The Intelligent Investor

The Intelligent Investor is a book about the investment paradigm of value investing.

The edition I read was basically a two-in-one book: one half was the 4th edition of the original The Intelligent Investor, written by Benjamin Graham in the early 70s, and the other half were commentaries to each chapter by Jason Zweig. The part written by Benjamin Graham was interesting and well-written albeit in parts dated. And while some of Zweig's commentaries clarified and updated on what Graham originally wrote, I found most of them redundant: they just said the same with other words and other stock examples. And compared to Graham I found Zweig's writing style annoying and I didn't like it.

My notes

Preface to the Fourth Edition, by Warren E. Buffett

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 decisions and the ability to keep emotions from corroding that framework.

Whether you achieve outstanding results will depend on the effort and intellect you apply to your investments, as well as on the amplitude of stock-market folly that prevail during your investing career. The sillier the market's behavior, the greater the opportunity for the business-like investor.

A Note About Benjamin Graham by Jason Zweig

Combining his extraordinary intellectual powers with profound common sense and vast experience, Graham developed his core principles, which are at least as valid today as they were during his lifetime:

• 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 market is a pendulum that forever swings between unsustainable optimism (which makes stocks too expensive) and unjustified pessimism (which makes them too cheap). The intelligent investor is a realist who sells to optimists and buys from pessimists.
• The future value of every investment is a function of its present price. The higher the price you pay, the lower your return will be.
• No matter how careful you are, the one risk no investor can ever eliminate is the risk of being wrong. Only by insisting on what Graham called the "margin of safety" – never overpaying, no matter how exciting an investment seems to be – can you minimize your odds of error.
• The secret to your financial success is inside yourself. If you become a critical thinker who takes no Wall Street "fact" on faith, and you invest with patient confidence, you can take steady advantage of even the worst bear markets. By developing your discipline and courage, you can refuse to let other people's mood swings govern your financial destiny. In the end, how your investments behave is much less important than how you behave.

Introduction: What This Book Expects to Accomplish

To invest intelligently in securities one should be forearmed with an adequate knowledge of how the various types of bonds and stocks have actually behaved under varying conditions – some of which, at least, one is likely to meet again in one's own experience. No statement is more true and better applicable to Wall Street than the famous warning of Santayana: "Those who do not remember the past are condemned to repeat it."

There are no sure and easy paths to riches on Wall Street or anywhere else.

The one principle that applies to nearly all these so-called "technical approaches" is that one should buy because a stock or the market has gone up and one should sell because it has declined. This is the exact opposite of sound business sense everywhere else, and it is most unlikely that it can lead to lasting success on Wall Street.

The extent of the market's shrinkage in 1969-70 should have served to dispel an illusion that had been gaining ground during the past two decades. This was that leading common stocks could be bought at any time and at any price, with the assurance not only of ultimate profit but also that any intervening loss would soon be recouped by a renewed advance of the market to new high levels. That was too good to be true.

The defensive (or passive) investor will place his chief emphasis on the avoidance of serious mistakes or losses. His second aim will be freedom from effort, annoyance, and the need for making frequent decisions. 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. Over many decades an enterprising investor of this sort could expect a worthwhile reward for his extra skill and effort, in the form of a better average return than that realized by the passive investor.

Obvious prospects for physical growth in a business do not translate into obvious profits for investors.

The experts do not have dependable ways of selecting and concentrating on the most promising companies in the most promising industries.

The investor's chief problem – and even his worst enemy – is likely to be himself.

Since anyone – by just buying and holding a representative list – can equal the performance of the market averages, it would seem a comparatively simple matter to "beat the averages"; but as a matter of fact the proportion of smart people who try this and fail is surprisingly large.

Commentary on the Introduction

If you have built castles in the air, your work need not be lost; that is where they should be. Now put the foundations under them.

Once you lose 95% of your money, you have to gain 1900% just to get back to where you started. Taking a foolish risk can put you so deep in the hole that it's virtually impossible to get out. That's why Graham constantly emphasizes the importance of avoiding losses [...].

What exactly does Graham mean by an "intelligent" investor? [...] It simply means being patient, disciplined, and eager to learn; you must be able to harness your emotions and think for yourself. This kind of intelligence, explains Graham, "is a trait more of the character than of the brain."

If you've failed at investing so far, it's not because you're stupid. It's because [...] 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."

