Book SummaryThe Intelligent Investor, by Benjamin Graham

1-Page Summary1-Page Book Summary of The Intelligent Investor

Investing well over the long term does not require incredible intelligence or deep insight. Instead, it requires two things:

• A rational framework for making decisions
• Preventing your emotions, and other people’s emotions, from overriding your framework

With these two elements, and without extensive trading experience, you can do better than more financially-educated people who lack patience, discipline, and emotional control.

Investing successfully in stocks requires keeping a few key principles in mind:

• A stock is not just a mere object you trade. It is a piece of ownership in a business. Therefore, the stock has a fundamental value that is often not the share price. Understand the business, and you understand the fundamental value.
• Pay attention to the price at which you buy stock. The more you pay for a stock, the lower your return will be. Buying stock carelessly, with the expectation that you can buy anytime at any price and still profit, is a mistake. As Graham says, “buy your stocks like you buy your groceries, not like you buy your perfume.”
• The market has constant mood swings. At times, it is over-optimistic, which makes stocks too expensive. At other times, it is pessimistic, which makes stocks cheap. The key is to buy from pessimists and sell to optimists.
• Keep a “margin of safety”—don’t get carried away and overpay for a stock, or a downturn can cause irrevocable losses.

This book covers two major types of intelligent investors—defensive investors and aggressive investors—and advises how each should invest. It also covers general investment principles and market behavior, popularizing Graham’s famous concepts of Mr. Market and Margin of Safety.

Let’s begin by discussing what investment is.

Investors vs. Speculators

What are investors? The term is thrown about loosely to describe anyone who buys or sells securities in the market. But since many people trade irresponsibly and by their emotions, describing them as “investors” seems too generous. For instance, if the stock market suffers a major drop, the media will report, “investors became bearish and pulled out of the market.” Yet these moments are precisely when sound investors would be buying stocks on the cheap.

Offering a more robust definition, Graham defines investment as an operation that, through extensive analysis, provides an adequate return and safety of principal. Everything that doesn’t fit this definition is speculation.

Investors and speculators therefore behave very differently.

Speculators trade on market movements of stock price They buy stocks as they move up, hoping to sell to someone who will pay more for it. When the price goes down, they sell to capture their gains or cap their losses. In all this, they ignore the fundamental value of what the company is worth.

Investors look at the fundamental value of the stock, independent of the stock price. In fact, Graham suggests that investors should be comfortable buying stock even if they could receive zero future information about its daily stock price. Investors also trade oppositely to speculators—they buy when the market is down, since stocks are cheap. Investors dread bull markets since it makes everything overpriced.

Speculators are swayed by popular opinion. They hear optimistic estimates from analysts and buy stock, without questioning the underlying value. They buy when everyone else is buying, and sell when everyone else is selling.

Investors are independent thinkers. They use a dependable system for decision-making.

Don’t Believe the Active Trading Hype

You’ve likely seen commercials for stock brokerages that let you trade more conveniently and with lower fees than ever before. Beware: brokerages make money when you trade, and not when you make money. Therefore, brokerages hype up speculation for common investors in their marketing, promising riches at unprecedented speed.

In reality, active trading worsens your performance. A 2000 study by finance professors found that the most active traders (who turned over more than 20% of their holdings each month) underperformed the market by 6.4% per year, while the least active traders (trading less than 0.2% of holdings each month) matched the market.

Defensive vs. Aggressive Investors

Having distinguished investors from speculators, Graham defines two different types of intelligent investors: defensive investors and aggressive (or enterprising) investors.

Defensive investors want to avoid spending too much time on investing. They like simplicity and don’t love thinking about investments or money. Their goal is to perform on average, in line with the market, and to avoid serious mistakes.

Aggressive investors are willing to devote serious time and energy to research stocks and select good ones. They enjoy thinking about money and see smart investing as a competitive game they want to win. Their goal is to achieve better returns than the passive investor (Graham says an extra 5% per year, before taxes, is necessary to justify all the effort.)

Both approaches can be intelligent and can perform well. The key is choosing the right type of investment for your temperament and goals, to stick with it over your entire investment timeline, and to keep your emotions well under control.

