The Intelligent Investor, Rev. Ed Key Takeaways

Require that your analysis support both the safety of principal and an adequate return before you call any operation an investment; if it cannot, treat it as speculation and say so plainly rather than borrowing a respectable name.

Quarantine speculation in a separate account, never added to because the market has risen and never allowed to influence your investment thinking; Graham puts the ceiling at 10% of total wealth.

Do not expect correct foresight to be rewarded, since near-term expectations are already common property and the professionals usually err; superior results come only from policies that are both sound and unpopular.

Assume any mechanical formula will destroy itself, either because it rested on a coincidence that time exposes or because publicity erodes whatever edge it had.

Wager only sums you can afford to lose, and treat speculation as a pastime rather than a pursuit, since it turns dangerous precisely when it is taken seriously.

Choose your stock allocation for long-run growth rather than as a shield against rising prices, since equities have matched inflation only a small share of the time and can lose ground while living costs climb.

Build your long-range assumptions on roughly 3% annual inflation, the working figure Graham recommended, rather than on the extremes of any single decade.

Add a real estate fund, ideally a low-cost REIT index offering, as a holding that should blunt inflation's effect on your purchasing power over time without dragging down returns.

Keep TIPS inside a tax-deferred account such as an IRA or 401(k), because the yearly inflation adjustment is taxed as income long before you receive it in cash.

Hold TIPS as a permanent retirement asset rather than a trading vehicle, with at least a tenth of those assets in them, since their short-term prices can swing sharply.

Judge every commitment by what you are paying for earnings and dividends at the moment of purchase, and disregard forecasts that simply extend the recent rate of gain forward.

Expect decades in which stocks barely advance at all; the last century contains such stretches, and the powerful bull market that follows one is a phase, not a permanent condition.

Elroy Dimson's estimate that pre-1871 returns are overstated by at least two points a year means the reliable record begins with the 1871 data, since the earlier indexes track only the firms that survived.

Assemble your expected return from the components you can observe separately: real growth in earnings and dividends, inflation, and whatever premium the public is currently willing to pay for stocks.

Dismiss the claim that a long enough holding period makes equities safe; no amount of time fixes the damage done by an excessive purchase price.

Split your portfolio between high-grade bonds and high-grade stocks, never letting either fall below a quarter or rise above three quarters, and pull the mix back toward even whenever drift pushes it past 55/45 or 45/55.

Decide whether you are an enterprising investor who will research and monitor holdings continuously or a defensive one who wants a permanent portfolio on autopilot, and accept that the choice rests on temperament and available time rather than on what the market is doing.

Abandon formulas that key stock exposure to your age, and size the bond floor instead against your income sources, upcoming obligations, career-linked risks and capacity to absorb losses.

Build rebalancing into the calendar twice a year, and keep cash on hand at every age, since a bond cushion is what makes holding stocks through a decline psychologically possible.

Put municipal bonds in taxable accounts and taxable bonds in retirement accounts unless you are in the lowest tax bracket, favor intermediate maturities of five to ten years, use funds when your bond money is under $100,000, and leave preferred stock alone.

Keep a permanent stake in common stocks instead of hiding in bonds. A bond-only portfolio isn't safer, it's riskier, because it leaves you wide open to inflation.

Make every stock pass all four of Graham's tests at once. Being big, financially strong, or a long-time dividend payer never makes up for a price above 25 times seven-year average earnings.

Keep the fastest-growing companies out of a defensive portfolio. Past earnings gains can't be projected forward, and the same stocks that multiply severalfold can give most of it back once growth stalls.

Buy fixed dollar amounts every month across U.S. stocks, foreign stocks and bonds, using index funds. The preset amounts automatically buy more shares when prices fall, and you never have to forecast anything.

Stick to investments your own knowledge, experience and temperament can handle. Don't let brand familiarity or loyalty to your employer pass for real insight. Spread your holdings across regions, and keep company stock a small slice of your retirement savings.

Keep the defensive mix of high-grade bonds and reasonably priced high-grade stocks as your home position, and leave it only for a reason you can state plainly.

Avoid foreign government bonds and newly issued securities, however tempting their yields or their recent earnings record.

Buy second-grade bonds and preferreds only at a steep discount to face value, since a point or two of extra income does not justify the risk of losing a third of your original investment.

Hold emerging-market and junk bond funds to a small fraction of a bond portfolio, and treat a freshly public stock as priced for disappointment rather than opportunity.

Trade rarely: commissions, trading costs and the shift from long-term to short-term tax rates mean you need a large gain just to break even, and Barber and Odean found the most active investors trailed the market by 6.4 percentage points a year.

Buy unusual bonds only when a federal guarantee or a strong corporate lease backs the yield, and leave railroad mortgages and most lawsuit-driven workouts to investors with a specialist's temperament.