While it seems easy to foresee which industry will grow the fastest, that foresight has no real value if most other investors are already expecting the same thing. 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. The intelligent investor dreads a bull market, since it makes stocks more costly to buy. And conversely, you should welcome a bear market, since it puts stocks back on sale.

Investment versus Speculation: Results to Be Expected by the Intelligent Investor

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

Speculation is always fascinating, and it can be a lot of fun while you are ahead of the game. If you want to try your luck at it, put aside a portion – the smaller the better – of your capital in a separate fund for this purpose. Never add more money to this account just because the market has gone up and profits are rolling in. (That's the time to think of taking money out of your speculative fund.) Never mingle your speculative and investment operations in the same account, nor in any part of your thinking.

[...] the future of security prices is never predictable.

The defensive investor must confine himself to the shares of important companies with a long record of profitable operations and in strong financial condition. Aggressive investors may buy other types of common stocks, but they should be on a definitely attractive basis as established by intelligent analysis.

Our enterprising security buyer, of course, will desire and expect to attain better overall results than his defensive or passive companion. But first he must make sure that his results will not be worse. It is no difficult trick to bring a great deal of energy, study, and native ability into Wall Street and to end up with losses instead of profits.

Let us consider several ways in which investors and speculators generally have endeavored to obtain better than average results. These include:

• Trading in the market: This usually means buying stocks when the market has been advancing and selling them after it has turned downward.
• Short-term selectivity: This means buying stocks of companies which are reporting or expected to report increased earnings, or for which some other favorable development is anticipated.
• Long-term selectivity: Here the usual emphasis is on an excellent record of past growth, which is considered likely to continue in the future

We have already expressed a negative view about the investor's overall chances of success in these areas of activity.

In his endeavor to select the most promising stocks either for the near term or the longer future, the investor faces obstacles of two kinds – the first stemming from human fallibility and the second from the nature of his competition. He may be wrong in his estimate of the future; or even if he is right, the current market price may already fully reflect what he is anticipating.

To enjoy a reasonable chance for continued better than average results, the investor must follow policies which are (1) inherently sound and promising, and (2) not popular on Wall Street.

Commentary on Chapter 1

All of human unhappiness comes from one single thing: not knowing how to remain at rest in a room.

Graham's definition of investing could not be clearer: "An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return". Note that investing, according to Graham, consists equally of three elements:

• 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.

An investor calculates what a stock is worth, based on the value of its businesses. A speculator gambles that a stock will go up in price because somebody else will pay even more for it.

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 has no interest in being temporarily right. To reach your long-term financial goals, you must be sustainably and reliably right.

If you look at a large quantity of data long enough, a huge number of patterns will emerge – if only by chance. By random luck alone, the companies that produce above-average stock returns will have plenty of things in common. But unless those factors cause the stocks to outperform, they can't be used to predict future returns.

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.

The Investor and Inflation

It is clear that those with a fixed dollar income will suffer when the cost of living advances, and the same applies to a fixed amount of dollar principal. Holders of stocks, on the other hand, have the possibility that a loss of the dollar's purchasing power may be offset by advances in their dividends and the prices of their shares.

If there is one thing guaranteed for the future, it is that the earnings and average annual market value of a stock portfolio will not grow at the uniform rate of 4%, or any other figure. In the memorable words of the elder J. P. Morgan, "They will fluctuate."

Just because of the uncertainties of the future the investor cannot afford to put all his funds into one basket – neither in the bond basket [...]; nor in the stock basket [...].

Commentary on Chapter 2

Americans are getting stronger. Twenty years ago, it took two people to carry ten dollars' worth of groceries. Today, a five-year-old can do it.

There's another reason investors overlook the importance of inflation: what psychologist call the money illusion. 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.

[...] it's important to measure your investing success not just by what you make, but by how much you keep after inflation.

Completely eradicating inflation runs against the economic self-interest of any government that regularly borrows money.

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:

• Real Estate Investment Trusts, or REITs, are companies that own and collect rent from commercial and residential properties.
• Treasury Inflation-Protected Securities, or TIPS, are U.S. government bonds that automatically go up in value when inflation rises.

A Century of Stock-Market History: The Level of Stock Prices in Early 1972

-

Commentary on Chapter 3

You've got to be careful if you don't know where you're going, 'cause you might not get there.

The heart of Graham's argument is that the intelligent investor must never forecast the future exclusively by extrapolating the past.