The Defensive Investor

How Should Defensive Investors Invest?

Graham’s recommendation is to split investments between stocks and bonds. The default split is 50-50 between stocks and bonds. This allows you to participate in both the gains of stocks as well as the relative safety of bonds.

At times, you can shift your balance in favor of stocks or bonds. If you feel stocks are overpriced and due for a downturn, you can shift your investment to 25% in stocks and 75% in bonds....

The Intelligent Investor Summary Introduction

Investing well over the long term does not require incredible intelligence or deep insight. Instead, it requires two things:

• A rational framework for making decisions
• Preventing your emotions, and other people’s emotions, from overriding your framework

With these two elements, and without extensive trading experience, you can do better than more financially-educated people who lack patience, discipline, and emotional control.

Investing successfully in stocks requires keeping a few key principles in mind:

• A stock is not just a mere object you trade. It is a piece of ownership in a business. Therefore, the stock has a fundamental value that is often not the share price. Understand the business, and you understand the fundamental value.
• Pay attention to the price at which you buy stock. The more you pay for a stock, the lower your return will be. Buying stock carelessly, with the expectation that you can buy anytime at any price and still profit, is a mistake. As Graham says, “buy your stocks like you buy your groceries, not like you buy your perfume.”
• The market has constant mood swings. At times, it is over-optimistic, which makes stocks too...

The Intelligent Investor Summary Chapter 1: What Is Investment?

Let’s begin by defining who investors are, in the context of this book.

Investors vs. Speculators

What are investors? The term is thrown about loosely to describe anyone who buys or sells securities in the market. But since many people trade irresponsibly and by their emotions, describing them as “investors” seems too generous. For instance, if the stock market suffers a major drop, the media will report, “investors became bearish and pulled out of the market.” Yet these moments are precisely when sound investors would be buying stocks on the cheap.

Likewise, people describe “speculation” loosely. Yet after a stock market crash, when sentiment is poor and all stocks are considered too risky, they’re often the most attractive for investment.

Offering a more robust definition, Graham defines investment as an operation that, through extensive analysis, provides an adequate return and safety of principal. Everything that doesn’t fit this definition is speculation.

Investors and speculators therefore behave very differently.

Speculators trade on market movements of stock price They buy stocks as they move up, hoping to sell to someone who will pay more for it....

Shortform Exercise: What Kind of Investor Are You?

Define what kind of investor you should be.

Are you currently an investor or a speculator? Remember that investment is an “operation that, through extensive analysis, provides an adequate return and safety of principal.” investors always consider the underlying value of what they’re buying.

The Intelligent Investor Summary Chapter 2: Inflation

Inflation is an increase in prices over time. A dollar today buys a lot less than a dollar did 20 years ago: the purchasing power of a dollar has decreased.

Inflation is an insidious problem, because it doesn’t change the actual balance of your bank account, it only changes the purchasing power of how much money you have. If 2% of your bank balance were deducted per year, you’d take notice and be alarmed. But when the same amount of money can buy 2% less in goods and services each year, it’s nearly undetectable.

Therefore, if you were to hold all of your savings simply in cash, it would gradually lose value because of inflation. In contrast, holding stocks in your portfolio reduces the effect of inflation. Even if inflation occurs in a given period, increases in the stock’s dividends and price may offset inflation. Bonds, being loans with fixed terms, don’t have the same flexible resistance to inflation.

We’ll discuss inflation in more detail and why stocks protect against it.

Measuring Inflation

How bad can inflation get? During certain periods, inflation can be rapid:

• In the US, in the 6 years from 1915 to 1920, cost of living nearly doubled.
• Also in...

The Intelligent Investor Summary Chapter 3: Is It a Good Time to Buy Stocks?

Is it a good time to buy stocks? This is a perennially difficult question to answer. Investment professionals, whose job is to figure this out, constantly get it wrong.

Public sentiment is even less reliable—when a large crash occurs, most people, having incurred large losses, declare stocks too risky; in reality, this is the time of greatest opportunity to buy. Conversely, when people expect growth to continue perpetually, they’re willing to buy at any price; this ebullience is inviting a steep crash to more reasonable levels.

