Discussion Board Response 1:
Benjamin Graham’s book titled the intelligent investor is one clear reason why Graham is called “the king of investments.” This classic book is a must-read for any investor who wants to travel on the journey of entrepreneurship. From business students, private investors, professional entrepreneurs and lecturers, this book is a load of wisdom sampled in less than 700 pages. The author (Benjamin Graham) is an experienced American professor with a wide knowledge of economics and investment. He uses a friendly language that can be understood with ease whether English is your native language or learned from college. The vocabulary used in this book is investment friendly that every potential investor will enjoy while going through this book. This book was published in the year 1973. Benjamin Graham, in this book, talks about value investments. He takes his readers through a step by step skills used in the journey of investment. The book is written in elaborated chapters that are fully explained making it easy to be understood by any person without necessarily demanding the academic investment knowledge. After reading this book, you will admit that it is the best investment book ever written and it is second to no other book on investment. The book gives and explains clear directions to be taken while travelling the journey of a successful investment. Benjamin Graham believes that one does not necessarily need a high IQ level or genius entrepreneurial instincts to be a successful investor, all that is needed is a good intellectual decision-making skill and high level of self-control to control emotions and avoid corroding your plans.
About the author and why every investor needs to listen to his advice.
Benjamin Graham was not only among the greatest investors but also the best investment thinker who ever lived. He is the UK born American, a professor in economics and a market analyst. Graham became the best investment thinker naturally when he underwent financial disruption. He went ahead to study economics where he did several market pieces of research. The author combines his life experience and academic intellectuals to come up with a wrap of the best and accurate investment framework that every investor students and professional will find priceless. This book will change how we view the investment world and the modern market, as it equips the reader with skills and frameworks to study the market and take advantage of it to emerge a successful investor.
About the book and why investment stakeholders need to read it.
About the intelligent investor
Everybody can be an investor, but, Are you an intelligent investor? And by investment intelligence, unlike other intelligence, Graham believes that intelligence investments have nothing to do with IQ and academic performance. This intelligence has more to do with the character than the brain. Graham believes that to succeed in your investment you do not necessarily have to be a genius academically. And if you fail it does not mean you are stupid, it means you lack the emotional discipline needed in investment.
“In short, if you’ve failed at investing so far, it’s not because you’re stupid. It’s because, like Sir Isaac Newton, you haven’t developed the emotional discipline that successful investing requires. In Chapter 8, Graham describes how to enhance your intelligence by harnessing your emotion and refusing to stoop to the market’s level of irrationality. There you can master his lesson that being an intelligent investor is more a matter of “character” than “brain.”
CHAPTERS’ SUMMARY
Chapter 1—- Investment versus Speculation: Results to Be Expected by the Intelligent Investor.
In this chapter, Graham outlines various words used in the entire book. He explains the distinction between the word investment and speculation. Graham explains that not everybody who is in the money market is called an investor. the reader finds that most of the things we call investments are mere speculative measures. An investment must assure the safety of the capital and promised returns. Anything missing these factors is just mere speculation. The chapter explains the difference between aggressive method and defensive methods of investment. This chapter also talks about portfolio rebalancing and how to achieve a 50-50 bond balance. Graham gives a success recipe where the investor buys a security at a relatively low price and sell them later at a relatively high price.
Chapter 2 – The Investor and Inflation
Graham explains that there is no periodical relationship between inflation and market prices. This chapter outlines how the rate of inflation determines the number of earnings accompany make within a given period. What are the risks of placing high predictions on inflation?
In the case of hedging inflation, what are the options for common stock? The author warns against investing in tangible stock in time of inflation. Economics students will find this chapter very vital. The chapter gives a real-life experience of the modern market.
Chapter 3—Stock Market
In this chapter of The Intelligent Investor, Benjamin Graham guides the investors to have a view of the wide image which is the history of the stock market. Graham focuses on the basic fluctuations on cost return and profits. The author argues, “With this background, he may be in a position to form some worthwhile judgment of the attractiveness or dangers of the level of the market as it presents itself at different times.” A vital aspect that investors will use to wonder about future markets.
