin Graham’s ideas and secrets are relevant for
you too. I’ll show you how to implement the secrets of one of the world’s greatest investors so
you can build Real Wealth.

How to be an intelligent owner

Most investors have forgotten Graham’s message.
They put most of their effort into buying a stock, only a little into selling
it—but none into owning it.
Graham reminds us, “there is just as much reason to exercise care and
judgment in being as in becoming a stockholder.”
So how should you, as an intelligent investor, go about being an
intelligent owner?
Graham starts by telling us that “there are just two basic questions to
which stockholders should turn their attention:
1. Is the management reasonably efficient?
2. Are the interests of the average outside shareholder receiving
proper recognition?”
You should judge the efficiency of management by comparing each
company’s profitability, size, and competitiveness against similar firms in
its industry.

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Chapter 2:

The “Intelligent” criteria you

need to look for in a stock to
get the best profits
Benjamin Graham wasn’t only one of the best investors who ever lived; he was also the greatest
practical investment thinker of all time. He knew when to buy and sell a company at the right time.
In April 1919, he earned a 250% return on the first day of trading Savold Tire, a new offering in
the booming automotive business; by October, the company had been exposed as a fraud and the
stock was worthless.
Graham became a master at researching stocks in deep detail. In 1925, while going through the
reports filed by oil pipelines with the US Interstate Commerce Commission, he learned that Northern
Pipe Line Co. – then trading at $65 per share – held at least $80 per share in high-quality bonds.
He bought Northern Pipeline, pestered its managers into raising the dividend, and came away
with $110 per share three years later.

How this master investor conquered the Great Depression

Despite a harrowing loss of nearly 70% during the Great Crash of 1929–1932, Graham survived
and thrived in its aftermath, pinpointing bargain stocks from the wreckage of the bear market.
From 1936 until he retired in 1956, his Graham-Newman Corp. fund gained at least 14.7% a year,
versus 12.2% for the stock market as a whole — one of the best long-term track records in Wall
Street history.

So how did Benjamin Graham do it?

Combining his extraordinary intellectual powers with profound common sense and vast
experience, Graham developed his core principles, which are as valid today as they were during
his lifetime:
➢ A
 stock is not just a ticker symbol or a company’s name on a computer screen. It’s an
ownership interest in real businesses, with an underlying value that doesn’t depend on
its share price.
➢ T he stock market never stands still but forever swings between unsustainable optimism
(which makes stocks too expensive) and unjustified pessimism (which makes them
too cheap).

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➢ T he most crucial element of any investment you make is its initial price. The higher the
price you pay, the lower your returns will be.
➢ R
 isk will never be completely eliminated in any business. But risk can be controlled.
By using the “margin of safety”, you’ll never overpay, no matter how exciting an
investment looks. You’ll minimize your odds of error.
➢ T he secret to your financial success is inside yourself. If you believe in yourself and you
invest with patience and confidence, you can take advantage of even the worst bear
markets. By developing discipline and courage, you can refuse to let other people’s
mood swings govern your financial destiny. Simply, how your investments behave is
much less important than how you behave.
Another important thing Benjamin Graham noted – The investment business is prone to
exaggeration and overstatement.
He describes precisely what he means by the business of investment: “An investment operation
is one which, upon thorough analysis, promises safety of principal and an adequate return.
Operations not meeting these requirements are speculative.”

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 The Wealth Secret of Columbia Room 305

Chapter 3:

