Investment vs.

Speculation – Chapter 1

One of the most important and basic rules is to keep the activities of investment and
speculation totally separate. They should be kept in separate accounts and
compartmentalized in your mind. If you must speculate, Graham admonishes investors
to limit their allocation to no greater than 10% of investment funds.

Just as there is intelligent investing, there is intelligent speculation. Intelligent investing

involves: 1) analysis of the fundamental soundness of a business 2) a calculated plan to
prevent a severe loss and 3) the pursuit of a reasonable return.
Speculation involves basing decisions on the market price, hoping that someone will pay
more than you at a later date. Unintelligent speculation would include speculating when
you believe you are investing,  speculating actively without  the knowledge or skill to do
so properly, and speculating with money you cannot afford to lose.

It is to the benefit of many on wall street to promote speculation because it produces

money for the industry. Many trendy formulas and stock picking “systems” are
promoted based on past performance. They may work for periods of time but almost
always disappear as they become popular. This means a successful speculator must
constantly stay ahead of the latest trend. This is the opposite of intelligent investing
which involves fundamental analysis that does not fluctuate with each passing trend.

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.

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.).

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.

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.

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.

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.

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.

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
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)