Focusing on the market's recent returns when they have been rosy, warns Graham, will lead to "a quite illogical and dangerous conclusion that equally marvelous results could be expected for common stocks in the future."

The stock market's performance depends on three factors:

• real growth (the rise of companies' earnings and dividends)
• inflationary growth (the general rise of prices throughout the economy)
• speculative growth – or decline (any increase or decrease in the investing public's appetite for stocks)

The only thing you can be confident of while forecasting future stock returns is that you will probably turn out to be wrong. The only indisputable truth that the past teaches us is that the future will always surprise us – always! And the corollary to that law of financial history is that the markets will most brutally surprise the very people who are most certain that their views about the future are right. Staying humble about your forecasting powers, as Graham did, will keep you from risking too much on a view of the future that may well turn out to be wrong.

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

General Portfolio Policy: The Defensive Investor

It has been an old and sound principle that those who cannot afford to take risks should be content with a relatively low return on their invested funds. From this there has developed the general notion that the rate of return which the investor should aim for is more or less proportionate to the degree of risk he is ready to run. Our view is different. The rate of return sought should be dependent, rather, on the amount of intelligent effort the investor is willing and able to bring to bear on his task. The minimum return goes to our passive investor, who wants both safety and freedom from concern. The maximum return would be realized by the alert and enterprising investor who exercises maximum intelligence and skill.

By sacrificing quality an investor can obtain a higher income return from his bonds. Long experience has demonstrated that the ordinary investor is wiser to keep away from such high-yield bonds. While, taken as a whole, they may work out somewhat better in terms of overall return than the first-quality issues, they expose the owner to too many individual risks of untoward developments, ranging from disquieting price declines to actual default.

Commentary on Chapter 4

When you leave it to chance, then all of a sudden you don't have any more luck.

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.

Both approaches are equally intelligent, and you can be successful with either – but only if you know yourself well enough to pick the right one, stick with it over the course of your investing lifetime, and keep your costs and emotions under control. Graham's distinction between active and passive investors is another of his reminders that financial risk lies not only where most of us look for it – in the economy or in our investments – but also within ourselves.

Because so few investors have the guts to cling to stocks in a falling market, Graham insists that everyone should keep a minimum of 25% in bonds. That cushion, he argues, will give you the courage to keep the rest of your money in stocks even when stocks sink.

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.

The Defensive Investor and Common Stocks

The selection of common stocks for the portfolio of the defensive investor should be a relatively simple matter. Here we would suggest four rules to be followed:

1. There should be adequate though not excessive diversification. This might mean a minimum of ten different issues and a maximum of about thirty.
2. Each company selected should be large, prominent, and conservatively financed.
3. Each company should have a long record of continuous dividend payments.
4. 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. We suggest that this limit be set at 25 times such average earnings, and not more than 20 times those of the last twelve-month period.

The term "growth stock" is applied to one which has increased its per-share earnings in the past at well above the rate for common stocks generally and is expected to continue to do so in the future. Obviously stocks of this kind are attractive to buy and to own, provided the price paid is not excessive. The problem lies there, of course, since growth stocks have long sold at high prices in relation to current earnings and at much higher multiples of their average profits over a past period. This has introduced a speculative element of considerable weight in the growth-stock picture and has made successful operations in this field a far from simple matter.

The "Rule of 72" is a handy mental tool. To estimate the length of time an amount of money takes to double, simply divide its assumed growth rate into 72. At 6%, for instance, money will double in 12 years.

Commentary on Chapter 5

Viewed logically, the decision of whether to own stocks today has nothing to do with how much money you might have lost by owning them a few years ago. When stocks are priced reasonable enough to give you future growth, then you should own them, regardless of the losses they may have cost you in the recent past.

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.

Dollar-cost averaging enables you to put a fixed amount of money into an investment at regular intervals. Every week, month, or calendar quarter, you buy more – whether the markets have gone (or are about to go) up, down, or sideways. [...] 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.

Portfolio Policy for the Enterprising Investor: Negative Approach

It is bad business to accept an acknowledged possibility of a loss of principal in exchange for a mere 1 or 2% of additional yearly income. If you are willing to assume some risk you should be certain that you can realize a really substantial gain in principal value if things go well.

Our one recommendation is that all investors should be wary of new issues – which means, simply, that these should be subjected to careful examination and unusually severe tests before they are purchased. There are two reasons for this double caveat. The first is that new issues have special salesmanship behind them, which calls therefore for a special degree of sales resistance. The second is that most new issues are sold under "favorable market conditions" – which means favorable for the seller and consequently less favorable for the buyer.

