Notes on "Intelligent Investing" Jan. 26, 2008

Almost finished the classic book on investing, The Intelligient Investor by Benjamin Graham. This is not a "teach you how to get rich fast" book. Instead, this is a serious book teaching you how to invest intelligently. I like his strict, research-style writing. In this book, Benjamin first made a similar statement, "it is very hard to beat the market", as "Random Walk". So the investor should start on preserving capital first, instead of chasing hot issues. He classifies the investors into defensive investor and enterprising investor. Here I will focus on suggestions on the defensive investor.

Portofolio Management:
He suggests the defensive investor divide his funds between high-grade bonds and high-grade common stocks. The defensive investor should never have less than 25% or more than 75% of his funds in common stocks. The standard division is 50-50. If the investor feels that the market is over-valued, he moves to lower stock/bond ratio. Vice versa. (In today's market, I think I rather choose money market and cash than bond.)

Rules for the Common-Stock selection of Defensive Investor:
1. Enough diversification: between 10 and 30 stocks;
2. Each company should be large, prominent and conservatively financed;
3. long record of continuous divident payments;
4. Price should be smaller than 25 times of average earnings over past seven years, and not more than 20 times those of the last twelve-month period.

Conservatively financed: The common stock ( at book value ) represents at least half of the total capitalization.

Metrics
He states that if you only use one metric, e.g. low P/E ratio, to select stocks, you won't get a good return. Instead you should use a combination of multiple metrics to select stocks. These metrics include low P/E ratio, strong financial position, Dividend Record, Current Dividend rate, projected earning growth ...

P/E ratio <= 25; Price/book value <= 4? Divident yield 2-4%? Net Income/Interest >= 4?
Book value of common stock/total capitalization >= 50%
10-year Continuous dividend


Per-Share Earnings
1. Don't take a single year's earnings seriously;
2. Look out for booby traps in the per-share figures;
3. The growth rate be calculated by comparing the average of the last three years with corresponding figures ten years earlier

Quote:
1. The investor's primary interest lies in acquiring and holding suitable securities at suitable prices.