Intelligent Investor Summary
Benjamin Graham's The Intelligent Investor
Graham, Chapter 1:
Graham lays out his definition of investing right from the start of this chapter. His description is "an investment operation is one which, upon thorough analysis promises safety of principal and an adequate return" (p. 18). He labels anything not meeting these standards as speculation. Graham then describes two different approaches to investing: defensive and aggressive. Obviously, safety is a big concern for the defensive investor, and that shows in his example of putting half of your money in stocks and half in bonds. He lists other approaches of defensive investing, like investing only in well established companies, and dollar-cost averaging. Graham's take on aggressive investing isn't as kind. The three types of the aggressive approach (trading the market, short-term selectivity, and long-term selectivity) are all considered to have less profitability. This is explained by the possibility of the aggressive investor being wrong on his or her market timing.
Graham, Chapter 8:
In chapter eight of Graham's book, he brings up the subject of market fluctuation. I think he makes an important point to those people who are monitoring their retirement portfolios almost on a daily basis. He states that "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" (p. 206). With this in mind, he suggests using these fluctuations in the market as a guide to making investment decisions. More precisely, he suggests using the dips in the market as points to acquire more of a quality stock along with finding new opportunities for suitable investments.
Graham, Chapter 9:
Mutual funds are the subject of the ninth chapter of The Intelligent Investor. Fund performance and the different types of funds available to the investor are covered. One of those types of funds is the performance fund, which seeks to outperform the Dow Jones Industrial Average in this case, so they are the more aggressive of the funds. Another type, the closed-end fund only offers a specific number of shares at one time, instead of continuously, and is the most illiquid of the bunch. The last mutual fund type Graham mentions in this chapter is the balanced fund. These types of funds contain a certain percentage of bond holdings. Even the conservatively investing Graham suggests you would be better off investing in bonds by themselves, rather than mixed in a fund with stocks.
Graham, Chapter 20:
Chapter 20 is entitled "Margin of Safety as the Central Concept of Investment" (p. 512). I think this chapter sums up Graham's investing philosophy. He not only covers the risk of buying a good quality stock at a high price, but buying a poor quality stock at a high price during an up-trending market. The latter is one of the riskier moves you can do with your money in the context of the margin-of-safety. On the other hand, purchasing stock in a good quality company, even if it's at a high price, will ultimately end up being the better choice. One other important point in this chapter is the mention of diversification as a tool of safety, not perfection. While he doesn't go into specific methods of diversification, Graham does point out that even if one stock tanks, diversifying your portfolio "guarantees only that (you) have a better chance for profit than for loss - not that loss is impossible" (p. 518).