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THE INTELLIGENT INVESTOR A BOOK OF PRACTICAL COUNSEL REVISED pubs/,, and www. ValueInvesting Notes | The Intelligent Investor. Introduction: What This Books Expects to Accomplish. •. Book only deal with that portion of their funds which they. Free pdf download and review of the book "The Intelligent Investor" by Benjamin Graham one of the best book in the world about investing.

Hence, Graham says that investing is more of a trait of character than IQ. Stock Market Volatility Mr. Market Concept - Chapter 8 Graham says that the true investor scarcely ever is forced to sell his shares.

The intelligent investor only pays attention to the current stock price when it suits him. The investor who permits himself to be worried by unjustified market declines in his holdings is essentially transforming his basic advantage into a basic disadvantage. One of our partners is called Mr. Market is a very obliging partner. Every day, he tells us what he thinks our interest is worth and furthermore, offers either to buy us our or to sell us an additional interest on that basis.

Sometimes his idea of value appears justified and plausible by business developments and prospects as we know them. Often, on the other hand, Mr. Market lets his enthusiasm or his fears run away with him, and the value he proposes seems to you a little short of silly.

If we are a prudent investor or a sensible businessman, will we let Mr. Only when we agree with him, or we want to trade with him.

We may happy to sell out to him when he quotes a ridiculously high price, and equally happy to buy from him when his price is low. But the rest of the time, we would be wiser to form our own views of the value of our holdings, based on full reports from the enterprise about its operations as well as its financial positions.

The speculator's main interest is to anticipate and profit from fluctuations in the market. The investor's primary interest is to acquire and hold suitable securities at suitable prices. Investing is not about beating others at their game, it's about controlling yourself at your own game.

Most investors fail because they pay too much attention to what the stock market is doing currently. Checking at least the last 5 years performance of the fund is crucial. Ultimately you have to know yourself well.

Many investors are more comfortable having a second opinion from a good financial adviser. Some people need others to show them what rate of return they need to earn on their investments. Or how much they should be saving to meet their financial goals. Some others may simply need someone to blame when their investments go down, instead of beating themselves up.

This might give these people some boost needed to keep investing steadily over the long run instead of giving up completely during a bear market. Busted budgets You struggle to make end meets. Do not know where your money go. Impossible to save regularly. Always fail to pay your bills on time. Simply put, your finances are out of control. Chaotic portfolio A professional "asset-allocation" can help. Major changes If you have become self-employed and need to set up a retirement plan.

Or your aging parents do not have their finances in order. Or college for your kids looks unaffordable. A genuine financial adviser might help to improve the quality of your life. Trust, then verify A lot of financial advisers are con artists who make you trust them.

And talk you out of investigating them. Before you put your financial future with them, it is important to find someone honest. Ronald Reagan used to say, "trust, then verify". Always do your due diligence. And make sure that your adviser truly knows his stuff, about the true fundamentals of investing.

And a satisfactory amount of years with skin in the game. Beware of financial advisers who use these words The opportunity of a lifetime Don't you want to be rich? You should focus on performance, not fees Can't lose No one else knows how to do this It's no-brainer The smart money is buying it It's a sure thing My note: There are many financial advisors who are unethical in Singapore.

There are some who are genuine and good. Those who have skin in the game and really is genuine in looking out for you is the one to go for. It is hard to find because their pay is ties to them selling policies to you. Take your time. Do not trust easily. Investment Selection How to Analyze Stocks and Bonds - Chapter 11 When analyzing bonds The most important criteria to take note of is the number of times that total interest charges have been covered by available earnings.

We should analyze for at least 7 years in the past. For preferred stocks It is the number of times the bond interest and preferred dividends combined have been covered by the available earnings for 7 years in the past.

For stocks We have to compare our valuations of the company to the current price that the company is trading at in the stock market. We should always seek a margin of safety - purchasing the stock for less than its intrinsic value. The lesser the assumptions we have to make about the future during analysis, the lesser the possibility for error is.

So we should not make too many assumptions when doing our analysis of stocks. The biggest source of value for stocks should be the average of the future potential earnings.

