The Intelligent Investor

To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making deci- sions and the ability to keep emotions from corroding that framework

A stock is not just a ticker symbol or an electronic blip; it is an ownership interest in an actual business, with an underlying value that does not depend on its share price

The intelligent investor is a realist who sells to optimists and buys from pessimists

No matter how careful you are, the one risk no investor can ever eliminate is the risk of being wrong

“Those who do not remember the past are condemned to repeat it.”

The defensive (or passive) investor will place his chief emphasis on the avoidance of serious mistakes or losses

The determining trait of the enterprising (or active, or aggressive) investor is his willingness to devote time and care to the selection of securities that are both sound and more attractive than the average

It has long been the prevalent view that the art of successful investment lies first in the choice of those industries that are most likely to grow in the future and then in identifying the most promising companies in these industries

The virtues of a simple portfolio policy have been emphasized—the purchase of high-grade bonds plus a diversified list of leading common stocks—which any investor can carry out with a little expert assistance

This book will teach you three powerful lessons: how you can minimize the odds of suffering irreversible losses; how you can maximize the chances of achieving sustainable gains; how you can control the self-defeating behavior that keeps most investors from reaching their full potential

But no matter how careful you are, the price of your investments will go down from time to time

What is an Intelligent Investor? It simply means being patient, disciplined, and eager to learn; you must also be able to harness your emotions and think for yourself.

In short, if you’ve failed at investing so far, it’s not because you’re stupid. It’s because, like Sir Isaac Newton, you haven’t developed the emotional discipline that successful investing requires

“while enthusiasm may be necessary for great accomplishments elsewhere, on Wall Street it almost invariably leads to disaster.”

“the investor’s chief problem—and even his worst enemy—is likely to be himself.”

“Obvious prospects for physical growth in a business do not translate into obvious profits for investors.”. By the time everyone decides that a given industry is “obviously” the best one to invest in, the prices of its stocks have been bid up so high that its future returns have nowhere to go but down

The intelligent investor realizes that stocks become more risky, not less, as their prices rise—and less risky, not more, as their prices fall

So take heart: The death of the bull market is not the bad news everyone believes it to be. Thanks to the decline in stock prices, now is a considerably safer—and saner—time to be building wealth

“An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”

Never mingle your speculative and investment operations in the same account, nor in any part of your thinking

The defensive investor must confine himself to the shares of important companies with a long record of profitable operations and in strong financial condition.

You must thoroughly analyze a company, and the soundness of its underlying businesses, before you buy its stock; you must deliberately protect yourself against serious losses; you must aspire to “adequate,” not extraordinary, performance

Graham urges you to invest only if you would be comfortable owning a stock even if you had no way of knowing its daily share price

The intelligent investor never dumps a stock purely because its share price has fallen; she always asks first whether the value of the company’s underlying businesses has changed

As Graham never stops reminding us, stocks do well or poorly in the future because the businesses behind them do well or poorly—nothing more, and nothing less

Never allow your speculative thinking to spill over into your investing activities; and never put more than 10% of your assets into your mad money account, no matter what happens

For better or worse, the gambling instinct is part of human nature— so it’s futile for most people even to try suppressing it. But you must confine and restrain it. That’s the single best way to make sure you will never fool yourself into confusing speculation with investment

Fortunately, you can bolster your defenses against inflation by branching out beyond stocks. Since Graham last wrote, two inflation-fighters have become widely available to investors: REITs (Real Estate Investment Trusts) and TIPS (Treasure Inflation-Protected Securities)

REITs (pronounced “reets”), are companies that own and collect rent from commercial and residential properties.10 Bundled into real-estate mutual funds, REITs do a decent job of combating inflation

TIPS are U.S. government bonds, first issued in 1997, that automatically go up in value when inflation rises. Because the full faith and credit of the United States stands behind them, all Treasury bonds are safe from the risk of default

For most investors, allocating at least 10% of your retirement assets to TIPS is an intelligent way to keep a portion of your money absolutely safe—and entirely beyond the reach of the long, invisible claws of inflation

The “price/earnings ratio” of a stock, or of a market average like the S&P 500-stock index, is a simple tool for taking the market’s temperature. In general, P/E below 10 is considered low, between 10 and 20 is considered moderate, and greater than 20 is considered expensive

The intelligent investor must never forecast the future exclusively by extrapolating the past

Anyone who claims that the long-term record “proves” that stocks are guaranteed to outperform bonds or cash is an ignoramus

The value of any investment is, and always must be, a function of the price you pay for it

