The intelligent investor

Benjamin Graham is the author of "The Intelligent Investor," which is one of the most influential investment books written. He is considered to be the father of value investing and his book tells value-oriented investment strategies. The book is consisted of few hundred pages but let us be concise and go straight to the points. Here are the main points of Graham.

1. Market is volatile and nobody can perfectly predicts its behavior. This is quite obvious. Even with careful examination of past movement and statistical analysis, it is not possible to perfectly forecast future market condition.

2. General public is usually wrong. People are emotional and market demand/supply fluctuate based on public psychology. However, market will come to an equilibrium over time. So as an individual investor, your job is to automate parts of your investment strategies. Once standards are formed, you will not be hop in and out of market like a frog following other investors. But rather, your profit/loss will be solely based on your own strategies and rules.

3. Every stock has business and market valuation. The business valuation is the stock's book value, which is a value you get when the company is liquidated. In addition, it is significant that you also take earnings into consideration when valuing business. You need to look at what the company is worth right now in term of book accounting but it is equally important to analyze future prospect and potential profits of a company. The market valuation is trading price of stock in market. After the stock valuation, you will approximate its intrinsic value, if that number is greater than the market price then the stock is undervalued. If market price is greater than the intrinsic value then the stock is overvalued.
Graham recommends investors to purchase stock near its intrinsic value. This means P/B being close to 1, preferably lower than 1, which means that stock is on sales.

4. Graham also advise investor to carefully examine growth potential of company. One can do so by analyzing financial position of a company and its earning growth rate. P/E below 15 is a good sign.

5. Market will fluctuate and reach equilibrium. Once you set your strategies, your job is to buy low and sell high. Sometimes, market will bring down the price of your stock for no apparent reasons. But it is important that you stick with your decision. If the stock you chosen is truly undervalued, market will adjust itself over time and bring the stock price back to what it should be. Hence, don't get nervous and let your stock ride along the wave.

6. Margin of safety is difference between the business valuation (intrinsic value) and market valuation. For a simple example, if IV =$20 and MV = $15 then margin of safety = $5. This means you have at least $5 buffer to withstand when the market fluctuate and your stock price declines. Since you believe that stock is worth $20 and bought it at $15, you saved yourself $5. So until the stock plummets to $10, you are not having a loss. The margin of safety comes from both quantitative and qualitative factors. Good management team can be considered margin of safety but then again unmeasurable factors are not good elements in analysis. Something unquantifiable is too vague, especially when your financial resource is scarce you do not want to rely on such factors. Graham put special emphasis on the financial health of company. Long term debt is a bad sign and possible insolvency problem.

Key point of "The intelligent investor" is to make wise investment based on careful analysis and pay a fair price for a stock regardless its future prospect. By doing so, you minimize the risk and become a victim of market fluctuation.