And we have to also take into account the required rate of return too. Depending on the quality of investment, the required rate of return will differ. Five elements to determine how much the enterprising investor should pay for a stock: 1. Long-term prospects of the company Download at least five years' worth of annual reports 10K from the company's website. Gather evidence in the financial statements that answer two questions: What makes this company grow? Where do and where will its profits come from?

Beware of companies that are: a. If a company would rather buy stock of other companies than themselves, that is a hint that we as an investor should too. Check their track records as an acquirer. Watch out for firms that took on acquisitions only to write it down in the future proving they had overpaid for the past acquisitions. Bad omen for future decision making.

OPM addict A company that likes to borrow debt or sell stock to get other people's money are dangerous. OPM are labeled as "cash from financing activities" of the statement of cash flows in the annual report. They can make a sick company looks to br growing even if the underlying business is not generating enough cash.

Johhny-One-Note A company that relies on one customer or a handful for most of its revenues. Look for companies that: a. Has a wide "moat" or competitive advantage Some companies can be easily stormed while others are impregnable. Several forces that can widen a company's moat include a strong brand identity like Harley Davidson , a monopoly or near monopoly, economies of scale, low-cost Gilette that can produce blades by the billion , unique intangible asset Coca-cola , a resistance to substitution most businesses have no alternative to electricity so utility companies are an example of one.

The company runs a marathon, not sprint The fastest growing companies tend to overheat and dies out.

Look for companies that have grown smoothly and steadily over the past 10 years. A sudden 1 or 2 year burst is hardly sustainable. The company sows and reaps All companies must spend some money on research and development.

But it will be tomorrow. Management competency Fair to assume that outstandingly successful company has unusually good management. Look for management that says what they will do, and do what they said.

A good manager will admit failures and take responsibility for them. Good management will not overpay their CEO.

They will spend more time managing the company in private instead of promoting it to the investing public. Also, ask whether their accounting practices are designed to make their financial results transparent or opaque. If "nonrecurring" charges keep on recurring or "extraordinary" items crop up so often they seemed ordinary, EBITDA takes priority over net income, this is a company that does not put shareholders interest first.

See in the statement of cash flows whether cash from operations has grown steadily over the past 10 years. Look at Warren Buffett popularized the concept of owner earnings which is net income plus amortization and depreciation, minus normal capital expenditures. Subtract from the net income any "unusual", "nonrecurring" or "extraordinary" charges.

Also minus any costs of granting stock options that diluted earnings away from existing shareholders into the hands of new inside owners. As well as any "income" from the company's pension fund.

In the footnotes to the financial statements, determine whether long-term debt is a fixed rate with constant interest payments or variable with payments that fluctuate, which could become costly if interest rates rise. Look out also for the ratio of earnings to fixed charges. Dividend record One of the most persuasive tests of high-quality companies is an uninterrupted record of dividend payments going back over many years. Graham suggests 20 years.

He also said that the defensive investor might be justified in limiting his purchases to those that met this test. Current dividend rate My note: I think the above 5 points are really good starting criteria for analyzing companies - for the enterprising investor.

If it assumes that its relative past performance will continue unchanged into the future. The second part is to consider to what extent the value of the past should be modified due to new conditions expected into the future. Per Share Earnings - Chapter 12 Graham has always been a long-term thinker.

He is wary of putting too much importance in short-term earnings. We should look at earnings that have been averaged over a long period of time at least 7 to 10 years. Looking at the longer term provides a better indicator of the future health of the company. This is because short-term earnings have greater analysis required such as scrutinizing any special charges, depreciation changes, income tax anomalies, dilution factors, etc.

But be wary of pro forma earnings. Pro forma earnings enable companies to show how well a company might have done if they did not do as badly as they did.

Best thing to do with pro forma earnings is to ignore them. Look into the footnotes! Be wary of aggressive revenue recognition practices.

It is a sign of dangers that run deep and large. Also be wary of companies that do not charge expenses against revenues when it is suitable to.

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Instead, treat these expenses as a capital expenditure that increases the company's total assets instead of decreasing net income. And cloaked in obscurity, They have been marketed often times by Wall Street as a great thing - "the best of both worlds.

Or you can exchange it for common stock of the issuing company at a predetermined ratio.

This is not necessarily a good thing. The buyer of such issues usually would need to give up some yield they get a lower interest rate and accept greater risk in exchange for the right of conversion.

