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The Intelligent Investor, Rev. Ed by Benjamin Graham Book Cover

by Benjamin Graham

Benjamin Graham's The Intelligent Investor, Rev. Ed distinguishes investing from speculation and introduces the margin of safety, offering defensive and enterprising investors concrete selection standards, diversification rules, and cautionary case studies for navigating markets without gambling.

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Chapter mindmaps

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Chapter 1

Key concepts: Chapter 1

Chapter 1

Defining Investment vs. Speculation

  • Investment requires thorough analysis, principal safety, and adequate return.
  • Anything less is speculation, regardless of what Wall Street calls it.
  • Speculation becomes unintelligent when you think you're investing.
  • Speculation is dangerous if taken seriously without skill.

The Limits of Being Right

  • Correct judgment may fail if already priced in.
  • Near-term expectations are common property on Wall Street.
  • Superior results require sound and unpopular policies.
  • Experts often err on long-term forecasts.

Diminishing Returns and Self-Destructive Formulas

  • Special situations once returned 20%+ but profits eroded.
  • Mechanical formulas like the 1949 earnings/interest rate formula stopped working.
  • Dow Theory's record turned questionable after 1934.
  • Any formula that works gets eroded once publicized.

Managing Speculation: Mad Money

  • Set aside a separate mad money account capped at 10% of wealth.
  • Never add to it because the market has risen.
  • Keep speculative and investment operations strictly separate.
  • Treat speculation as a pastime, not a serious pursuit.

Key Takeaways

  • Require analysis to support principal safety and adequate return.
  • Quarantine speculation; never let it influence investment thinking.
  • Don't expect correct foresight to be rewarded.
  • Assume any mechanical formula will destroy itself.

Chapter 2

Key concepts: Chapter 2

Chapter 2

Inflation Fears and the All-Stock Case

  • Graham rejects bonds as inherently bad and stocks as inherently better.
  • Fixed income suffers from inflation, but stocks aren't good at any price.
  • Advising 100% stocks for institutions is as absurd as favoring any bond.

Historical Inflation and Stock Performance

  • Past inflation varied: living costs doubled 1915-1920, rose 15% 1965-1970.
  • Plan for about 3% annual inflation, as Graham suggested.
  • Stocks beat bonds over 55 years but not high-grade yields available in 1971.
  • From 1966-1970, living costs rose 22% while stock earnings and prices fell.

Stocks as an Unreliable Inflation Hedge

  • Stocks kept pace with inflation only about one-fifth of the time.
  • Corporate earnings rate declined over two decades despite inflation.
  • Corporate debt grew nearly fivefold by 1969; pretax profits only doubled.

REITs: Real Estate Investment Trusts

  • Own commercial and residential property, collect rent.
  • Defend reasonably well against inflation over time.
  • Vanguard REIT Index Fund is the strongest choice.
  • No REIT fund is foolproof, but limits purchasing-power erosion.

TIPS: Treasury Inflation-Protected Securities

  • U.S. government bonds since 1997; value rises with inflation.
  • Treasury backing removes default risk; inflation adjustment preserves purchasing power.
  • IRS taxes yearly inflation adjustment as income; hold in tax-deferred accounts.
  • Ideal for retirement cash; hold permanently, at least 10% of retirement assets.

Chapter 3

Key concepts: Chapter 3

Chapter 3

The Hundred-Year Record

  • Data from 1871 onward reveal century of cycles.
  • Three eras: 1900-1924, New Era to 1949, bull to 1968.
  • Valuation shifted from 6.3 to 22.9 times earnings.
  • Dividend yield fell from over 7% to 3.0%.

Bull-Market Baloney

  • Never forecast future solely by extrapolating past.
  • Graham foresaw 1973-1974 bear market, stocks lost 37%.
  • Bullish books like Dow 36,000 ignored valuation.
  • Value is always a function of what you pay.

Survivorship Bias

  • Pre-1871 data unreliable; indexes tracked few firms.
  • Most early firms failed and are omitted from indexes.
  • Dimson: pre-1871 returns overstated by at least 2% yearly.
  • Stocks did no better than cash or bonds before 1871.

Components of Future Returns

  • Real earnings growth has averaged 1.5% to 2%.
  • Inflation near 2.4% and dividends at 1.9% in 2003.
  • Speculative growth depends on public's appetite for stocks.
  • Shiller's ratio at 22.8 signals danger zone.

Key Takeaways

  • Judge commitments by what you pay for earnings and dividends.
  • Expect decades of little stock advance; bull markets are phases.
  • Reliable record begins with 1871 data due to survivorship bias.
  • Assemble expected return from observable components.

Chapter 4

Key concepts: Chapter 4

Chapter 4

Return and Risk

  • Return should depend on intelligent effort, not just risk.
  • Passive investor earns minimum; enterprising investor earns maximum.
  • Bargain securities may carry less real risk than conventional bonds.

The 50-50 Allocation

  • Defensive investor: 25-75% stocks, inverse in bonds; standard 50-50.
  • Rebalance when stocks hit 55% or 45% by moving one-eleventh.
  • Yale's abandonment shows market advance can destroy formula approach.

Active or Defensive

  • Choice depends on investor type, not market conditions.
  • Enterprising: continuous research and monitoring; defensive: permanent autopilot.
  • Both equally intelligent if you know yourself.

Age Is the Wrong Dial

  • Age should never determine allocation.
  • Reject age-based formulas like 100 minus age.
  • Keep cash and a bond floor for psychological resilience.

Life Factors and Income Menu

  • Consider marital status, children, career exposure, loss capacity.
  • Rebalance every six months; keep cash at every age.
  • Municipal bonds in taxable accounts, taxable bonds in retirement accounts.
  • Favor intermediate bonds; use funds under $100,000; avoid preferred stock.
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