Summary of The Intelligent Investor

Chapter 1: Investment vs Speculation

Investment: Promises safety of principal and an adequate return.

1.?Thoroughly Analyze

2.??Protect yourself against losses

3.?Must aspire to adequate profits only

?Speculation: No safety of principal, hope of gain but with the risk of loss.

1.?Don’t think this as an investment

2.??It is dangerous

3.?Must have strict limits on the amount.

?Chapter 2: The Investor & Inflation

Inflation: Increase in the prices of goods and services in an economy.

Money Illusion: When returns are more than inflation rate then only it’s a real profit.

?Chapter 3: A Century of stock-market History

You ‘ve got to be careful if you don’t know where you’re going. Because you might not get there.

The stock market’s performance depends on three factors:??1. Real growth: The rise of company’s earnings and dividend’s

2. Inflationary growth: The general rise of prices throughout the economy

3. Speculative growth or decline: Any increase or decrease in the investing public’s appetite for stocks.

?Chapter 4: General Portfolio Policy the Defensive Investor

2 ways to be an intelligent investor

1.?Defensive Investor

2.??Aggressive Investor

Defensive investor: Creating a permanent portfolio that runs on autopilot and requires no further effect.

Aggressive investor: - Continually researching, selecting and monitoring a dynamic mix of stocks, bonds or mutual funds.

?Chapter 5: The defensive investor and common stocks

4 Rules for the common stock: -

1.?Adequate diversification.

2.?Selected company should be large and conservatively financed

3.?Each company should have a long record of continuous dividend payments

4.?The investor should impose some limit on the price he will pay

Do not invest in growth stocks as they are very expensive and no dividends.

“Buy what you know” does not work always.

Dollar-cost Averaging: Invest a Fixed amount every month in index funds.

?Chapter 6: Portfolio Policy for the enterprising Investor – Negative side

Enterprising investor should not have these in their portfolio (The negative side)

1.?Junk Bonds:

High yield bonds

Less credit rating

2.?Foreign Bonds:

Issued in a domestic market by a foreign entity

Foreign bonds are Risky investment

Not more than 10% of the portfolio should be allocated

3.?IPO’s

We don’t know financial statements

Only very few IPO’s give good returns.

4.?Day Trading:

Holding stocks for a few hours at a time.

Committing financial suicide.

Few might make money but most will lose.

Taxed at maximum rate

?Chapter 7: Portfolio Policy for the Enterprising Investor -The positive side

?Enterprising Investor can do:

1.?Buying in low markets and selling in high markets.

2.?Buying Growth stocks.

3.?Buying bargain issues.

4.?Buying into special situations.

?Chapter 8: The Investor and Market Fluctuations

Investors make money in market by two possible ways: -

1.?Timing: Buy when the future course is deemed to be upward, to sell when the course is downward.

2.?Pricing: To buy stocks when they are quoted below their fair value and to sell them when they rise above such value.

?What investor can control:

1.?Brokerage costs, by trading rarely, patiently and cheaply

2.?Ownership costs, by refusing to buy expensive mutual funds

3.?Expectations, by using realism, to forecast his returns.

4.?Risk, by diversifying and by rebalancing

5.?Tax bills, by holding stocks for at least one year

6.?Most of all, his own behavior.

?Chapter 9: Investing in investment funds

Two types of mutual funds for defensive investors:

Open ended funds: - An investment scheme where the shares can be issued and redeemed at any time.

Closed ended funds: - An investment scheme where the shares can be redeemed only after lock in period completed.

?When should we sell?

1.?A sharp and unexpected change in strategy

2.?An increase in expenses

3.?Large and frequent tax bills

4.?Suddenly erratic returns

?Chapter 10: The Investor and His Advisers

Seek professional advices in below four cases:

1.?Big losses: If your portfolio lost more than 40% of its value

2.?Busted budgets: If you are failing to pay your bills on time

3.?Chaatic portfolios: You lack the investing harmony that true diversification brings.

4.?Major changes: If you have become self-employed and need to setup a retirement plan

?How to screening an adviser?

Determine whether he cares about helping clients or just goes through the motions.

