10 Key Lessons from The Intelligent Investor by Benjamin Graham - Arvabelle (2024)

Here are a few terms that may be helpful to research before starting The Intelligent Investor:

• Stocks
• Bonds
• ETFs and Index Funds
• Volatility
• Intrinsic Value

Warren Buffet first read The Intelligent Investor when he was 19 years old. Later, when Warren Buffet entered Columbia Business School, Benjamin Graham became Buffet’s professor.

Warren Buffet has referred to The Intelligent Investor as “By far the best book on investing ever written”.

An active or enterprising investor is an investor that regularly researches and analyzes the fundamentals of potential stocks and bonds. This type of investing requires time and dedication on your part.

Apassive ordefensive investor often creates a long term portfolio that can be automated.Often times, defensive investors may include ETFs or other funds in their portfolio. This type of diversification allows them toput theirfinances on autopilot.

Investing passively requires much less time than active investing. However, you will still need to remove your emotions from your decision making. Knowing that stock prices will fluctuate, passive investors will need to be able to get through both the highs and the lows of the market.

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Why invest in the first place? According to Benjamin Graham, protecting against inflation is one major reason to invest.

Inflationhappens when the dollar loses value or purchasing power.

To put this into perspective, if you had $1 in 1900, you could have bought 70 lbs of potatoes. In today’s world, you’d be lucky to find a pack of gum that costs $1.

"If you receive a 2% raise in a year when inflation runs at 4%, you will almost certainly feel better than you will if you take a 2% pay cut during a year when inflation is zero.

Yet both changes in your salary leave you in a virtually identical position—2% worse off after inflation. So long as the nominal (or absolute) change is positive, we view it as a good thing—even if the real (or after-inflation) result is negative."

Let’s say you saved $1 under your mattress or in a bank for 100 years. You also invested $1.

The dollar you tucked away is worth much less today. However, the dollar you invested had the potential to hold or grow its value over time.

Throughout The Intelligent Investor, emphasis is placed on the importance of using fundamental analysis to choose your investments. According to Graham, investments should be based on the company’s numbers and performance – not your emotions.

These are some of the factors that Benjamin Graham looked at when selecting stocks:

• EPS (Earnings Per Share)
• P/E Ratio (Price to Earnings Ratio)
• Long term growth rate

Throughout the book, Benjamin Graham reiterates his belief in sticking to these fundamentals – even if you are familiar with a stock. To Graham, knowing and using a company’s services in your personal life does not override the fundamentals. He believes that if the numbers don’t line up, buying a familiar company’s stock as an investment doesn’t make sense.

The goal of using fundamental analysis is to find a company’s intrinsic value. Intrinsic valueis the “true” value of a company, or a measure of how much the company is actually worth.

Once you figure out the intrinsic value of a stock, the goal ofvalue investing is to find stocks that are trading under this intrinsic value. Benjamin Graham’s investing objective is to buy these stocks that are undervalued.

As you’ve probably heard many times, diversification is key, andThe Intelligent Investor reinforces this idea.

Diversification means having a variety of assets in your portfolio. Benjamin Graham discusses having a mix of stocks and bonds. He also touches on investing in REITs and index funds as an alternative way to diversify.

The way in which you choose to diversify will greatly depend on if you are an active investor or a passive investor. However the concept remains the same – don’t put all your eggs in one basket.

Another lesson from The Intelligent Investor is that dollar cost averaging is a good way to stay consistent, without timing the market.

Dollar cost averagingsimply means investing a consistent amount over time. The key with dollar cost averaging is to invest a fixed amount of money each month (or week), regardless of share price.

Let’s say you invest $500 every month to max out your Roth IRA.

That $500 will buy fewer shares when the market is up, and more shares when the market is down. However your average share price will likely even out.

If you use dollar cost averaging in your investing strategy, using a platform like M1 Finance that allows fractional shares can be extremely beneficial.

One of the most well known pieces from The Intelligent Investor, is the imaginary character “Mr. Market”.

Mr. Market is a character that shows up every day with a price quote for will buy or sell stocks for. His quotes depend on his mood and outlook – which swings between wild optimism and extreme pessimism.

Benjamin Graham created Mr. Market as an allegory to represent the emotional swings and groupthink that affects the stock market and investors.

With this allegory, Graham points out that optimism in the market causes stock prices to go up, whereas pessimism causes stock prices to go down. He advises against immediately reacting to these swings in the market.

We touched on dollar cost averaging, or investing consistently without worrying too much about small prices changes. However, Benjamin Graham suggests that even if a company is “good”, you shouldn’t overpay for their stock.

A good company at a bad price is not a good investment.

An investor will never be 100% correct – there’s always risk involved. This is why Graham believes that in order to minimize some of the risk, investors should refer back to their fundamental analysis and never overpay.

Margin of safety is one of the key concepts fromThe Intelligent Investor that is a recurring subject throughout the book.

Margin of safety is partially based on the difference between the “true” value of a stock and the price it’s trading at. Buying undervalued stocks gives you a bit of buffer room between the market price and the intrinsic value of the stock.

Having a diverse portfolio is also a way to build in that margin of safety.

Many of the lessons from The Intelligent Investortie into Graham’s overall beliefs of using fundamental analysis, seeking safe and steady returns, and reducing the risk of significant loss.

Benjamin Graham believes that all investors should be thoroughly researching their investments, diversifying, and avoiding hype in the market.

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