The Abridged Version
of The Intelligent Investor, summarized by Daniel Alexander Apatiga
According
to The Intelligent Investor by
Benjamin Graham (4th edition Audible mp3 version), the main thing that is the most
important is to invest in securities/equities (with the exception being that of
Bonds, which doesn’t fluctuate like a stock by nature) whenever they are at a “bargain”
price. But, in order to analyze the
stock, one must look at its past history.
After the past history is looked at, for instance, how has the p/e ratio
changed over time. If the p/e ratio is
high, then it must be a growth stock. A
low p/e ratio (price-to-earnings) implies that it’s undervalued by the market
as a whole. A stock with a low p/e is
considered safe. However, why then does
this stock not increase in value and is not more popular? The fact that the stock is overlooked might
imply that it is unpopular, however, it might not grow at the rate you would
want it to. Generally, it is a good idea to invest in
unpopular stocks (by volatility and p/e) if you believe that it will
become popular. If you look at a chart
of p/e relative to the value of the stock, you will see that there is a close
correlation. Thus, if you buy a stock
with the attitude that you think the company will make higher than expected
earnings than what other people on wall-street think, then you are on the right
track. Aka., if you go after a stock
with lower-than-expected earnings but you think the analysts are wrong, which
they typically are (and also analysts vary from one to another), then you
should buy the security at the bargain price.
Regarding
what Graham calls, “dollar-cost-averaging,” this is simply the exercise of
depositing funds into your brokerage account every month or at some specific
interval to invest into stocks. This is
a practice that I’ve begun, and it’s useful to the extent that it allows for
one to invest in various stock as they are “low” so that later you will not
regret not investing in the same security you should have invested in.
Regarding
what Graham considers to be the ideal bond-to-stock ratio, this can only take
place once the investor has sufficient funds to invest in bonds and thus, for
our purposes as “poor investors,” investing bonds will have to wait until one
has around 1k in funds to invest in them.
But typically, the investor should invest in stocks at least 25% of one’s
allocated funds for investment purposes and the rest into stocks when the
market is at a low, according to Graham.
To take the contrapositive of that statement, if one were to allocate
one’s funds when the market is at a high and you have enough funds to invest in
Bonds, then the desired ratio is 25% in stocks and the rest into Bonds. Of course, there is an in-between area from
within the spectrum, which is entirely up to you, the intelligent investor, who
thinks about the market as a whole. Bonds
are particularly useful because of their historic steadfastness in yielding
better results when the market is in depression than if one were to invest in
stocks. Graham gives many examples of
this in both his 4th edition book and abridged version combined.
Regarding
“types” of investors, I was totally unaware that there are more than one type,
but according to Graham, the defensive investor is one who does not have time
to check his or her portfolio every day.
This kind of investor invests in large-cap stocks, mainly, with little
emphasis in high risk, rather, investing in stocks with low p/e and in
technology stocks or well-established, popular companies. The other type is the entrepreneurial
investor who spends time in security analysis like it is his or her “quasi-business.” This is the kind of investor who invests in
small businesses he/she thinks will do well, objectively, and who does not
listen to analysts because they can be wrong.
He/she looks at small, or unpopular, large businesses “that are going
through a time of trouble” in a prophetic way.
This prophetic way is a lot like how Nvidia did well because I knew that
Nvidia would become a much larger company than it was. The entrepreneurial investor is a lot like an
inside trader, except he/she does not truly know company secrets, in that he/she
has a hunch that the stock will do well because of external factors. We must all try to be entrepreneurial
investors.