Assess whether he is sufficiently educated, trained and experienced to help you.

Chapter 11: Security Analysis for the Lay Investor

Below 5 elements are decisive:

1.?Company long term prospectus: analyze last 5 years annual reports. What makes this company grow? Where do its profits come from?

2.?Management: A company’s management should say what they will do, then do what they said, managers should directly admit their failures and take responsibility.

3.?Financial Strength & Capital Structure: Cash from operations has grown steadily in the past 10 years. Debt should be under 50% of total capital.

4.?Dividend record: Should have a record of continuous dividend payments for the last 20 years.

5.?Current dividend rate: Currently how much dividend company is paying?

Chapter 12: Things to consider about per-share earnings

?Don’t just consider only one year’s EPS Check previous years.

Pro forma earnings enable companies to display how well they might have done if they hadn’t done as poorly as they did.

Read backwards: Start reading company’s financial reports from last page to the first

Read the notes: Never buy a stock without reading the footnotes to the financial statements

Read more: Put more time and energy to learn more about financial reporting.

?Chapter 13: A Comparison of Four Listed companies

Don’t buy a company shares just because of its PE Ratio is high.

Chief elements of performance:

1.?Profitability

2.?Stability

3.?Growth

4.?Financial Position

5.?Dividends

6.?Price history

Chapter 14: Stock selection for the Defensive investor

?Criteria for stock selection: -

1.?Adequate size of the enterprise: choose companies having at least $ 2 billion market value

2.?A strong financial condition: Current assets should be at least twice current liabilities.

3.?Earnings stability: Continuous earnings for at least the past 10 years.

4.?Dividend record: Continuous payments for at least the past 20 years.

5.?Earnings growth: last 3 years avg EPS should be atleast 1/3 of the last 10 years avg EPS

6.?Current PE ratio should not be more than 15 times average EPS of the past three years.

?Chapter 15: Stock selection for the enterprising investor

Criteria for stock selection: -

1.?Financial condition: Current assets atleast 1.5 times current liabilities. Debt not more than 110% of net current assets.

2.?Earnings stability: No losses in the last five years

3.?Dividend record: Is the company paying dividends currently or not?

4.?Price: Less than 120% net tangible assets.

?Chapter 16: Convertible issues and warrants

1.?Convertible bonds:

- Can be converted into a common stock

- enables the issuer to save on interest expenses

- Behaves like stocks works like options.

???2. Warrants: Gives the bondholder the right to buy a certain number of shares.

?Chapter 17: Four Extremely Instructive case histories

Four extremes

-???????An overpriced company gone bankrupt

-???????A multinational company in losses

-???????A small firm took a bigger one

-???????An IPO of shares in a worthless company

Chapter 18: A comparison of eight pairs of companies

-???????Companies and investors may change, but results are always same.

-???????There may be good & bad companies, but there are no good stocks.

-???????Don’t buy a stock just because its price has been going up, check whether underlying company’s value is increasing.

-???????Once a company becomes a giant, its growth must slow down.

-???????Ask yourself, in which company you are going to invest?

Chapter 19: Shareholders and managements dividend policy

Investors put more effort in buying & selling stocks, but not owning them.

Two basic questions

1.?Is the management reasonably efficient?

-???????You can judge the efficiency of management by comparing size and profitability against similar firms

-???????If you don’t like how your company is being managed, you have the right to question them.

2.?Are the shareholder receiving proper recognition?

-???????Some companies don’t pay dividends, instead they say they reinvest

-???????This is called “Daddy-Know-Best” attitude.

Chapter 20: “Margin of Safety” as the central concept of investment

Margin of safety:

Difference between the intrinsic value of a stock and its market price

The risk is not in our stocks, but in ourselves.

1.?Do I understand this investment as well as I think I do?

2.?How will I react if my analysis turns out to be wrong?

Diversification:

Practice of spreading investments around so that exposure to any one type of asset is limited.

?No matter what MR Market throws at you, you will always be able to stay safe, by following “Margin of safety” and “Diversification” Principals.

Thanks & Regards

Limelight Investor

Email: [email protected]

Website:?www.Limelightinvestor.in

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