In each edition of The Intelligent Investor, revised roughly every 5 years from 1949 to 1973, Graham gave an assessment of whether stocks were undervalued or overvalued, and thus whether investors should choose to invest or sit on the sidelines. In this chapter, he reflects on those predictions and the general method of evaluating the stock market. (Shortform note: For today’s readers, this is of course less relevant for its actual predictions and more to illustrate Graham’s thinking.)

Stock Market History

In hindsight, over the past 75 years, stocks have trended consistently upwards. Here’s a chart showing the S&P 500 on a log...

The Intelligent Investor Summary Chapter 4-5: The Defensive Investor

With some market fundamentals covered, we’ll now discuss the two major types of investors: defensive investors in this chapter, and aggressive investors in the next.

Defensive investors want to avoid spending too much time on investing. They like simplicity and don’t love thinking about investments or money. Their goal is to perform on average in line with the market, and to avoid serious mistakes.

We’ll cover how the defensive investor should invest, both from a philosophical point of view on how to behave and a tactical point of view on what stocks and bonds to buy.

How Should Defensive Investors Invest?

Graham’s recommendation is to split investments between stocks and bonds. The default split is 50-50 between stocks and bonds. This allows you to participate in both the gains of stocks as well as the relative safety of bonds.

At times, you can shift your balance in favor of stocks or bonds. If you feel stocks are overpriced and due for a downturn, you can shift your investment to 25% in stocks and 75% in bonds. Likewise, after a steep market downturn or when stocks are cheap, you might shift to 75% in stocks and 25% in bonds. But Graham advises no more than...

The Intelligent Investor Summary Chapter 6: The Aggressive Investor, Generally

In contrast to defensive investors, who want to minimize time and get acceptable results, aggressive investors want to devote serious time to investment research to achieve better returns than average.

When describing these investors as “aggressive,” Graham is not urging any carelessness or impulsiveness, despite general connotations of the term “aggressive.” In stark contrast, aggressive investors should methodically value potential investments, be patient for bargains, and maintain level-headedness when the market is reactive in either direction.

(Shortform note: Graham uses the terms “enterprising investor” and “aggressive investor” interchangeably—we use “aggressive” since it’s the more well-known of the two terms.)

Expectations for the Aggressive Investor

Effort Required of the Aggressive Investor

To be successful as an aggressive investor, you must devote your full effort and attention to the task. You should view your investing as equivalent to operating a full business—just as you can’t be half a business operator, you can’t be half an aggressive investor and half a passive investor.

Since most people can’t put in this effort, they should become...

The Intelligent Investor Summary Chapter 7: The Aggressive Investor, Specifically

With the general mindset established, we can now cover the specific choices of the aggressive investor. While the defensive investor can earn market returns simply by investing in general mutual funds, the aggressive investor needs to seek pointed opportunities to be above average.

Asset Classes to Avoid

An aggressive investor willing to do a lot of work will likely be more interested in a broad array of asset classes. If you know what you’re doing and can find good opportunities, you’ll likely enter areas that defensive investors should stay clear of.

However, Graham cautions against a set of instruments that even aggressive investors should be skeptical of. An investor’s success is defined just as much by what he chooses not to do as by what he does.

For the below issues, the aggressive investor should be cautious and scrutinize the security before investing.

• Be careful not to get carried away by the promise of higher returns while ignoring the risk and inadequate margin of safety.
• Avoid buying each of these securities at full prices. Consider buying them only at steep discounts (where prices are below two-thirds of their fundamental value).

In any...

The Intelligent Investor Summary Chapter 8: Market Fluctuations and Mr. Market

When asked to predict what the market would do, the financier J.P. Morgan said, “it will fluctuate.”

You can be sure that the market will fluctuate. In all likelihood, you will not be able to predict when and how the market fluctuates. You can, however, respond in two critical ways:

1. Steel yourself mentally for the fluctuations. Prepare for the idea that your portfolio may decline by 30% from its high point, and don’t tie your emotions to these fluctuations.
2. Watch patiently and prepare to spot opportunities when they do appear. When the market sours on a stock, it can be an overreaction and present a bargain buying opportunity.