“By the rule of opposites,” the more enthusiastic investors become about the stock market in the long run, the more certain they are to be proved wrong in the short run

In the financial markets, the worse the future looks, the better it usually turns out to be

We have suggested as a fundamental guiding rule that the investor should never have less than 25% or more than 75% of his funds in common stocks, with a consequent inverse range of between 75% and 25% in bonds

There are two ways to be an intelligent investor: by continually researching, selecting, and monitoring a dynamic mix of stocks, bonds, or mutual funds; or by creating a permanent portfolio that runs on autopilot and requires no further effort (but generates very little excitement)

Graham calls the first approach “active” or “enterprising”; it takes lots of time and loads of energy. The “passive” or “defensive” strategy takes little time or effort but requires an almost ascetic detachment from the alluring hullabaloo of the market

Some people will feel most comfortable combining both methods—creating a portfolio that is mainly active and partly passive, or vice versa.

No intelligent investor, no matter how starved for yield, would ever buy a stock for its dividend income alone; the company and its businesses must be solid, and its stock price must be reasonable

No intelligent investor, no matter how starved for yield, would ever buy a stock for its dividend income alone; the company and its businesses must be solid, and its stock price must be reasonable

There should be adequate though not excessive diversification. This might mean a minimum of ten different issues and a maximum of about thirty

Each company selected should be large, prominent, and conservatively financed

Each company should have a long record of continuous dividend payments

The investor should impose some limit on the price he will pay for an issue in relation to its average earnings over, say, the past seven years

When stocks are priced reasonably enough to give you future growth, then you should own them, regardless of the losses they may have cost you in the recent past

Becoming more familiar with a subject does not significantly reduce people’s tendency to exaggerate how much they actually know about it. That’s why “investing in what you know” can be so dangerous; the more you know going in, the less likely you are to probe a stock for weaknesses

The more familiar a stock is, the more likely it is to turn a defensive investor into a lazy one who thinks there’s no need to do any homework. Don’t let that happen to you

Graham’s guideline of owning between 10 and 30 stocks remains a good starting point for investors who want to pick their own stocks, but you must make sure that you are not overexposed to one industry

Do not let the ease and up-to-the-minute feel of the Inter- net seduce you into becoming a speculator. A defensive investor runs—and wins—the race by sitting still

The ideal way to dollar-cost average is into a portfolio of index funds, which own every stock or bond worth having. That way, you renounce not only the guessing game of where the market is going but which sectors of the market—and which particular stocks or bonds within them—will do the best

Best of all, once you build a permanent autopilot portfolio with index funds as its heart and core, you’ll be able to answer every mar- ket question with the most powerful response a defensive investor could ever have: “I don’t know and I don’t care.”

The knowledge of how little you can know about the future, coupled with the acceptance of your ignorance, is a defensive investor’s most powerful weapon

Thousands of people have tried, and the evidence is clear: The more you trade, the less you keep

Don’t just do something, stand there. It’s time for everyone to acknowledge that the term “long-term investor” is redundant. A long-term investor is the only kind of investor there is. Someone who can’t hold on to stocks for more than a few months at a time is doomed to end up not as a victor but as a victim

More important, buying IPOs is a bad idea because it flagrantly violates one of Graham’s most fundamental rules: No matter how many other people want to buy a stock, you should buy only if the stock is a cheap way to own a desirable business

Weighing the evidence objectively, the intelligent investor should conclude that IPO does not stand only for “initial public offering.” More accurately, it is also shorthand for: It’s Probably Overpriced, Imaginary Profits Only, Insiders’ Private Opportunity, or Idiotic, Preposterous, and Outrageous

Many, perhaps most, investors seek to place themselves in such an intermediate category; in our opinion that is a compromise that is more likely to produce disappointment than achievement

For most investors, market timing is a practical and emotional impossibility

A great company is not a great investment if you pay too much for the stock

“the relatively unpopular large company.” This kind of temporary unpopularity can create lasting wealth by enabling you to buy a great company at a good price

Putting up to a third of your stock money in mutual funds that hold foreign stocks (including those in emerging markets) helps insure against the risk that our own backyard may not always be the best place in the world to invest

A less ambitious form of pricing is the simple effort to make sure that when you buy you do not pay too much for your stocks

Nearly all the bull markets had a number of well-defined characteristics in common, such as (1) a historically high price level, (2) high price/earnings ratios, (3) low dividend yields as against bond yields, (4) much speculation on margin, and (5) many offerings of new common-stock issues of poor quality