Commentary on Chapter 6

For the aggressive as well as the defensive investor, what you don't do is as important to your success as what you do.

[...] day trading – holding stocks for a few hours at a time – is one of the best weapons ever invented for committing financial suicide. Some of your trades might make money, most of your trades will lose money, but your broker will always make money.

We all want to buy "the next Microsoft" – precisely because we know we missed buying the first Microsoft. But we conveniently overlook the fact that most other IPOs were terrible investments.

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.

When we're in public instead of in private, when valuation suddenly becomes a popularity contest, the price of a stock seems more important than the value of the business it represents. As long as someone else will pay even more than you did for a stock, why does it matter what the business is worth?

Portfolio Policy for the Enterprising Investor: The Positive Side

It is a mere statistical chore to identify companies that have "outperformed the averages" in the past. [...] Why, then, should the investor not merely pick out the 15 or 20 most likely looking issues of this group and lo! he has a guaranteed-successful stock portfolio? There are two catches to this simple idea. The first is that common stocks with good records and apparently good prospects sell at correspondingly high prices. The investor may be right in his judgment of their prospects and still not fare particularly well, merely because he has paid in full (and perhaps overpaid) for the expected prosperity. The second is that his judgment as to the future may prove wrong. Unusually rapid growth cannot keep up forever; when a company has already registered a brilliant expansion, its very increase in size makes a repetition of its achievement more difficult. At some point the growth curve flattens out, and in many cases it turns downward.

We should advise against the usual type of growth-stock commitment for the enterprising investor. This is one in which the excellent prospects are fully recognized in the market and already reflected in a current price-earnings ratio of, say, higher than 20.

[...] an "enterprising" investor is not one who takes more risk than average or who buys "aggressive growth" stocks; an enterprising investor is simply one who is willing to put in extra time and effort in researching his portfolio.

To obtain better than average investment results over a long pull requires a policy of selection or operation possessing a twofold merit: (1) It must meet objective or rational tests of underlying soundness; and (2) it must be different from the policy followed by most investors or speculators.

If we assume that it is the habit of the market to overvalue common stocks which have been showing excellent growth or are glamorous for some other reason, it is logical to expect that it will undervalue – relatively, at least – companies that are out of favor because of unsatisfactory developments of a temporary nature.

The key requirement here is that the enterprising investor concentrate on the larger companies that are going through a period of unpopularity. While small companies may also be undervalued for similar reasons, and in many cases may later increase their earnings and share price, they entail the risk of a definite loss of profitability and also of protracted neglect by the market in spite of better earnings. The large companies thus have a double advantage over the others. First, they have the resources in capital and brain power to carry them through adversity and back to a satisfactory earnings base. Second, the market is likely to respond with reasonable speed to any improvement shown.

We have what appear to be two major sources of undervaluation: (1) currently disappointing results and (2) protracted neglect or unpopularity. However, neither of these causes, if considered by itself alone, can be relied on as a guide to successful common-stock investment.

Commentary on Chapter 7

It requires a great deal of boldness and a great deal of caution to make a great fortune; and when you have got it, it requires ten times as much wit to keep it.

Looking back, you can always see exactly when you should have bought and sold your stocks. But don't let that fool you into thinking you can see, in real time, just when to get in and out.

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 more a stock has gone up, the more it seems likely to keep going up. But that instinctive belief is flatly contradicted by a fundamental law of financial physics: The bigger they get, the slower they grow. A $1-billion company can double its sales fairly easily; but where can a $50-billion company turn to find another $50 billion in business?

The Investor and Market Fluctuations

Since common stocks, even of investment grade, are subject to recurrent and wide fluctuations in their prices, the intelligent investor should be interested in the possibilities of profiting from these pendulum swings. There are two possible ways by which he may try to do this: the way of timing and the way of pricing. By timing we mean the endeavor to anticipate the action of the stock market – to buy or hold when the future course is deemed to be upward, to sell or refrain from buying when the course is downward. By pricing we mean the endeavor to buy stocks when they are quoted below their fair value and to sell them when they rise above such value. 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.

In stock-market affairs the popularity of a trading theory has itself an influence on the market's behavior which detracts in the long run from its profit-making possibilities.

[...] even the intelligent investor is likely to need considerable will power to keep from following the crowd.