Two more valuable principles

you can use to beat any
market conditions
Value Investor Principle #1: Volatility is always shaking the markets, but you can profit from it
Volatility is a no-brainer when it comes to investing in stocks. Share prices react vigorously to any
significant changes in current earnings, short-term earnings prospects and economic conditions.
Volatile markets never worried Benjamin Graham. In fact, it actually presented him with great buying
opportunities. This is best explained with the General Motors volatile share price movements.
• From 1925 to 1929, GMs shares rose from $13 to $92 (a 607% increase).
• In 1932, GMs shares crashed to $7.50, bounced back to $77 (over 700% increase)
two years later, and then relapsed to $25.50 in 1938.
• By 1946, GM was trading at around $80, but in the same year fell to $48 (a loss of 40%).
Each drop of GM’s share price presented an opportunity to buy the group below what it was really
worth. So how did he make the best out of these opportunities?
Benjamin Graham encourages you to view downturns as great buying opportunities
and not let the market’s views dictate buy and sell decisions.
Value Investor Principle #2: Never forget you’re an owner of the business
According to Benjamin Graham, stocks aren’t just quotations on a computer screen. Rather, they
represent ownership in the businesses. That’s why before Benjamin Graham buys a company, he
makes sure he thoroughly analyses the underlying business and its prospects. And he encourages
investors to do the same.
Graham also urges investors to never forget that they’re owners of a business and not owners
of a quotation on the stock market. So, it’s crucial you understand, when investing in a company,
you’re trusting your hard-earned cash with its management.
The problem with this, management can easily fail to act in the best interest of its shareholders.
To find whether this might be the case, you can look at these two red flags:
• Management fails to pay dividends both with earnings and with the value of the
shareholder’s equity
• Management fails to use shareholders money in a profitable manner.
Use these red flags to determine whether you can trust management to look out for your best interest.
As a last key takeaway, Benjamin Graham urges you to know what kind of investor you are. Being
able to understand yourself will go a long way in making the right investment decisions.

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 The Wealth Secret of Columbia Room 305

Chapter Four:

Graham’s four factors for

selecting the right stock
at the right price
If you understand Benjamin Graham, you know that the fundamental key to his market-beating
investment strategy is value investing.
Value investors like Benjamin Graham actively seek stocks of companies they believe the market
has undervalued. These investors believe the market overreacts to good and bad news, resulting
in stock price movements that do not match the company’s long-term fundamentals. The result is
an opportunity for value investors to profit by buying when the price is deflated.
So which factors determine how much you should be willing to pay for a stock? What makes one
company worth 10 times earnings and another worth 20 times? How can you be reasonably sure
that you are not overpaying for an apparently rosy future that turns out to be your worst nightmare?
According to Benjamin Graham, he feels that four factors are decisive. He summarises them as:
1. The company’s “general long-term prospects”
2. The quality of its management
3. Its financial strength and capital structure
4. Its dividend record
Let me explain…

Long-term prospects are vital to identify the real potential of a company

The intelligent investor should begin by downloading at least five years’ worth of annual reports
from the company’s website or from Stock Exchange News Service (SENS) via Moneyweb.co.za.
Then explore the company’s financial statements, gathering evidence to help you answer two overriding
questions. What makes this company grow? And where do (and where will) its profits come from?
Among the problems to watch for when analysing a company’s financials are:

Danger sign #1: The company is a “serial acquirer”

An average of more than two or three acquisitions a year is a sign of potential trouble. If a
company would rather buy the stock of other businesses than invest in its own, shouldn’t you take
the hint and look elsewhere too?
And check the company’s track record as an acquirer. Watch out for trigger-happy companies that
wolf down big acquisitions, only to end up off-loading them.

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Danger sign #2: The company is an “other people’s money” addict

“Other people’s money” addicts borrow debt or sell stock to raise boatloads of Other People’s
Money (OPM). These OPM are labelled “cash from financing activities” on the company’s cash
flow statement in the annual report.
And they can make a sick company appear to be growing even if its underlying businesses aren’t
generating enough cash.