The longer a bull market lasts, the more severely investors will be afflicted with amnesia; after five years or so, many people no longer believe that bear markets are even possible. All those who forget are doomed to be reminded; and, in the stock market, recovered memories are always unpleasant

Easy ways to make money in the stock market fade for two reasons: the natural tendency of trends to reverse over time, or “regress to the mean,” and the rapid adoption of the stock-picking scheme by large numbers of people, who pile in and spoil all the fun of those who got there first

A stock does not become a sound investment merely because it can be bought at close to its asset value. The investor should demand, in addition, a satisfactory ratio of earnings to price, a sufficiently strong financial position, and the prospect that its earnings will at least be maintained over the years

The true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation

Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal

The speculator’s primary interest lies in anticipating and profiting from market fluctuations. The investor’s primary interest lies in acquiring and holding suitable securities at suitable prices

The investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances. He should always remember that market quotations are there for his convenience, either to be taken advantage of or to be ignored

“Never buy a stock immediately after a substantial rise or sell one immediately after a substantial drop.”

But investing isn’t about beating others at their game. It’s about controlling yourself at your own game

If you investment horizon is long—at least 25 or 30 years—there is only one sensible approach: Buy every month, automatically, and whenever else you can spare some money

It turns out that our brains are hardwired to get us into investing trouble; humans are pattern-seeking animals

Groundbreaking new research in neuroscience shows that our brains are designed to perceive trends even where they might not exist

Instead of fearing a bear market, you should embrace it. The intelligent investor should be perfectly comfortable owning a stock or mutual fund even if the stock market stopped supplying daily prices for the next 10 years

By putting much of your portfolio on permanent autopilot, you can fight the prediction addiction, focus on your long-term financial goals, and tune out Mr. Market’s mood swings

Selling into a bear market can make sense if it creates a tax windfall

Unfortunately, in the financial markets, luck is more important than skill

Buying funds based purely on their past performance is one of the stupidest things an investor can do

Index funds have only one significant flaw: They are boring. You’ll never be able to go to a barbecue and brag about how you own the top-performing fund in the country

Late in his life, Graham praised index funds as the best choice for individual investors, as does Warren Buffett

If you’re not prepared to stick with a fund through at least three lean years, you shouldn’t buy it in the first place. Patience is the fund investor’s single most powerful ally

The ideal choice for most investors is a total stock market index fund, a low-cost way to hold every stock worth owning

Graham feels that five elements are decisive: the company’s “general long-term prospects”, the quality of its management, its financial strength and capital structure, its dividend record and its current dividend rate

Graham suggests that the defensive investor can, “most simply,” buy every stock in the DowJones Industrial Average. Today’s defensive investor can do even better—by buying a total stock-market index fund that holds essentially every stock worth having

Keep 90% of your stock money in an index fund, leaving 10% with which to try picking your own stocks. Only after you build that solid core should you explore

If you are not willing to go to the minimal effort of reading the proxy and making basic comparisons of financial health across five years’ worth of annual reports, then you are too defensive to be buying individual stocks at all. Get yourself out of the stock-picking business and into an index fund, where you belong

The fact that most professionals do a poor job of stock picking does not mean that most amateurs can do better. The vast majority of people who try to pick stocks learn that they are not as good at it as they thought; the lucki- est ones discover this early on, while the less fortunate take years to learn it.

Summary of Buffett’s approach: He looks for what he calls “franchise” companies with strong consumer brands, easily understandable businesses, robust financial health, and near-monopolies in their markets, like H & R Block, Gillette, and the Washington Post Co

Successful investing professionals have two things in common: First, they are disciplined and consistent. Second, they think a great deal about what they do and how to do it, but they pay very little attention to what the market is doing

If you buy a stock purely because its price has been going up—instead of asking whether the underlying company’s value is increasing—then sooner or later you will be extremely sorry. That’s not a likelihood. It is a certainty

The people who take the biggest gambles and make the biggest gains in a bull market are almost always the ones who get hurt the worst in the bear market that inevitably follows

Losing some money is an inevitable part of investing, and there’s nothing you can do to prevent it

Graham’s “margin of safety” performs the same function: By refusing to pay too much for an investment, you minimize the chances that your wealth will ever disappear or suddenly be destroyed

Ultimately, financial risk resides not in what kinds of investments you have, but in what kind of investor you are

Simply by keeping your holdings permanently diversified, and refusing to fling money at Mr. Market’s latest, craziest fashions, you can ensure that the consequences of your mistakes will never be catastrophic