The whole structure of stock-market quotations contains a built-in contradiction. The better a company's record and prospects, the less relationship the price of its shares will have to their book value. But the greater the premium above book value, the less certain the basis of determining its intrinsic value – i.e. the more this "value" will depend on the changing moods and measurements of the stock market. Thus we reach the final paradox, that the more successful the company, the greater are likely to be the fluctuations in the price of its shares.

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.

[...] most businesses change in character and quality over the years, sometimes for the better, perhaps more often for the worse. The investor need not watch his companies's performance like a hawk; but he should give it a good, hard look from time to time.

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. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.

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. Market movements are important to him in a practical sense, because they alternately create low price levels at which he would be wise to buy and high price levels at which he certainly should refrain from buying and probably would be wise to sell.

Commentary on Chapter 8

The happiness of those who want to be popular depends on others; the happiness of those who seek pleasure fluctuates with moods outside their control; but the happiness of the wise grows out of their own free acts.

The challenge for the intelligent investor is not to find the stocks that will go up the most and down the least, but rather to prevent yourself from being your own worst enemy – from buying high just because Mr. Market says "Buy!" and from selling low just because Mr. Market says "Sell!".

In any case, for anyone who will be investing for years to come, falling stock prices are good news, not bad, since they enable you to buy more for less money.

Investing in Investment Funds

-

Commentary on Chapter 9

[...] buying funds based purely on their past performance is one of the stupidest things an investor can do.

A fund can offer excellent value even if it doesn't beat the market – by providing an economical way to diversify your holdings and by freeing up your time for all the other things you would rather be doing than picking your own stocks.

Recognize that an index fund – which owns all the stocks in the market, all the time, without any pretense of being able to select the "best" and avoid the "worst" – will beat most funds over the long run.

Index funds have only one significant flaw: They are boring. [...] You'll never be able to boast that you beat the market, because the job of an index fund is to match the market's return, not to exceed it.

Hold an index fund for 20 years or more, adding new money every month, and you are all but certain to outperform the vast majority of professional and individual investors alike.

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

The Investor and His Advisers

If the reason people invest is to make money, then in seeking advice they are asking others to tell them how to make money. That idea has some element of naïveté. Businessmen seek professional advice on various elements of their business, but they do not expect to be told how to make a profit. That is their own bailiwick.

Commentary on Chapter 10

-

Security Analysis for the Lay Investor

One of the most persuasive tests of high quality is an uninterrupted record of dividend payments going back over many years.

Commentary on Chapter 11

An average of more than two or three acquisitions a year is a sign of potential trouble. After all, if the company itself would rather buy the stock of other businesses than invest in its own, shouldn't you take the hint and look elsewhere too?

Several forces can widen a company's moat [i.e. competitive advantage]: a strong brand identity; a monopoly or near-monopoly on the market; economies of scale, or the ability to supply huge amounts of goods or services cheaply; a unique intangible asset; a resistance to substitution.

The most basic possible definition of a good business is this: It generates more cash than it consumes. Good managers keep finding ways of putting that cash to productive use. In the long run, companies that meet this definition are virtually certain to grow in value, no matter what the stock market does.

Things to Consider About Per-Share Earnings

-

Commentary on Chapter 12

In short, pro forma earnings enable companies to show how well they might have done if they hadn't done as badly as they did. As an intelligent investor, the only thing you should do with pro forma earnings is ignore them.

When you research a company's financial reports, start reading on the last page and slowly work your way toward the front. Anything that the company doesn't want you to find is buried in the back – which is precisely why you should look there first.

A Comparison of Four Listed Companies

-

Commentary on Chapter 13

-

Stock Selection for the Defensive Investor

[...] seven quality and quantity criteria suggested for the selection of specific common stocks:

1. Adequate Size of the Enterprise: [...] Our idea is to exclude small companies which may be subject to more than average vicissitudes especially in the industrial field.
2. A Sufficiently Strong Financial Condition: For industrial companies current assets should be at least twice current liabilities – a so-called two-to-one current ratio. Also, long-term debt should not exceed the net current assets.
3. Earnings Stability: Some earnings for the common stock in each of the past ten years.
4. Dividend Record: Uninterrupted payments for at least the past 20 years.
5. Earnings Growth: A minimum increase of at least one-third in per-share earnings in the past ten years using three-year averages at the beginning and end.
6. Moderate Price/Earnings Ratio: Current price should not be more than 15 times average earnings of the past three years.
7. Moderate Ratio of Price to Assets: Current price should not be more than 1.5 times the book value last reported. However, a multiplier of earnings below 15 could justify a correspondingly higher multiplier of assets.