Danger sign #3: The company generates most of its revenue

through one customer
The final danger sign is very simple to understand. Your main goal here should be to identify a
company’s main sources of revenue. What you must avoid are companies that rely mainly on one
or two customers to generate most of its revenues. Why?
Well, what happens if the company that generates the revenue goes bust? Then how will the
stock grow its earnings? Simply, it won’t.
But as you study the sources of growth and profit, always seek the positives as well as negatives.
As much as there are problems, you need to watch out for, there are also the good signs:
1. The company has a strong competitive advantage
The company has a strong “moat” or competitive advantage. Like castles, some companies can
easily be stormed by marauding competitors, while others continuously grow.
Several factors can widen a company’s moat: a strong brand identity.
Think of a company like Coca- Cola, whose secret formula for flavoured syrup has no real physical
value but maintains a priceless hold on consumers all over the world.
2. The company is a marathoner, not a sprinter
You can identify a marathoner-company by looking back at its income statements. You’ll see
whether revenues and total earnings have grown smoothly and steadily over the past 10 years.
3. The company sows and reaps the rewards
No matter how good a company’s products or how powerful its brands, a company must spend
some money to develop new business.
Even though research and development spending aren’t considered a source of growth today, it
may well be tomorrow — particularly if a firm has a proven record of rejuvenating its businesses
with new ideas and equipment.
4. The quality and conduct of management are just as key as profits and growth
A company’s executives should say what they will do, then do what they said. Read the past
annual reports to see what forecasts the managers made and if they fulfilled them or fell short.
Directors should admit their failures and take responsibility for them, rather than blaming their
poor performance on scapegoats like “the economy,” “uncertainty,” or “weak demand.”

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 The Wealth Secret of Columbia Room 305

Identify the financial strength and capital structure of a company

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.
Start by reading the statement of cash flows in the company’s annual report. See whether cash
from operations has grown steadily throughout the past 10 years. Then you can go further.
Warren Buffett popularised the concept of owner earnings (in other words, free cash flow).
If “owner earnings” per share have grown at a steady average of at least 6% or 7% over the past
10 years, the company is a stable generator of cash, and its prospects for growth are good.
Next, look at the company’s capital structure. Turn to the balance sheet to see how much debt
(including preferred stock) the company has; in general, long-term debt should be under 50% of
total capital. Another ratio you can use is the debt to equity ratio, which shows you how much
debt a company is using to finance its assets.

The company must have a consistent record of paying

shareholders dividends
The burden is on the company to show that you are better off if it does not pay a dividend. If the
firm has consistently outperformed its competition in good markets and bad, the managers are
clearly putting the cash to optimal use.
If a business is faltering or the stock is underperforming compared to its rivals, then the managers
and directors are misusing the cash by refusing to pay a dividend.
You see, dividends are owed to investors. It’s a form of reward and they belong in the shareholder’s
hands. What’s more, consistent dividend-paying stocks will be much more attractive.

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 The Wealth Secret of Columbia Room 305

Chapter Five:

The ultimate “safety net” every

investor needs to know about
In Chapter 20 of Benjamin Graham’s book, “The Intelligent Investor”, there’s an important
investing concept that can be useful to every investor.
Benjamin Graham, encourages investing with a “margin of safety”.
Now if you don’t know what that is, a margin of safety is simply the difference between the real
value of the business and the price at which it’s trading.
The aim of every investor is to pay less than the real value – that simple. In other words, the aim is
to buy assets at a rate below the valuation of the business, because it offers you a safety net.
Let me explain a little further…

The greater the margin of safety, the less risky the investment
To explain what Benjamin Graham means when he talks about margin of safety, you can look at
this example…
Let’s say you think a company is worth R100 a share and you buy it for R95. You don’t really have a
real margin of safety. But, if that company (worth R100) is a strong leader in the markets and you
buy it for R75 a share, then you’re getting a good margin of safety.
However, if that R100 company is a much riskier business, you’ll want a much bigger margin of
safety. This means you may want to wait until the company sells for R60, or even R50 a share.
You see, the greater the margin, the more freedom you have for any negative impacts or
unforeseen events before you start losing money.

The most important indicator of a margin of safety – Net Asset Value

A company that trades close to or above its real value offers almost no margin of safety. According
to Benjamin Graham’s book, The Intelligent Investor, buying without a margin of safety is no
better than speculation.
So how do you find a margin of safety? It’s simple. You just look at a company’s share price and
compare it to its net asset value (NAV).
To calculate NAV = Total Assets – Liabilities. Then to calculate it on a per share basis, you divide
the NAV by the total number of outstanding shares in the company.
So just to give you an idea of what it means to buy with a “margin of safety”, here’s a personal
example. I applied Benjamin Graham’s famous NAV indicator to unearth a stock that was trading
at a massive discount for my Real Wealth members.