Keep your stock-bond mix near a balanced center and shift only within a moderate band when your conviction is strong; mechanical market timing and growth stocks already priced for rapid expansion are not dependable for an intelligent investor.

Treat the market's long-standing dislike of secondary companies as a source of opportunity, but require a concrete reason for the discount to close before you buy.

Refuse to let one industry or company dominate your portfolio; use net working capital and new-low lists to find undervalued stocks, but spread the money across roughly twenty or more positions because any one can still lose money.

Follow Graham's guideline to place as much as a third of your stock portfolio in overseas mutual funds, including emerging markets, since living and earning in dollars already concentrates you in the American economy.

Dismiss any signal that tells you when to sell but not when to buy back cheaper, and expect a forecasting formula with a long winning record to stop working once enough investors follow it.

Review your companies occasionally rather than constantly: the market's mispricing of a sound business is there to be exploited, while a business whose quality has quietly slipped is the more common and more dangerous case.

Treat Mr. Market's daily quotation as an option rather than a verdict, since the private investor's real edge is the freedom to refuse his price, a freedom professional managers have given up.

Commit in writing to buying a broad stock market index fund on a monthly schedule for decades, and judge the plan by whether it reaches your goals rather than by whether it outruns other investors.

Put price declines to work deliberately: sell a losing position to offset ordinary income, then wait out the wash-sale period before repurchasing it.

Treat a mutual fund as a disciplined way to save and diversify rather than a route to beating the market: the professionals who run these funds collectively are the market, and their fees make the typical shareholder's return lower than the average itself.

Buy a closed-end fund only when it trades below the value of its holdings, since that discount supplies a cushion a comparable open-end fund cannot offer.

Refuse to pay more than net asset value for management; the decade's record offers no support for the idea that premium-priced funds earn their premium.

Graham reported that 74 percent of surveyed investors expected their funds to beat the S&P 500 every year, so treat any private conviction that you can select winners above the average as a familiar psychological tilt rather than a working strategy.

Buy a fund only if you would keep holding it through several consecutive bad years; if a stretch of poor returns would drive you out, you should not own it to begin with.

Settle whether you intend to stay defensive or become aggressive before you choose anyone to advise you, since relying on unconventional suggestions you cannot evaluate moves you into the aggressive role by default.

Expect no orderly hierarchy among sources of advice; a relative, a banker, a broker and a counselor are not interchangeable, so match the kind of help you need to the kind of source you consult.

Judge a counsel firm by the mistakes it prevents rather than the performance it adds, and read a portfolio confined to leading companies and government bonds as the product on offer rather than a shortfall.

Discard any recommendation built on near-term prospects, because it says nothing about whether the current price is warranted by long-term earning power.

Draw up the financial plan, investment policy statement and allocation schedule with your adviser before any money moves, and walk away from anyone who promises market timing or abandons a strategy after a single bad year.

A bond's safety depends on how far earnings have exceeded its charges across a full cycle, with even the weakest year still clearing a lower bar; what might happen in the future doesn't count in that judgment.

Coverage problems show up before failure, not after: the railroads that later needed court protection typically showed thin or shrinking coverage years in advance, which makes the test worth running on a holding, not only on a purchase.

Every price embeds a growth rate, and when the rate needed to justify it can't plausibly last, the price is counting on earnings that haven't arrived yet, so any estimate built from the formula needs room for error.

Separating what the past record alone supports from what judgment adds on top, and writing down both figures with reasons, turns valuation into a growing body of experience instead of a string of isolated guesses.

Companies that grow by buying others, lean on borrowed money or depend on a single customer, that see insiders sell repeatedly or carry heavy option overhangs, are the ones to avoid; Benjamin Graham sets long-term debt below half of total capital and ranks owner earnings above reported profit.

Compare every version of earnings a company reports, not just the headline. The fully diluted figure after special charges is far closer to what the business actually earned than the primary number that leads the release.

Ask what a company capitalizes and why before trusting its profits. Shifting construction or development costs onto the balance sheet can inflate assets while barely touching reported expenses.

Treat recurring "nonrecurring" write-downs as evidence that the charges are ordinary costs of doing business. Expect them to reappear in coming quarters.

Strip pension income out of net income and test the assumed return against what the fund actually earns. A plan assuming more than it delivers is creating profit on paper.

Read the annual report from the back page first. The notes, and words like "however," "began" and "change," point to what management would rather you skipped. Learn enough financial reporting to follow the trail.

Judge a company by what stands behind its price, not by how fast its profits have been growing. A 9.7 multiple and a 45 multiple can belong to businesses of similar quality, and only the low end gives you protection.

Treat a stock split as an accounting event that doesn't change what the business is worth, and don't build a holding period around expecting a chain of them.

Know what you give up when you pay today for a future that hasn't arrived. The future you hoped for can come true and still leave you with nothing, and the other outcome can cost you dearly.

