Benjamin Graham, Jason Zweig
I was struck by Graham’s certainty that, sooner or later, all bull markets must end badly. (Location 167)
The intelligent investor is a realist who sells to optimists and buys from pessimists. (Location 195)
From these two broad examples we draw two morals for our readers: 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. (Location 311)
Instead, this book will teach you three powerful lessons: how you can minimize the odds of suffering irreversible losses; how you can maximize the chances of achieving sustainable (Location 374)
gains; how you can control the self-defeating behavior that keeps most investors from reaching their full potential. (Location 375)
But no matter how careful you are, the price of your investments will go (Location 382)
down from time to time. While no one can eliminate that risk, Graham will show you how to manage it—and how to get your fears under control. (Location 383)
It simply means being patient, disciplined, and eager to learn; you must also be able to harness your emotions and think for yourself. (Location 387)
“Obvious prospects for physical growth in a business do not translate into obvious profits for investors.” While it seems easy to foresee which industry (Location 441)
will grow the fastest, that foresight has no real value if most other investors are already expecting the same thing. (Location 442)
The people who now claim that the next “sure thing” will be health care, or energy, or real estate, or gold, are no more likely to be right in the end than the hypesters of high tech turned out to be. (Location 446)
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 (so long as you keep enough cash on hand to meet your spending needs), you should welcome a bear market, since it puts stocks back on sale. (Location 453)
And everyone who buys a so-called “hot” common-stock issue, or makes a purchase in any way similar thereto, is either speculating or gambling. (Location 514)
As Graham once put it, investors judge “the market price by established standards of value,” while speculators “base [their] standards of value upon the market price.” (Location 728)
Graham urges you to invest only if you (Location 731)
would be comfortable owning a stock even if you had no way of knowing its daily share price. (Location 731)
never put more than 10% of your assets into your mad money account, no matter what happens. (Location 889)
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. (Location 2854)
It turned out, in the sequel, that the opposite was true. The market’s behavior in the past 20 years has not followed the former pattern, nor obeyed what once were well-established danger signals, nor permitted its successful exploitation by applying old rules for buying low and selling high. Whether the old, fairly regular bull-and-bear-market pattern will eventually return we do not know. But it seems unrealistic to us for the investor to endeavor to base his present policy on the classic formula—i.e., to wait for demonstrable bear-market (Location 2921)
Many of the “formula planners” found themselves entirely or nearly out of the stock market at some level in the middle 1950s. True, they had realized excellent profits, but in a broad sense the market “ran away” from them thereafter, and their formulas gave them little opportunity to buy back a common-stock position. (Location 2936)
The moral seems to be that any approach to moneymaking in the stock market which can be easily described and followed by a lot of people is by its terms too simple and too easy to last. (Location 2942)
As the market advances he will from time to time make sales out of his stockholdings, putting the proceeds into bonds; as it declines he will reverse the procedure. (Location 2969)
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. This really means that, in a very real sense, the better the quality of a common stock, the more speculative it is likely to be—at least as compared with the unspectacular middle-grade issues. (Location 2990)
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. (Location 3006)
There are two chief morals to this story. The first is that the stock market often goes far wrong, and sometimes an alert and courageous investor can take advantage of its patent errors. The other is that 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’ performance like a hawk; but he should give it a good, hard look from time to time. (Location 3052)
form your own ideas of the value of your holdings, based on full reports from the company about its operations and financial position. (Location 3093)
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. (Location 3098)
The most realistic distinction between the investor and the speculator is found in their attitude toward stock-market movements. The speculator’s primary interest lies in anticipating and profiting from market fluctuations. The investor’s primary interest lies in acquiring and holding (Location 3102)
It is far from certain that the typical investor should regularly hold off buying until low market levels appear, because this may involve a long wait, very likely the loss of income, and the possible missing of investment opportunities. On the whole it may be better for the investor to do his stock buying whenever he has money to put in stocks, except when the general (Location 3106)
market level is much higher than can be justified by well-established standards of value. (Location 3108)
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. He should always remember that market quotations are there for his convenience, either to be taken advantage of or to be ignored. He should never buy a stock because it has gone up or sell one because it has gone down. He would not be far wrong if this motto read more simply: “Never buy a stock immediately after a substantial rise or sell one immediately after a substantial drop.” (Location 3115)
Here are some of the handicaps mutual-fund managers and other professional investors are saddled with: (Location 3252)
your returns will always be hostage to Mr. Market and his whims. But you can control: (Location 3270)
