Introduction: THE INTELLIGENT INVESTORS

Introduction: THE INTELLIGENT INVESTORS 

Elaboration of the Introduction

The Introduction serves as the foundational pillar and mission statement for the entire 33-section document. It is not merely a preface but a critical piece that sets the tone, establishes credibility, and provides the primary resource for the learning journey ahead.

Its key components can be broken down as follows:

1. The Central Text: "The Intelligent Investor" by Benjamin Graham

• Credibility and Endorsement: The introduction immediately establishes its authority by quoting Warren Buffett's endorsement: "By far the best book on investing ever written." This is crucial because Buffett is the most famous and successful investor in history, and his seal of approval signals to the reader that the material to follow is not just theory, but a philosophy proven in practice.

• The "Father of Value Investing": Benjamin Graham is introduced as the definitive source. He is the intellectual architect behind the entire value investing school of thought. The document positions itself as a guide to understanding and applying his principles.

2. Providing the Tools for Learning
The introduction is highly practical. It doesn't just tell the reader to read the book; it provides direct access to it:

• Accessibility: It offers an e-copy of the book, acknowledging that a physical hard copy is also available. This removes the first barrier to entry for the reader.

• Guidance for Study: Recognizing that "The Intelligent Investor" can be a dense and challenging read, the introduction provides a curated "summary of the book" and explicitly points out that Chapters 8 and 20 are the most important, according to Buffett. This gives the reader a focused starting point.

  • Chapter 8: The Investor and Market Fluctuations - This is where Graham introduces the famous "Mr. Market" allegory, which teaches investors how to think about market volatility emotionally.

  • Chapter 20: "Margin of Safety" as the Central Concept of Investment - This is the cornerstone of value investing, the principle of always buying at a significant discount to intrinsic value to minimize the risk of loss.

3. A Preview of the Core Philosophy
The linked summary provides a concise preview of the core tenets that will be explored in detail throughout the document:

• Risk Management: Through asset allocation and diversification.

• Maximizing Probabilities: Through valuation analysis and the margin of safety.

• A Disciplined Approach: To prevent emotionally-driven, consequential errors.

4. Multi-Format Learning Resources
To cater to different learning styles, the introduction provides resources in various formats:

• Audiobook: A YouTube link to an audio version for those who prefer listening.

• Additional Synopses: Multiple website links for summaries and chapter-by-chapter reviews, allowing the reader to cross-reference and deepen their understanding.

5. The Aspirational Goal
The closing remark, "May your investing be as successful as Warren Buffett," sets a high but inspiring bar. It frames the entire ensuing discussion not as a get-rich-quick scheme, but as a journey toward profound, long-term success by emulating the best.

---

Summary of the Introduction

The Introduction establishes "The Intelligent Investor" by Benjamin Graham as the ultimate guide to investing and provides all necessary resources to begin studying its principles.

It immediately captures the reader's attention with a powerful endorsement from Warren Buffett, validating the source material's immense value. The section is intensely practical, providing direct links to an e-copy of the book, a helpful summary, and specific guidance on the most critical chapters (8 and 20).

By offering the content in multiple formats (text, audio, online summaries), it ensures the foundational knowledge is accessible to everyone. Ultimately, the introduction frames the entire document that follows as a practical guide to understanding and applying the time-tested, Buffett-approved philosophy of Benjamin Graham, with the aspirational goal of achieving significant, long-term investing success.

Intelligent Investor Chapter 8: The Investor and Market Fluctuations

Chapter 8: The Investor and Market Fluctuations

An investor must prepare both financially and psychologically for the fluctuations certain to occur in the market.

There are two ways an investor tries to profit from fluctuations:

1. Timing: Buy when you think the price will go up, and then sell once it goes up.
2. Pricing: Buy when the price is below fair value and sell once it reaches or exceeds fair value.

Consistent market timing is exceptionally difficult, as is evident by the countless market predictions and forecasts by industry professionals that differ from actual events by a wide margin. The variety of these predictions is great enough that an investor can make any move he chooses and find a prediction that supports this move.

Graham goes so far as to say it is absurd to think that the general public can ever make money out of market forecasting. There is no basis in logic or history to believe otherwise.

With regard to the pricing approach, Graham says that this is also extremely difficult to properly execute. Cycles often last for 5 years or more which causes people to lose their nerve and act irrationally. For example, in a prolonged bull market, people may fear being left behind, so they buy at the slightest indication of a bear market, feel vindicated as the prices escalate further, and then lose when the real bear market returns.

Also, any signals identified by experts to help determine whether this is a bear or bull market have been shown to be inconsistent in successfully identifying the position in the market cycle.

Conclusion: If you are banking on market fluctuations, you will not consistently perform well. Market fluctuations are not sound portfolio policy!

The intelligent investor uses a formulaic approach to determine whether stock prices have risen too high and he should sell, or prices have dropped significantly, and he should buy. Or, in other words, if he should alter the allocation of stocks to bonds in his portfolio (as per the tactical asset allocation policy that Graham discusses in previous chapters). The ideal approach is the rebalancing approach discussed in previous chapters (varying from 50-50 allocation to up to 75-25, and reviewing at set intervals throughout the year).

Business Valuation and Stock-Market Valuation

The stock market is paradoxical in that the highest grade stocks are often the most speculative because they gain great premiums over book value and are based more on the changing moods of the market and its confidence in the premium valuation it had put on the company in the first place. Thus, for conservative investors, they would be best to focus on companies with relatively low premiums placed upon them - a market rate no more than 1/3 above the net tangible-asset value.

However, a stock does not become sound because it can be bought close to asset value. The intelligent investor must also demand a satisfactory price-earnings ratio, sufficiently strong financial position, and the prospect of earnings being maintained over the years.

Intelligent Investors with portfolios close to the net tangible asset valuation of the underlying companies need worry less about stock market fluctuations than those who paid high multiples of earnings and assets. The intelligent investor should disregard the market price and not allow the mistakes that the market will make in its valuation to affect his feelings about the business. Do not let the market’s madness fool you into selling your shares at a loss - such a move requires reasoned judgment independent of the market price.

It is in this chapter that Graham creates the oft-cited Parable of Mr. Market. Essentially, you area private business owner. You own a share that you purchased for $1,000. Your partner is Mr. Market. Every day, Mr. Market quotes you a price for your interest and also offers to sell you his interest for the same price. Sometimes the quote is rationally connected with the business. On other days, it is clear that Mr. Market’s enthusiasm or fear has gotten to him, and the value he has placed is irrational. Graham says the Intelligent Investor would only let Mr. Market’s daily quote affect him if the Intelligent Investor agrees with the price (due to his own analysis of the value of the company), or he wants to buy from or sell to Mr. Market. Unless you want to transact with Mr. Market, you would be wiser to make your own analysis of the value of the company. If you want to transact, then you must compare Mr. Market’s value to the value you reached independently. This parable reflects the way a stock market investor should treat his relationship with the stock market.