We cover two trading strategies that deal with market fluctuations: market timing and stock pricing. Graham is sour on the former as a reliable investment strategy, but, as we’ve seen, he believes in the latter.

Market Timing Doesn’t Work

Market timing has a strong allure: buy when the market is down, and sell when the market is up. The trouble is determining when exactly the bottom or the peak of a market is. This often seems obvious in retrospect but is exceedingly difficult to predict in the future.

Graham argues that...

Shortform Exercise: Prepare for Fluctuations

Your investments will fluctuate. Prepare for them.

Have you ever committed the mistake of following Mr. Market, buying when the market was rising and selling as it was falling? What was your thinking during that time?

The Intelligent Investor Summary Chapter 9: Investment Funds

While much of the book is about choosing individual securities (stocks or bonds), there is a simpler way to invest—through mutual funds. Mutual funds pool together money from many investors, then invest those funds along the fund’s strategy. Therefore, when you buy a share of the fund, you hold a portion of the fund’s underlying securities, including a wide array of stocks and bonds.

At the time of Graham’s writing in the early 1970s, mutual funds were a rising force in finance, with roughly $50 billion under management. Since that time, mutual funds have become a juggernaut, with nearly $20 trillion under management (for context, the total market capitalization of the US stock market is around $40 trillion).

This chapter discusses what expectations to have on fund performance, how to choose funds, and which funds to avoid.

Which Funds to Choose?

Mutual funds come in many flavors:

• In scope, with some representing the entire stock market and others focused on particular industries such as...

The Intelligent Investor Summary Chapter 10: Financial Advisors

If you’re not trained in treating medical conditions, you consult a doctor for medical advice. Likewise, if you’re not trained in finance, it’s natural to feel like you need advice from financial experts. Choosing the right advisors is important for you to keep your money.

Finance offers a wide range of advisors, including banks, financial information providers, brokerages, and investment banks. We’ll cover generalities of how to distinguish good advisors from bad ones and how each specific advisor works.

General Advice on Finding Advisors

Now that you know how much effort it takes to earn above-average returns, and how few people successfully do it, you should be skeptical of anyone who promises to do this for you. When finding financial advisors, have grounded expectations for what they should do for you.

• If you owned a business, you could find consultants for specific aspects of the business (such as marketing or legal compliance), but you should not expect to find a consultant to do the main work of building a profitable business. That is the business owner’s concern and responsibility.
• Likewise, you should not hire an advisor with the expectation that...

The Intelligent Investor Summary Chapters 11-13: Security Analysis

If you want to choose individual stocks and bonds, you will need to understand the company’s financial position and future growth prospects. This work is called “security analysis” and it involves diving into the company’s financial statements. It also involves reading between the lines to infer what is really going on behind the numbers.

While no one has a crystal ball and can foresee the future with complete accuracy, certain indicators help you understand whether a company is situated for long-term growth or whether it’s likely to collapse within a few years.

Security analysis tries to answer two basic questions:

1. How safe is this bond or stock?
2. What is the value of this stock?

Stock Analysis

The chief question when buying stocks is whether the stock’s current price is too high or too low relative to its underlying value.

The current price is easy to determine since it’s quoted as market prices on stock tickers. The stock’s underlying value is more difficult, since it involves predicting how the company will perform in the future.

While Graham doesn’t give precise formulas for calculating company value (that’s more complex and out of the scope of...

The Intelligent Investor Summary Chapters 14-15: How To Choose Stocks, In More Detail

We now have a general understanding of how to think about a company’s long-term prospects, and also how the market prices the company’s stocks. We can now think about how to choose specific stocks. We’ll start with defensive investors, then cover aggressive investors.

How Defensive Investors Should Choose Stocks

Let’s begin by questioning the premise. Should a defensive investor choose stocks at all? Nowadays, the answer is likely no—defensive investors might best be served by not choosing individual stocks, instead buying an index fund representing a broad swath of the stock market. This will provide broad diversification, and your performance will be in line with the overall market.

But if you want to choose your own stocks, as a defensive investor you should buy only high-quality stocks at reasonable prices. In practice, defensive investors should look for stocks with these seven criteria:

1. Size: More than $100 million in revenue
   • Small companies face more volatility and may be unable to survive bad events.
   • Graham’s criterion was set in 1970, and $100 million in revenue may be too small today. In his commentary, Zweig defines...