Commentary on Chapter 14

A low-cost index fund is the best tool ever created for low-maintenance stock investing – and any effort to improve on it takes more work (and incurs more risk and higher costs) than a truly defensive investor can justify.

No matter how confident we feel, there's no way to find out whether a stock will go up until after we buy it.

Diversification doesn't just minimize your odds of being wrong. It also maximizes your chances of being right.

Stock Selection for the Enterprising Investor

-

Commentary on Chapter 15

It's worth repeating that for most investors, selecting individual stocks is unnecessary – if not inadvisable. The fact that most professionals do a poor job of stock picking does not mean that most amateurs can do better.

By test-driving your techniques before trying them with real money, you can make mistakes without incurring any actual losses, develop the discipline to avoid frequent trading, compare your approach against those of leading money managers, and learn what works for you.

No matter which techniques they use in picking stocks, successful investing professionals have two things in common: First, they are disciplined and consistent, refusing to change their approach even when it is unfashionable. 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.

Convertible Issues and Warrants

-

Commentary on Chapter 16

-

Four Extremely Instructive Case Histories

The speculative public is incorrigible. [...] It will buy anything, at any price, if there seems to be some "action" in progress. It will fall for any company identified with "franchising", computers, electronics, science, technology, or what have you, when the particular fashion is raging.

Commentary on Chapter 17

-

A Comparison of Eight Pairs of Companies

-

Commentary on Chapter 18

At some point in its life, almost every stock is a bargain; at another time, it will be expensive. Although there are good and bad companies, there is no such thing as a good stock; there are only good stock prices, which come and go.

The intelligent investor should recognize that market panics can create great prices for good companies and good prices for great companies.

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.

Shareholders and Managements: Dividend Policy

Shareholders are justified in raising questions as to the competence of the management when the results (1) are unsatisfactory in themselves, (2) are poorer than those obtained by other companies that appear similarly situated, and (3) have resulted in an unsatisfactory market price of long duration.

Commentary on Chapter 19

-

"Margin of Safety" as the Central Concept of Investment

The margin of safety is always dependent on the price paid. It will be large at one price, small at some higher price, nonexistent at some still higher price.

There is a close logical connection between the concept of a safety margin and the principle of diversification. One is correlative with the other. Even with a margin in the investor's favor, an individual security may work out badly. For the margin guarantees only that he has a better chance for profit than for loss – not that loss is impossible. But as the number of such commitments is increased the more certain does it become that the aggregate of the profits will exceed the aggregate of the losses.

We say that to have a true investment there must be present a true margin of safety. And a true margin of safety is one that can be demonstrated by figures, by persuasive reasoning, and by reference to a body of actual experience.

Graham is saying that there is no such thing as a good or bad stock; there are only cheap stocks and expensive stocks. Even the best company becomes a "sell" when its stock price goes too high, while the worst company is worth buying if its stock goes low enough.

To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.

Commentary on Chapter 20

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. (Being "right" makes speculators even more eager to take extra risk, as their confidence catches fire.) And once you lose big money, you then have to gamble even harder just to get back to where you were [...].

Losing some money is an inevitable part of investing, and there's nothing you can do to prevent it. But, to be an intelligent investor, you must take responsibility for ensuring that you never lose most or all of your money.

Before you invest, you must ensure that you have realistically assessed your probability of being right and how you will react to the consequences of being wrong.

The probability of making at least one mistake at some point in your investing lifetime is virtually 100%, and those odds are entirely out of your control. However, you do have control over the consequences of being wrong.

Postscript

[...] one lucky break, or one supremely shrewd decision – can we tell them apart? – may count for more than a lifetime of journeyman efforts. But behind the luck, or the crucial decision, there must usually exist a background of preparation and disciplined capacity. One needs to be sufficiently established and recognized so that these opportunities will knock at his particular door. One must have the means, the judgment, and the courage to take advantage of them.

Commentary on Postscript

To be an investor, you must be a believer in a better tomorrow.

The Superinvestors of Graham-and-Doddsville (by Warren E. Buffett)

If you buy a dollar bill for 60 cents, it's riskier than if you buy a dollar bill for 40 cents, but the expectation of reward is greater in the latter case. The greater the potential for reward in the value portfolio, the less risk there is.