Know the difference between investment and speculation.
Investment involves a thorough analysis of the underlying value of an asset and its potential for sustainable growth over time.
Speculation relies on predicting price movements without considering the asset's intrinsic value, often driven by emotions and market trends. Speculative activities are inherently riskier.
Focus on facts and analysis, not tips or hunches. The intelligent investor focuses on significant data like a company's earnings, dividends, future growth, financial state.
Investors should prioritize safety and diversification, whereas speculators expose themselves to greater uncertainty and potential losses.
Inflation erodes the purchasing power of money over time. The intelligent investor must account for this. Stocks provide a good long-term hedge against inflation because their earnings tend to rise with inflation and the stock market tends to rise over time.
Bonds do poorly in inflation due to fixed coupon payments. Adjustable-rate bonds help counter this.
Real estate values and rents tend to keep pace with inflation, making property a decent inflation hedge.
Gold maintains its value during inflation but provides no earnings. It's speculative and only useful as a small portion of assets.
Companies that regularly reinvest earnings deliver better inflation-adjusted returns. Focus on firms that consistently grow.
Avoid fixed-value investments like cash savings accounts since inflation erodes their real returns. Stay invested in growth assets.
Stock price swings are often excessive and irrational, influenced by economic and geopolitical events, and driven by emotion not logic. This leads to periods of overvaluation and undervaluation. The author personifies the irrationality of the market by using the “Mr. Market” allegory. The intelligent investor ignores Mr. Market and focuses on companies' fundamentals.
You cannot predict/time the market. Investors should not assume that past market trends will continue indefinitely.
The intelligent investor aims to avoid buying at excessive prices and focus on undervalued stocks. It's important to focus on the fundamental value of stocks rather than short-term market movements.
Be a defensive investor, one who prioritizes the preservation of capital.
You should have a well-diversified portfolio of both stocks and bonds, with a minimum of 25% and a maximum of 75% allocated to each.
Bonds should consist of high-quality, investment-grade issues with staggered maturities to reduce interest rate risk.
Consider using low-cost index funds or exchange-traded funds (ETFs) for stock investments to achieve broad market exposure.
Avoid Initial Public Offerings. IPOs often happen in bull markets and lead to inflated valuations.
To minimize risk, no more than 5% of the portfolio should be in one stock. No more than 25% in any one industry. Diversify adequately.
Avoid speculative and high-risk investments, as well as excessive trading. Patience and discipline are key traits for the defensive investor, who should be prepared to hold onto their investments even during market fluctuations.
Regular portfolio reviews are essential to rebalance the allocation back to the target percentages.
The defensive investor should focus their stock purchases on established, high-quality companies with a consistent earning power and dividend record. Companies should also have a moderate P/E (price-to-earnings) ratio and a reasonable debt-to-equity ratio.
Defensive investors should aim to buy stocks at a discount to their intrinsic value while using a margin of safety (accounting for human errors through diversification and investing in high dividend and low debt companies).
The intelligent investor is willing to put in more time and effort into stock selection and analysis. Consider the negative approach, which involves screening out certain stocks based on criteria such as high debt, speculative nature, or inadequate earnings history.
The author's main investment approach is value investing, which involves determining companies' true value based on their fundamentals and targeting undervalued companies with long-term business potential. Value investing ignores short-term market trends, believing the market overreacts without considering fundamentals. It aims to buy quality stocks on sale relative to their true worth.
To determine a company's value, use fundamental analysis of its long-term growth prospects, quality of management, financial strength and capital structure, dividend record, and current dividend rate. This info can be obtained through public records.
The formula the author developed to determine value is:
V = (EPS * (8.5 + 2g) * 4.4) / Y
V = the value expected over the next 7 to 10 years
EPS = the company's last 12-month earnings per share
8.5 = P/E base for a no-growth company
g = reasonably expected 7 to 10 Year Growth Rate of EPS
4.4 = the average yield of AAA corporate bonds in 1962