Boganmeldelse af Benjamin Grahams "The Intelligent Investor"

Investing Book Summaries

The Intelligent Investor: The Classic Text on Value Investing

June 11, 2017

Abstract

  • To be a true value investor, you got to have a mindset that enables you to ride-out market swings. If you acquire a security at $80 based on a thesis that it’s intrinsic value is $120, you are not poorer if said security plumbets to $50. If you’re still convinced that the intrinsic value is intact, you shouldn’t panic – Mr. Market is just confused.
  • Mr. Market is a manio-depressive persona who turns up everyday with an offer to buy a or sell stakes in a wide array of businesses. His mood determines the price, which is why his offerings can change dramatically from day to day. It’s your task to befriend Mr. Market by taking him up on his offers to sell his ‘discounted goods’, and refuse to overpay for story stocks.
  • Ben emphasizes the importance of acquiring bargains based on the “50 cent for a dollar”-mantra; value investors focus on acquiring 1 dollar of intrinsic value for 50 cents. In length, disciples of Ben operate based on pricing (determination of intrinsic value) rather than timing.

The book Warren Buffett has praised as the bible for value investors fully lives up to the tribute. The Intelligent Investor is a timeless classic packed with principles that are as relevant today  as they were when the book got published in 1949. As the book contains such a wide array of important lessons, what should one highlight in a blog post? I’ll follow Buffet’s example who has repeatedly exclaimed that the chapters regarding Mr. Market and the margin of safety principle are all you need to become a succesful investor.

The mindset to ride-out market swings
Graham teaches us that a healthy attitude towards and understanding of market swings characterises the intelligent investor. The investor should know that market swings are inevitable, which is why a strong mentality is a must in order to resist jumping into emotionally-driven actions. The intelligent investor should base his investment decisions on analysis and sound principles while staying relatively immune to optimism and pessimism in the market place. If, for instance, you’ve bought a security at $80 based on a valuation indicating the business is worth $120, ask yourself if you’re worse of if that security plummets to $50. The obvious answer – which your home banking would agree on – is yes, you are poorer on paper. However, if you’re convinced that the intrinsic value of $120 is still intact, you should not panic; Mr. Market is just confused. Now would be the time to buy, not sell. Graham explains it somewhat along the lines of: “One has to be psychologically prepared to be a real investor, not just a speculator disguised as an investor.” He underscores the importance of basing your investment decisions on pricing rather than timing. Timing concerns speculation in the market’s direction. Pricing revolves around determining a security’s intrinsic value, and then insisting on buying only when the market price is substantially below said value.

You ought to remember these convictions and approaches when Mr. Market knocks at your door. Value investors know that the market is inefficient; that price and value are two separate components of any security. Value investors reject the notion that market participants are objective. Rather, a value investor knows that the market is governed by short-sighted actions, which are triggered by greed, envy, fear and panic. Ben embeds these emotions into his maniodepressive persona, Mr. Market. Graham introduces this gentlemen as an invisible partner in any business who knocks at your door each day with offers to either sell his stake to you or buy your holdings. Mr. Market is an emotional guy, so his mood is always reflected in the prices. If he’s depressed, he’ll be willing to sell his stake at a lower price than yesterday where he might have been in a jolly-good spirit. Mr. Market obviously represents the array of all investors’ moods. When more persons are depressed and wishes to relinquish ownership of a given asset, the price plumbets. Contrarily, when buyers flock to the counter, the price goes up. These swings in prices – which are driven by greed, envy, panic and fear – renders objectivity an impossibility; this causes price and value to deviate from one another. That allows value investors to intercept securities as bargain prices – a price significantly lower than e.g. a stock’s intrinsic value, or fair value (the value a security should have been traded at as so forth the market was governed exclusively by intelligent buyers and sellers).

Insist on intercepting bargains
The previous section serves as a stepping-stone to discuss the corner stone of the value investing universe: the margin of safety principle. The famous “50 cent for a dollar”-mantra illustrates the act of acquiring intrinsic value at a discount. The methods to determine intrinsic value are many, e.g. Ben’s net-nets (read Value Investing Made Easy), a Discounted Cash Flow analysis (read Why are we so clueless about the stock market?), determination of reproduction value (read Value Investing: From Graham to Buffett and Beyondor other approaches (read The Manual of Ideas). The analyst should determine which method is most suitable for a given opportunity, but the same principle is recurring throughout: insist on buying only when there’s a sufficient span between your estimate of intrinsic value and price. Ben recommends a minimum margin of safety of 30%. Insisting on never buying if a margin of safety isn’t present protects the investor from errors in the analysis and unforeseen incidents that affect the company’s outlook. Mix this principle with a portfolio of stable and relatively stable businesses, and you’re secured a better night’s sleep once market prices go south.

These two chapters are but a tiny fraction of an inexhaustible well of wise words. If you wish to venture into the value investing universe, this masterpiece is a must-read. Besides the two chapters touched upon here, the book also covers the distinction between the defensive and enterprise investor’s portfolio policy; the relation between stocks earnings power and market prices; how to determine markets’ central value; and tons of other best bets. It’s no wonder Buffett has exclaimed that The Intelligent Investor is “the best book on investing ever written.”

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