Chapter 4 – General Portfolio Policy
This chapter answers various corporate finance questions like; What is the correlation between risk rate and the level of reward? What factors should investors consider in the selection of bond? How does an investor divide his funds between bonds and common stock? The chapter also talks about bond and tax. As an investor is it advisable to buy taxable bonds? When are you supposed to buy taxable or tax-free bonds? Should you buy long-maturity securities or short maturities securities? Investors will find priceless skills in this chapter.
Chapter 5 – The Defensive Investor and Common Stocks
In this chapter, Graham outlines the gains by the owner of the common stocks.
“Must there be a return of the new-stock-offering madness before the present bull market can come to its definitive close? Who knows? But we do know that an intelligent investor will not forget what happened in 1962 and will let others make the next batch of quick profits in this area and experience the consequent harrowing losses.”
Chapter 6 – Portfolio Policy for the Enterprising Investor:
Negative Approach
Any investor both aggressive investor and defensive investor, what they do not do is as important as what they do, just as in boxing where they say that the punch that you do not take is the one that will throw you down. These are some of the items listed by Graham as don’ts:
- No low-grade bonds
- No low grade preferred stocks
- No foreign government bond issues
An investor will gain a lot from this chapter.
Chapter 7 – Portfolio Policy for the Enterprising Investor:
The Positive Side
The best investment values are psychology and arithmetic. For the investors who have the efforts and skills required to meet the average market demand graham suggests these factors;
- Buying in at low price and selling at high market price.
- Buying keenly identified stocks.
- Buying bargain issues of various types
- Buying under special market conditions.
Chapter 8 – The Investor and Market Fluctuations
This chapter talks about market fluctuations. Graham cautions the investors against trying to predict the market conditions instead, they ought to concentrate on getting the best stock at the best available prices. A quantitative formula can be used to determine the best price, but this is just an approximation. Graham also outlines the business valuation and stock market valuation. He says that an investor should expect market fluctuation at one point in the investment life. How one handles the fluctuation separates an investor from a speculator.
Chapter 9 – Investing in Investment Funds
What are the various types of investment funds? What determines the choice of investment funds? How do you do investment funds evaluation? How do you do fund valuation? This chapter holds the answers to all these questions. The author, Graham outlines various types of investments funds. Each fund has its unique features cons and pros. Each fund is different from the other in terms of tax, objectives, approach and other features. Each fund has its method of determining its value.
Chapter 10 – The Investor and His Advisers
It is like a human to seek advice for external persons. An investor will tend to seek advice from other professional investors. As Graham puts it in these chapters, “there are peculiarities inherent in the very concept of investment advice.” The sole purpose of starting an investment is to create growth for your money, this requires the services of an expert adviser, but we ask ourselves why the adviser cannot use his thoughts to start his investment and make money instead of offering such advice in exchange of salary. Graham advises investors to be cautious whenever an adviser is more loyal to the organization than the individual himself. This is one of the most interesting chapters in this book.
Chapter 11 – Security Analysis for the Lay Investor:
General Approach
In this chapter, Graham explains about investment analysis. Investment analysts should use clear and simple arithmetic to evaluate an investment.
“Mathematics is ordinarily considered as producing precise and dependable results, but in the stock market, the more elaborate and abstruse the mathematics the more uncertain and speculative are the conclusions we draw therefrom. In forty-four years of Wall Street experience and study, I have never seen dependable calculations made about common stock values, or related investment policies, that went beyond simple arithmetic or the most elementary algebra. Whenever calculus is brought in, or higher algebra, you could take it as a warning signal that the operator was trying to substitute theory for experience, and usually also to give to speculation the deceptive guise of investment.”
Chapter 12 – Things to Consider About Per-Share Earnings
This chapter talks about shares and how to divide the dividends. The simplest approach of dividing dividends is by dividing the net returns by the number of shareholders in the company. Graham explains that the most common types of earnings per share are diluted and premium earnings per share. Graham uses the case study of Aluminum Company Of America to explain this interesting chapter.
Chapter 13 – A Comparison of Four Listed Companies
Graham explains a step by step process for evaluating the Strength, weakness, opportunities and threats of the four companies. The process takes into consideration the factors like profit, strength and cost of production. The four companies include Google, Microsoft, Apple and Blackberry. Graham puts into this chapter his investment experience in the analysis of these four companies which are listed publicly. The data of the four companies are thoroughly analyzed and comparison is done step by step to allow easy understanding by any investor regardless of IQ or academic qualifications.
