Book Summary: Intelligent Investor – Benjamin Graham

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  • ISBN-10: 9780062312686
  • ISBN-13: 978-0062312686

Warning: This book is an advanced read even for finance professionals. You must have basic knowledge on capital markets to be able to understand and appreciate the book. Like high echelons of Carnatic music, this book is a God send for those obsessed with return on and of their investment, but most others may be unable to appreciate the finesse of the mentioned points.

Graham on Risk Management
Graham on Risk Management

This book is one of Investment Classics vouched by none other than the most well-known investor of our times Mr. Warren Buffett. Most revelations in the field of investment lose relevance overtime and even prove dismal in succeeding cycles, as can be seen in some of the commentary by the supplementary author Jason Zweig (more on that later) but Graham’s principles have themselves have survived several market cycles. Infact these principles thrive on the market cyclicality. So let’s go about to explore the voluminous book.

Speculation Vs. Investment

A shareholder is a part owner of the company and has to study the business fundamentals thoroughly before deciding to put his money into it. The investor must be convinced that he is receiving more value of the company for the price he is paying. Purchasing shares with the hope that it would increase in price is speculation. A non-professional who is speculating on share prices is purely gambling.  It is an exciting past time worth being pursued with only a small portion considered as fun money which you are okay to loose.

Investor’s Biggest Enemy- Inflation

A good investment must deliver an inflation beating return with an acceptable level of risk. Graham considers bonds (debt securities) as one of the most important vehicle to achieve the same. Since secure return of principal is of prime importance, Graham prefers Govt.bonds over corporate bonds as there is nil risk of default by the Government and a few additional points from corporate bonds do not justify the additional risk. However, Graham recommends buying bonds of corporates when available at a steep discount in the secondary market due to temporary adverse conditions faced by the company or market.

Two Types of Investor – Defensive and Enterprising

Myth in investing world is that you have to take higher risks to obtain higher returns. According to Graham higher returns go to the investor who actively pursues it, i.e an enterprising investor while the passive or defensive investors get average returns.

Portfolio Allocation

Between stocks and bonds, Graham recommends a minimum of 25% and a maximum of 75% allocation on each of them. Only investors who are prepared for a huge draw down(notional loss on quoted price) should allocate 75% on stocks at any point in time. Conservative investors may be better off with maximum allocation on bonds.

Rules for Common stock Component

  1. There should be adequate but not excessive diversification. i.e a minimum of 10 and a maximum of 30 stocks.
  2. Each of the selected company should be large, prominent and conservatively financed.
  3. Each company should have a long record of continuous dividend payments of atleast 10 years.
  4. Set a limit to max price one would pay for the stock. Suggested: Trailing 12 months PE of 20 or average of 25.

Graham in general advices against picking stocks individually as he considers an individual cannot do a better job at stock picking than the professionals who seem to do a pretty average job themselves. His preferred way of investment in equity is through index funds.

For an enterprising investor who is willing to put in more efforts into stock picking he advises following guidelines:

  1. Financial Condition: (a) Current assets at least 1.5 times current liabilities and (b) debt not more than 110% of net current assets (for industrial companies)
  2. Earnings Stability: No deficit in the last five years.
  3. Dividend Record: some current dividend
  4. Earnings growth: Last year’s earnings more than of prev years
  5. Price: Less than 120% of net tangible assets.

Dollar(Rupee) Cost Averaging:

Such carefully selected stocks must be purchased through a monthly purchase plan of a fixed amount every month as long as the basis premise of selection holds good.

Graham on Dollar Cost Averaging
Graham on Dollar Cost Averaging

Portfolio Tracking and Updation:

The portfolio must be reviewed atleast once a year. But frequent urge to check the stock prices must be avoided.

Dividend Policy:

Graham is extremely critical of companies that retain more earnings than required for growth. For the company managers to believe that they are more qualified in growing the retained earnings than the shareholders is incorrect, unproven and misaligned incentives.

My Critic on the book: The commentary of the book by Jason Zweig adds number of recent examples. However, the commentary is dated only till 2003. So the book completely skips the 2008 crash and the lessons from it. Jason Zweig has also recommends investing in junk funds as he says risk has been significantly reduced due to diversification. Diversification does not do away with systemic risks which while adequately addressed by Graham need to continue to be adhered too.

This book is a great read if you want to understand more on Asset Allocation in capital markets.  For more in depth knowledge on picking stocks please read ‘Security Analysis‘ by Graham and Dodd.


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Is debt bad?

We have seen finance experts like Dave Ramsay tell us to cut up our credit cards. We have seen how delinquent home loans not only caused people to lose their homes but also a systemic crisis that spread across several financial institution and countries during 2008. Repossessed cars and two wheeler are common in many low income households. To add to this trouble student loan defaults have become high all over the world as the income opportunities often don’t match up with the cost of some of these courses.

So is debt a bad thing? Should we indeed cut up credit cards? Save for 15+ years to buy a home. Never take a loan in our life?