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 The Wealth Secret of Columbia Room 305

I looked at the company’s share price of R22 compared to its NAV of R40.29. This meant, the stock
was trading at a 67% discount. I analysed the company and made sure that it also was a great
long-term share.
And it was!
It banked 98.55% gains for my readers.

A final word from the man himself – Benjamin Graham

When asked what keeps most individual investors from succeeding, Graham had a concise
answer:
“The primary cause of failure is that they pay too much attention to what the stock market
is doing currently.”
In other words, the stock market is volatile. One day shares will soar, the next day they’ll drop.
The point is, don’t react to these volatile changes in share prices. Just leave your investments to
do the work.

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Bonus Chapter:

How to generate a R500,000

windfall starting with R10,000
using the oldest wealth
trick in the world
Compound interest is the most powerful force in finance.
It’s the force behind almost every fortune. The brilliant financial writer of the Dow Theory Letters,
Richard Russell, calls compound interest “The Royal Road to Riches.” And it’s mathematically
guaranteed.
This compounding method is the most powerful strategy to implement over a longer time, for
your portfolio.
It’s simply the effect of earning returns on returns. The bigger your returns get, the bigger your
future returns will be.
For example: Let’s say you invest R50,000 and you receive an annual 15% return.
In the first year, you’ll earn R7,500. So your new balance is R57,500 (R50,000 + R7,500).
If you keep compounding your portfolio and re-investing the return on your portfolio every year it
would turn into R202,277 in 10 years and in 20 years, your R50,000 investment would be worth a
smashing R818,326.
You can clearly see the potential of the powerful gift, compound interest, offers.
That’s why I’m going to show you how to generate a R500,000 windfall from simple compounding
starting with R10,000.
But first you need to know…

How to make the most of compounding

There are three important factors you need to consider to make the most of compounding.
1. Time is the most important element in compounding.
2. The earlier you start; the more money you will earn.
3. The stock market is the best place to earn compound interest.

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 The Wealth Secret of Columbia Room 305

You buy quality companies that have a strong track-record of paying dividends. Then you let the
mathematics work. In fact, “the compounding effect of reinvesting the annual dividend yield is
quite significant over a 50-year period. With reinvested dividends contributing as much as 90% of
the total return over this period.”
So the real question is, how can you take advantage of the most powerful force in finance?
Well, you can’t just invest your money anywhere or in any stock. You need to invest in EXTRA
ordinary investments that’ll deliver the compounded returns you need to make R500,000 or more.
And I use a unique way to find these extraordinary investments to achieve amazing and consistent
returns.

The secret of Mispriced Stocks!

Professional investors like Warren Buffett, Walter Schloss, Irving Kahn and William J. Ruane all
used it to make a fortune.
I started using this strategy and sharing it with Real Wealth readers in October 2010. And in that
time, it’s generated an average annual return of 14.86% over the last 11 years..
In fact, as you’ll see below, it has more than doubled the returns of the JSE since 2010…

390,00%

350,00% Real Wealth Portfolio JSE All Share

310,00%

270,00%

230,00%
190,00% Real Wealth = 359.62%
150,00% JSE All Share = 108.73%
110,00%

70,00%
30,00%

-10,00%
Se 01 1

Se 01 2

Se 01 3

Se 01 4

Se 01 5

Se 01 6

Se 01 7

Se 01 8

Se 01 9

Se 02 0

Se 02 1
M 010

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M 012

M 013

M 014

M 015

M 016

M 017

M 018

M 019

M 020

21
20
2

2
-2

-2

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This would’ve turned just a R10,000 once off investment into R49.504. Or a R49,504 yearly
investment could’ve turned into an incredible R277,765.
And there’s absolutely no reason why these returns won’t continue. After all, exceptional
investors like William Ruane, Warren Buffett and Walter Shloss have used this secret to make huge
amounts of money and build their billion-dollar empires.
Remember: The key to receiving this windfall is to continuously re-invest your dividends and profits!
Now to get started, you must check the “buys” on the back of every issue of Real Wealth and start
investing. What’s great is, you can start with any amount. But the more you invest, the bigger
windfall you could generate.

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