Chapter 14 – Stock Selection for the Defensive Investor
Investment analysis involves an arithmetic analysis of the past and current details; this is principally done to reduce investment errors. Predicting future conditions is not part of Graham’s interest. Portfolio risk can be minimized when a company is restricted to certain securities. In this chapter, Graham explains basic rules guiding investors in-stock selection. These include;
- Diversification; holdings need to be diversified among many companies.
- Strength of the company; select industrious companies only.
- Uninterrupted return; choose companies with a vast culture of uninterrupted returns.
- Price; never pay a very high price for the returns of the company.
Chapter 15—stock selection
In this chapter, Benjamin Graham explains the selection of stock by the investor. what do you consider while doing this? What determines the profitability of stock? How do you beat the odds in the selection of stock?
Chapter 16 – Convertible Issues and Warrants
Are you interested to learn about convertible shares? As am investor do you know about an elevator pitch? Are you interested in learning how to dilute equity due to the presence of convertible issues? Yes? Then this is the book you have been missing. In this chapter, Graham talks about the convertible issues and warrants. The points and explanations are clearly illustrated to make sense easily to the reader.
Chapter 17 – Four Extremely Instructive Case Histories
In this chapter, Graham explains value investment using instances in the four sections: An important and highly-priced enterprise which makes investors not to realize that it is in its dying stages, a careless company whose approach of shares acquisition causes miseries due to its aggressive nature, a weird overhaul whereby the company has more than required branches, and finally unethical public offer of company ownership. The chapter uses graphs and other statistical data presentation methods to present the explanations.
Chapter 18 – A Comparison of Eight Pairs of Companies
This is another chapter that Graham applies his analysis of the sixteen companies that are currently extinct. The chapter assesses the relationship between the sets of companies: Amazon versus Akamai, Tesla versus General motors, cisco versus Sysco, yahoo versus yum, commerce one versus capital one, palm versus 3com, CMGI versus CGI, Ball versus Stryker, Nortel versus Nortek, Red Hat versus Brown Shoes.
Graham says “………What have we learned? The market scoffs at Graham’s principles in the short run, but they are always revalidated in the end. If you buy a stock purely because its price has been going up—instead of asking whether the underlying company’s value is increasing—then sooner or later you will be extremely sorry. That’s not a likelihood. It is a certainty…….”
Chapter 19 –Shareholders and Managements: Dividend Policy
Every shareholder is part of the company ownership, hence every decision made in the business will directly have an impact on the shareholder, therefore, every shareholder should take part in the decision-making process of the company and also in the voting process. “Shareholders are justified in raising questions as to the competence of management,” Graham writes, “when the [performance] results [of management] are (1) unsatisfactory… (2) … poorer than those obtained by [comparable competitors], and (3) have resulted in an unsatisfactory market price of long duration.”
Chapter 20 – ‘Margin of Safety’ as the Central Concept of Investment
In case the title of Graham’s final chapter is not self-explanatory to you, he talks about the safety of the margins as the fundamental rope that ties all the decisions of an investment policy. If one has to read only one chapter in the powerful book, I would recommend this chapter. The author sums it all in this chapter.
Summary of the intelligent investor.
The Intelligent Investor ought to be read by every aspiring and current investor as a building block to develop a successful investment skill. The principles in this book can be applied for over a century regardless of the market changes.
My favourite part and I think it is also the best contribution of the author, is the clear distinction of an investor and a speculator. This is a fact that should change many people who have been thinking that they are investors yet they are just speculators. Timing is always a great factor of investment skills, but the book advice the investors to develop a good business plan and choose good market stock instead of trying to time and predict the future market conditions. This is very vital in surviving market fluctuation impacted by Mr Market.
Graham challenges investors to stop relying on the external advisers and believe in their instincts. If the experts have what it takes to help you make more money, then why don’t they use those thoughts to make their own money instead of selling the advice to us? Challenge? Any attempt to beat the market forces is a fool’s game… “In effect, that would mean that the stock market experts as a whole could beat themselves — a logical contradiction.”
Target Audience.
Benjamin Graham’s book, The Intelligent Investor, relevant to everybody to make money through investment. The book is of more essence to the business students, finance and commerce students, economics students, investors and professionals like lecturers and researchers.
Rating
The book is the best investment book I have ever read. With clear illustrations and simple and well-elaborated points, I give this book five stars.