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All convertible issues should be analyzed individually Simply being a convertible issues does not warrant it a good investment. We should also be wary of new convertible issues during near the end of bull markets - where it is most advantageous for the company.

A lot of the good bargains of issues are found among the older ones.

My note: I do not have any experience with convertible issues. But from what Graham says, it is not that good of a thing either. When we buy a stock, we become an owner of the company Its managers, all the way up to the CEO, work for us. Its board of directors must answer to us. Its cash and businesses belong to us. Graham advises shareholders to be more active as owners of the company. Management that has goods results should be rewarded and those with bad results should be questioned.

He thinks that shareholders should demand a portion of the company's earnings to be returned to as dividends if the company does not know the best use of the excess capital of the company. In summary, shareholders should think more like an owner when buying stock. Instead of simply treating stock as a piece of paper that wiggles in price daily, My note: I think that Graham version is akin to today's becoming a more active shareholder that tries to influence management.

I personally do not think this chapter is that important. Because it takes too much effort to try to influence the management. The bulk of work should be analysing past management's action and be accepting of it before investing in the company. A Margin of Safety Most Important! This ability can constitute as a margin of safety requirement. Margin of safety is often said by Benjamin Graham as "the secret of sound investment. Margin of safety in stock investing is the difference between the intrinsic value of the company and the price we pay.

The amount of price paid is the most important factor in investment Determining the purchase price, and having the discipline to only buy at or below the price is where the true test lies at. Graham says that a sufficiently low price can turn stocks of mediocre quality into a sound investment opportunity.

Provided that the buyer is informed and experienced and that he practices enough diversification. The greater the margin of safety, the more leeway we have for things to go bad - before we lose money. If the future is as we expect it to be, or better, the profits we will get are also much higher. My note: It is not easy to be patient enough to wait until there is enough margin of safety.

In the bull market, there are lesser opportunities. More opportunities in a bear market. That is why value investors welcome it. The most important reason to use margin of safety Hardly anyone in the world can hardly make an accurate forecast into the future of a company.

There is always a risk of paying too high. The reason for having a margin of safety is essentially to make an accurate forecast of the future less necessary. There is a buffer for inaccurate forecasts. One of the main reason for investor's loss Graham says is through buying low-quality stocks at times of favorable business conditions without a margin of safety.

Most investors came into a wrong conclusion about the earnings of a company based on past few good years. This is dangerous. No good company will have great results forever. There is danger in buying growth stocks because investors usually project future earnings of growth companies at rates far above average and place a too high of a premium for these stocks. That leaves little rooms for error. Growth stocks should be purchased only when there is a good amount of margin of safety based on a conservative projection.

Diversification is also a key component of the margin of safety based on Graham The odds would be with us when we only invest in individual stocks with a large enough margin of safety. The truth is some will not live up to expectations. Having large enough diversification, Graham says that the combined gains will be much higher than the losses. In diversification, the more opportunity we find, the greater the probability that the portfolio will have an above average gain.

The biggest lesson that we can take away is that there will always be cases where people got too greedy and pay ridiculous prices for stock of companies who is not fundamentally sound.

The outcome is definitely not desirable. There will be cases where companies are currently unpopular but the business is doing well.

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That means that the stock may currently not be doing well. But the company is doing well. An intelligent investor always analyzes the long-term evolution and management principles of a company before investing.

An intelligent investor always protects him- or herself from losses by diversifying investments. A famous quote by Warren Buffet is about his 2 rules for investing. Rule No. Nobody can predict the next Facebook, but everyone can protect themselves against losses. By doing a thorough analysis, intelligent investors find stocks with a gap between their current price and the intrinsic value the company holds and will eventually unlock.

Oh and she does one other thing. Market, where he pictures the entire stock market as a single person. If you imagine Mr. Market is not very clever, totally unpredictable and suffers from serious mood swings.Speculation [p 18] A. For the defensive investor we suggest an upper limit of purchase price at 25 times average earnings of the past 7 years.

But thorough analysis shows that attempts to do this just don't work. Comments by Zweig [p ] 1. If it assumes that its relative past performance will continue unchanged into the future. Most of the time, people who failed in investing is not because they are stupid.

Having large enough diversification, Graham says that the combined gains will be much higher than the losses. Allocate capital wisely.