From Shylock of ‘Merchant of Venice’ to today’s bank that offer Personal loans and credit cards with dubious terms the bankers have been portrayed as Vultures. It is often joked ‘Banks will only lend money to those that don’t need them.’. Are these Financial institutions just vultures that serve no real need?

Continue reading Is debt bad?

Why thrifty saving is not the same as investing

‘A penny saved is a penny earned’ is an adage you will hear so often that its sheer repetition will make you believe it to be true. But is it really true? Sure, money not spent right now is sitting to be spent on something else later. Economics defines this as opportunity cost. But in this article, I am going to argue against ‘thrifty saving’ as a way to ‘grow your money’ or to ‘get and live rich’. Continue reading Why thrifty saving is not the same as investing

Book Summary: The Richest Man in Babylon

This is one of the oldest books on investments and personal finance that has survived time and covers all the basic knowledge required for a beginner wealth builder. The fable covers simple advice to start wealth building to most common mistakes committed by those in their journey to financial independence.

Continue reading Book Summary: The Richest Man in Babylon


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Book Summary: Automatic Wealth – Michael Masterson

automatic wealth
Automatic Wealth

Buy the book here: Automatic Wealth: The six steps to Financial Independence

A book of the title ‘Automatic Wealth‘ is sure to get interest from many, however the this is no get rich quick with no work book. Some specific advice in the book, revolves around USA, however the basic premises of the book is applicable across countries and markets.

The book breaks down the process of wealth building into six steps:

Six Steps to Automatic Wealth:

Continue reading Book Summary: Automatic Wealth – Michael Masterson


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Everything you need to know about life insurance (incl if you need it at all )

Life Insurance in India

India has one of the lowest penetration of life insurance of under 3.5 %. But many of us have a number of policies for which we dutifully, pay premiums every year but don’t know for sure if we it is useful or not. Even as a finance professional, I have made a number of those rookie mistakes, so I can totally understand how gullible one can be to those pitches.

So let us examine, some basic questions to help us guide through these decisions.

What is insurance?

Insurance contract ensures the policy holder is compensated for his loss when a certain event happens. So extending this definition, we can say a life insurance is a monetary compensation for loss of earning potential due to death or disability.

This simple definition provides us all the necessary understanding required to evaluate a policy. So let me try and break this done into a checklist.

Benefits of Term Insurance
Benefits of Term Insurance

 

Continue reading Everything you need to know about life insurance (incl if you need it at all )

Four Steps to Setting and Achieving Your Financial Goals

Financial Goals

This is Part of our Personal Finance Education Series. You can check Part I, Part II, Part III, Part IV here.

From our expenses Account, we know how much money we spend/need every month. We also know where we stand today in terms of wealth, from calculating our Net worth. The next step is to know where we need to go

What are your short term and long term Financial Goals?

Money is only a means to get somewhere. Instead of simply saving money for the sake of it, we need to clearly define goals against which want to save money for.

Financial Goals
Financial Goals

Continue reading Four Steps to Setting and Achieving Your Financial Goals

What is your Networth?

Forbes list of Billionaires and their net worth never fails to gather interest of one and all. We often read with great interest, news that ‘Mukesh Ambani ‘s net worth is 36 B USD, Sachin Bansal is over $1 B USD etc. Let’s explore what this means and why it is important.

What does a Net worth Mean?

Net worth is the net of what you own over what you owe, i.e Assets over the liabilities. For a company this information is captured in the Balance Sheet and is updated at the end of an year.

Why is Net worth Important?

While your personal Income and Expenses statement that we earlier saw captures your current earning, spending and savings on a monthly basis, Net worth is the end result or your progress card of how well you have done so far with your Income and Expenses.

Your Personal Balance sheet/Net worth is an indicator of your resilience to impact in your earning ability. This is why bank’s ask for surety when they extend a loan.

Networth
Networth

Continue reading What is your Networth?

Where is my money, honey ?

Money Thoughts:

Have you wondered “I’ve been working for nearly a decade or more now. How is it that my Zero Balance Salary account is stuck forever at that ‘Zero Balance'”

“I started my career with a salary close to what my dad retired with, and in spite of all the generous increments and all these years of hard work I’ll probably own nothing more than what he did when he retired and to top it all I don’t even have a pension”

I dont know
“It’s only 5th, how come it’s showing zero balance again”

Continue reading Where is my money, honey ?

The one habit that enabled me to quit my job and become my own boss

Good habits are, often over a period of time, the difference between a roaring success and a crashing failure. Good habits make things possible by setting you in the right direction step by step instead of a whimsical leap of faith. But, there are often habits that once practised and reviewed, DO help you take that leap of faith! One such habit helped me quit my day job, eventually freeing up my time for working on the kind of projects that I had always wanted to work on and do things that I had always wanted to do without worrying about leaves. In this post, I help you discover what that habit is and how much it can liberate you to follow your long put-off dreams.

Continue reading The one habit that enabled me to quit my job and become my own boss