- Our main objective will be to guide the reader against the areas of possible substantial error and to develop policies with which he will be comfortable. We shall say quite a bit about the psychology of investors. For indeed, the investor's chief problem — and even his worst enemy — is likely to be himself.
- Unless you are confident in your analytical abilities and are willing to spend hours analyzing stocks, a dollar-cost averaging approach into low-fee indexed funds is the way to go
- In the past we have made a basic distinction between two kinds of investors to whom this book was addressed — the "defensive" and the "enterprising." The defensive (or passive) investor will place his 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. 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. Over many decades an enterprising investor of this sort could expect a worthwhile reward for his extra skill and effort, in the form of a better average
- The intelligent investor realizes that stocks become more risky, not less, as their prices rise-and less risky, not more, as their prices fall. The intelligent investor dreads a bull market, since it makes stocks more risky and expensive
- Note that investing, according to Graham, consists equally of three elements:
- You must thoroughly analyze a company, and the soundness of its underlying businesses, before you buy its stock
- You must deliberately protect yourself against serious losses
- You must aspire to "adequate," not extraordinary, performance
- Graham urges you to invest only if you would be comfortable owning a stock even if you had no way of knowing its daily share price
- Far from being an afterthought, dividends are the greatest force in stock investing.
- Viewed logically, the decision of whether to own stocks today has nothing to do with how much money you might have lost by owning them a few years ago. When stocks are priced reasonably enough to give you future growth, then you should own them, regardless of the losses they may have cost you in the recent past. That's all the more true when bond yields are low, reducing the future returns on income producing investments
- The costs of trading wear away your returns like so many swipes of sandpaper. Buying or selling a hot little stock can cost 2% to 4% (or 4% to 8% for a "round-trip" buy-and-sell transaction). If you put $1,000 into a stock, your trading costs could eat up roughly $40 before you even get started. Sell the stock, and you could fork over another 4% in trading expenses. Oh, yes-there's one other thing. When you trade instead of invest, you turn long-term gains (taxed at a maximum capital-gains rate of 20%) into ordinary income (taxed at a maximum rate of 38.6%). Add it all up, and a stock trader needs to gain at least 10% just to break even on buying and selling a stock. Anyone can do that once, by luck alone. To do it often enough to justify the obsessive attention it
- A great deal of brain power goes into this field, and undoubtedly some people can make money by being good stock- market analysts. But it is absurd to think that the general public can ever make money out of market forecasts.
- But note this important fact: The true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons' mistakes of judgment.
- This may well be the single most important paragraph in Graham's entire book. In these 113 words Graham sums up his lifetime of experience. You cannot read these words too often; they are like Kryptonite for bear markets. If you keep them close at hand and let them guide you throughout your investing life, you will survive whatever the markets throw at you
- Let us close this section with something in the nature of a parable. Imagine that in some private business you own a small share that cost you $1,000. One of your partners, named Mr. Market, is very obliging indeed. Every day he tells you what he thinks your interest is worth and furthermore offers either to buy you out or to sell you an additional interest on that basis. Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them. Often, on the other hand, Mr. Market lets his enthusiasm or his fears run away with him, and the value he proposes seems to you a little short of silly. If you are a prudent investor or a sensible businessman, will you let Mr. Market's daily communication determine your view of the value of a $1,000 interest in the enterprise? Only in case you agree with him or in case you want to trade with him. You may be happy to sell out to him when he quotes you a ridiculously high price, and equally happy to buy from him when his price is low. But the rest of the time you will be wiser to form your own ideas of the value of your holdings, based on full reports from the company about its operations and financial position. The true investor is in that very position when he owns a listed common stock. He can take advantage of the daily market price or leave it alone, as dictated by his own judgment and inclination. He must take cognizance of important price movements, for otherwise his judgment will have nothing to work on. Conceivably they may give him a warning signal which he will do well to heed — this in plain English means that he is to sell his shares because the price has gone down, foreboding worse things to come. In our view such signals are misleading at least as often as they are helpful. Basically, 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. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.
- Recognize that investing intelligently is about controlling the controllable. You can't control whether the stocks or funds you buy will outperform the market today, next week, this month, or this year; in the short run, your returns will always be hostage to Mr. Market and his whims. But you can control: your brokerage costs, by trading rarely, patiently, and cheaply your ownership costs, by refusing to buy mutual funds with excessive annual expenses your expectations, by using realism, not fantasy, to forecast your returns your risk, by deciding how much of your total assets to put at hazard in the stock market, by diversifying, and by re-balancing your tax bills, by holding stocks for at least one year and, whenever possible, for at least five years, to lower your capital-gains liability and, most of all, your own behavior.
- Patience is the fund investor's single most powerful ally.
- As Graham put it: "In 44 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.
- This is one of the central points of Graham's book. All investors labor under a cruel irony: We invest in the present, but we invest for the future. And, unfortunately, the future is almost entirely uncertain
- 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.
- As Graham liked to say, in the short run the market is a voting machine, but in the long run it is a weighing machine.
- The margin of safety is the difference between the percentage rate of the earnings on the stock at the price you pay for it and the rate of interest on bonds, and that margin of safety is the difference which would absorb unsatisfactory developments. 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. For most investors, diversification is the simplest and cheapest way to widen your margin of safety.
What I got out of it
- It becomes quite clear why and how Ben Graham was one of the most successful investors in history. He sees investing in such a clear manner and by dissecting this this book he allows you to peer into his mental models and thought processes
- Through numerous examples and repetitions, Graham makes it obvious that unless you are willing to devote many hours into learning and researching different stocks, you should invest the majority of your money into low-index funds which track the market. This may seem boring but he proves that this is often a defensive investors best move and beats the vast majority of active investors anyway. Dollar-cost averaging, compounding and dividends are some of your best friends and should never be overlooked
- Offers too much good advice to try to summarize here and I recommend everybody, regardless of age or economic status to read this book. If the principles are adhered to, it truly has the power to change your life