Measure a company by its bottom line and its balance sheet, not its sales. Exodus multiplied revenue from $52.7 million to $242.1 million in a year, reported a $130.3 million loss, and finished at a penny.

Decide which of the two defensive routes you are actually taking, a true mix of leading stocks bought without regard to price or a list filtered against the seven minimum standards, and commit to it instead of blending the two ad hoc.

Expect a qualifying list to look unfashionable, since the standards screen out both shaky small companies and the popular glamour issues that most analysts prefer to recommend.

Understand that every purchase rests either on value you can measure today or on a bet about future earnings. Leaning on the first keeps you from paying up for growth that has not arrived.

Buy the whole market instead of trying to identify winners: hold a low-cost total market index fund for the bulk of your money and cap any stock picking at a tenth of it.

Run the two closing checks before committing: read at least five years of filings and proxy statements, and look up institutional ownership, because heavy institutional holding means a stock is likely already overowned.

Rehearse with hypothetical picks for a full year and score them against an S&P 500 index fund before risking real money; even if that year goes well, cap individual stocks at a tenth of your portfolio.

Confine any special-situation work to deals you can model at 20% or better annualized with roughly four-in-five confidence, and spread working-capital bargains across a hundred or more issues rather than a few.

Expect the index-beating names to be the giant, heavily traded, high-priced industrials carrying enormous goodwill rather than the cheap laggards, because momentum attaches to great size and long-standing market favor.

Favor managers who set attainable targets, build from within instead of by acquisition, allocate capital well and forgo hundred-million-dollar option packages, and buy their companies when a scandal or a crash has depressed the price, not when the underlying business is failing.

Adopt the two habits that mark successful professionals: hold to one consistent method even when it is unfashionable, and direct your thinking at process rather than at whatever the market is doing.

A convertible can't genuinely benefit both sides at once. Whatever protection or upside the buyer gets comes out of the common shareholders' claim.

Convertibles usually hurt you on the issuer's schedule, not the market's. A call notice can turn a big gain into a loss before the holder can react.

Warrants work better attached to a bond than built into a conversion feature, since they sell for more than the shares behind them.

Convertible bonds look like bonds but behave like stocks. Their long-run returns trail stocks while their prices follow the stock market far more closely than the bond market.

A covered call trades an unlimited gain for a limited cushion, and the broker is the one who reliably profits from that trade.

Judge a company by how it handles money, its debt, and its operating record, not by the market's current enthusiasm. A better business is not automatically a better buy at any price, and higher growth usually commands a higher multiple without any guarantee that the premium is deserved.

Count warrants and convertible claims alongside the common shares when you figure out what you are really paying, because those add-ons can turn an apparently reasonable multiple into an absurd one.

Treat sharp market declines as chances to buy sound businesses, since a panic can hit a solid firm with no news from the company itself and then see its shares recover substantially within months.

Distrust a company that announces a banner year while actually losing money and swelling its receivables. A dull business earning real profits and selling at a low multiple offers a safer bargain than a glamorous name priced at a huge multiple.

Hunt for the uncommon situation where you can put a reliable value on a business and find the market paying far less, rather than trying to forecast which stock will outperform. And refuse to buy on a rising price alone, because that purchase is headed for a poor outcome, not just at risk of one.

Shareholder democracy has almost no record of removing underperforming management; control shifts only when an individual or a tight group takes a decisive stake.

Retained earnings are justified only by a demonstrated rise in per-share profits; otherwise, the fair expectation is a payout near two-thirds of earnings.

A stock split merely restates the share count at a lower price, while a genuine stock dividend of up to 5% reflects profits plowed back and carries a tax edge over cash dividends followed by additional stock sales.

Operational skill does not translate into wise deployment of owners' capital; management tends to accumulate retained funds for its own convenience, and Arnott and Asness found that high-dividend firms enjoyed a 3.9 percentage point edge in decade-long earnings growth.

Buybacks serve owners only when shares are cheap; with options in play, companies repurchase high from insiders who paid low, and dividends would reduce the value of those options. Option plans granting managers over 3% of shares, or lacking a five-year industry-relative performance hurdle, warrant rejection.

Require a cushion between a security's earning power and the bond rate before committing capital. Test that cushion across weak years rather than extrapolating today's profits.

Avoid the classic mistake of buying junk during booms. When the price is low enough, even an unimpressive security can become sound.

Spread commitments across enough sound holdings. That gives a favorable edge many chances to outweigh the losers.

Protect against permanent damage and against your own blind spots. A severe drawdown forces riskier bets to recover. A sound decision depends on confidence that matches your record. It also depends on how you will feel if you are wrong.

When the downside is ruinous, let the severity of the outcome outrank the odds. Concentrated bets on speculative manias can put you on the wrong side of a wager you cannot afford.