If you investment horizon is long—at least 25 or 30 years—there is only one sensible approach: Buy every month, automatically, and whenever else you can spare some money. The single best choice for this lifelong holding is a total stock-market index fund. Sell only when you need the cash (Location 3282)
best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go. (Location 3292)
Groundbreaking new research in neuroscience shows that our brains are designed to perceive trends even where they might not exist. After an event occurs just two or three times in a row, regions of the human brain called the anterior cingulate and nucleus accumbens automatically anticipate that it will happen again. If it does repeat, a natural chemical called dopamine is released, flooding your brain with a soft euphoria. Thus, if a stock goes up a few times in a row, you reflexively expect it to keep going—and your brain chemistry changes as the stock rises, giving you a “natural high.” You effectively become addicted to your own predictions. (Location 3301)
Making $1,000 on a stock feels great—but a $1,000 loss wields an emotional wallop more than twice as powerful. (Location 3311)
The longer and further stocks fall, and the more steadily you keep buying as they drop, the more money you will make in the end—if you remain steadfast until the end. (Location 3350)
The intelligent investor should be perfectly comfortable owning a stock or mutual fund even if the stock market stopped supplying daily prices for the next 10 years. (Location 3352)
Before 2002 ended, you could have sold all your Coke shares, locking in the $3,200 loss. Then, after waiting 31 days to comply with IRS rules, you would buy 200 shares of Coke all over again. The result: You would be able to reduce your taxable income by $3,000 in 2002, and you could use the remaining (Location 3365)
Our study of the various methods has led us to suggest a foreshortened and quite simple formula for the valuation of growth stocks, which is intended to produce figures fairly close to those resulting from the more refined mathematical calculations. Our formula is: Value = Current (Normal) Earnings × (8.5 plus twice the expected annual growth rate) (Location 4340)
1. Adequate Size of the Enterprise All our minimum figures must be arbitrary and especially in the matter of size required. Our idea is to exclude small companies which may be subject to more than average vicissitudes especially in the industrial field. (There are often good possibilities in such enterprises but we do not consider them suited to the needs of the defensive investor.) Let us use round amounts: not less than $100 million of annual sales for an industrial company and, not less than $50 million of total assets for a public utility. 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 (or “working capital”). For public utilities the debt should not exceed twice the stock equity (at book value). 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 (Location 5057)
Current price should not be more than 1½ times the book value last reported. However, a multiplier of earnings below 15 could justify a correspondingly higher multiplier of assets. As a rule of thumb we suggest that the product of the multiplier times the ratio of price to book value should not exceed 22.5. (This figure corresponds to 15 times earnings and 1½ times book value. It would admit an issue selling at only 9 times earnings and 2.5 times asset value, etc.) (Location 5073)
what percentage of a company’s shares are owned by institutions. Anything over 60% suggests that a stock is scarcely undiscovered and probably “overowned.” (When big institutions sell, they tend to move in lockstep, with disastrous results for the stock. Imagine all the Radio City Rockettes toppling off the front edge of the stage at once and you get the idea.) Those websites will also tell you who the largest owners of the stock are. If they are money-management firms that invest in a style similar to your own, that’s a good sign. (Location 5336)
So let us apply to our list some additional criteria, rather similar to those we suggested for the defensive investor, but not so severe. We suggest the following: Financial condition: (a) Current assets at least 1½ times current liabilities, and (b) debt not more than 110% of net current assets (for industrial companies). Earnings stability: No deficit in the last five years covered in the Stock Guide. Dividend record: Some current dividend. Earnings growth: Last year’s earnings more than those of 1966. Price: Less than 120% net tangible assets. (Location 5488)
Bargain Issues, or Net-Current-Asset Stocks (Location 5567)
It always seemed, and still seems, ridiculously simple to say that if one can acquire a diversified group of common stocks at a price less than the applicable net current assets alone—after deducting all prior claims, and counting as zero the fixed and other assets—the results should be quite satisfactory. (Location 5571)
If we eliminated those which had reported net losses in the last 12-month period we would be still left with enough issues to make up a diversified list. (Location 5577)
He looks for what he calls “franchise” companies with strong consumer brands, easily understandable businesses, robust financial health, and near-monopolies in their markets, like H & R Block, Gillette, and the Washington Post Co. Buffett likes to snap up a stock when a scandal, big loss, or other bad news passes over it like a storm cloud—as when he bought Coca-Cola soon after its disastrous rollout of “New Coke” and the market crash of 1987. (Location 5743)
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. (Location 7366)
For the intelligent investor, Graham’s “margin of safety” performs the same function: By refusing to pay too much for an investment, you minimize the chances that your wealth will ever disappear or suddenly be destroyed. (Location 7382)
Ultimately, financial risk resides not in what kinds of investments you have, but in what kind of investor you are. If you want to know what risk really is, go to the nearest bathroom and step up to the mirror. That’s risk, gazing back at you from the glass. (Location 7396)
Their portfolio was always well diversified, with more than a hundred different issues represented. (Location 7449)