The Intelligent Investor Summary Chapter 17: Case Studies in Failed Companies

(Shortform note: Chapter 16 discussed convertible issues; we covered this in Chapter 7 on what the Aggressive Investor should avoid.)

When choosing investments, it’s as important to avoid overhyped companies on the brink of failure as it is to choose bargain stocks. Graham shows four case studies of companies that had astronomical stock prices but showed clear warning signs of their impending demise. Moreover, to detect their weak conditions, you wouldn’t have needed to understand their intricate workings—you could have used the basic financial metrics we’ve covered already.

Then, in his commentary, Zweig adds modern examples of each archetype.

The four archetypes shown are:

• A giant company with signs of poor operating performance
• An empire-building conglomerate that grows unwisely through acquisition
• An acquisition where a small company absorbs a giant
• A company with little substance riding a speculative wave

Archetype 1: A Poorly Operating Giant

Penn Central

In 1970, the nation’s largest railroad company Penn Central filed for bankruptcy. This was shocking to the finance world, but Graham argues **its demise could have been predicted well in...

The Intelligent Investor Summary Chapter 18: Contrasting Bargain Stocks and Overpriced Stocks

Graham extends his security analysis to comparing eight pairs of publicly traded businesses. The overall purpose was to illustrate how the market reacts differently to two types of companies:

1. The value stock: a solid, steady performer with reliable growth, but that might have fallen out of fashion with the market. At low prices, the stock would be a bargain.
2. The growth stock: a flashy company that showed faster recent growth or higher net margins, thus having its stock price bid up to high multiples of earnings. These stocks are speculative and likely overpriced, by Graham’s standards.

In some pairs, the companies were chosen from the same industry (such as Real Estate Investment Trust vs. Realty Equities Corp. of New York) while in other pairs, the companies were in very different industries and were chosen merely because they had similar names (International Flavors & Fragrances vs. International Harvester Co., a machinery manufacturer).

In most pairs, the market valued the growth stock at much higher multiples of earnings. In some cases, the growth company even had a higher total valuation than the value company, even though the value company...

The Intelligent Investor Summary Chapter 19: A Stock Owner is a Business Owner

When most people buy a share of stock in a company, they see it as an item of abstract value, rising and falling with the whims of the market. In turn, they see themselves as passive observers of a business, content to let management do whatever it thinks is best.

Graham urges you to see a stock in a much more concrete way: as a piece of ownership in a real business. If you owned 100% of stock in a business, you’d see yourself as a business owner. Similarly, even if you own only 0.001% of a company, you should still see yourself a legitimate part-owner of a business. The CEO of the company works for you, and its board of directors answers to you.

As a business owner, you should actively monitor the business’s performance and the decisions of its management. If you are disappointed by this performance, you should actively demand that management do a better job. Should management continue to perform poorly, you should actively demand that current management be fired and new management be installed. You have a voting right in how the company is run, and you should see this duty nearly as important as voting in your national election.

Most individual investors do none of...

The Intelligent Investor Summary Chapter 20: Margin of Safety

Graham ends The Intelligent Investor with one of his most famous concepts: margin of safety. The concept underlies much of what we’ve covered in this summary; here, we can explicitly discuss it as a satisfying conclusion.

In simple terms, margin of safety is a measure of how much can go wrong before an investment goes bad. If you make investments with a larger margin of safety, you have a greater likelihood of prevailing in the end.

Warren Buffett offers an analogy: If you’re designing a bridge that tends to support 10,000 pounds in everyday traffic, you should design it to carry 30,000 pounds.

For a concrete example, consider how the margin of safety varies based on a stock’s price-to-earnings ratio.

• A stock with a high price-to-earnings ratio has extraordinary expectations from the market—the company is expected to grow quickly over an extended future period. A high valuation today therefore is strongly dependent on its future outcomes. The higher the price-to-earnings ratio, the lower the margin of safety: everything expected of the company must go right. Its growth prospects need to materialize, it cannot be stifled by competition or regulation, management...