I plan to write a little everyday for the next thirty days. This is motivated by a bunch of intersecting objectives - to experiment with a writing practice, to develop a foundational understanding of investing, and to have a flow activity to wake up to and start the day with. I recently picked up the all-time classic “The Intelligent Investor”. I had been reading JL Collins’ stock series intermittently for the past couple of days when I found this beauty shoved in a cabinet at my native home (my gracious shelter until the pending move to Canada). Over the years, I have gotten pretty bad at retaining the core ideas from all those educational books I’ve read. And often I find myself reading books on my phone mindlessly, as the internet has washed away any aesthetic boundaries between legitimate published books and legitimate rubbish. Writing to retain as the motto will be my countermeasure to all of that. At least for the next thirty days of reading. And recalling the gist to put it down in my own words will be my countermeasure to getting lazy and using the text verbatim. So for the next thirty days, I am going to chronicle what I retain of my readings. Every single day without fail is very idealistic and close to impractical. So we’re shooting for never missing twice, and at least five days a week. By the end of reading of this book and the stock series of blogposts, I will have updated my portfolio with the knowledge I retain.

Day 1 (08/21) - Introduction

I’ve previously read the book The Psychology of Money. Introduction to The Intelligent Investor to me gives off the same undertone - building wealth in the stock market has not as much to do with raw smarts and mathematical genius as it is do with temperament, and the emotional and psychological discipline to not get lured into speculating about the next decade’s FAANG companies. This is comforting to me as a very risk-averse person when it comes to money, but also because this mindset has come handy as an excuse to not dive deep into the potentially boring nitty gritty of securities. But by the same token, it has kept me away from useful financial education on the mechanisms of the market. The Intelligent Investor is exciting in that while it will be covering investment principles and those stock market concepts in detail, the book will address not only defensive, but also enterprising investors, rather than simply shunning all active investment. I like that all of the wisdom will be backed with case studies of historical events and patterns. There is a strong emphasis on the distinction between speculation and investment, and so is with the distinction between market price and underlying value. I really liked this analogy with the mental frame of buying groceries vs perfume, ‘The really dreadful losses of the past few years (the book’s current year is 1971-1972) were realized in those common-stock issues where the buyer forgot to ask “How much?”’

Day 2 (08/22) - Investment vs Speculation 1/n

Mr. Benjamin Graham cuts some slack for speculation as he begins this nuanced discussion. There’s always a speculative factor in stock prices. Some speculation is, in fact, necessary - the risks of profit and loss of betting on budding stars of their time like Amazon had to be assumed by someone after all, so that they could get off and running. [This Amazon example was added by commentator Jason Zweig to be clear]. But he warns that speculation is unintelligent when you lack the skill for it, you risk more money than you can afford to lose, and/or when you operate on margin. Do it with a small and separate fund if you dare and don’t add money to it off-policy. Then he does an elaborate illustration of how the period after 1964 was sort of an exception to the rule when bonds fluctuated more than stocks and their prices went to record high levels. And the intended takeaway is that the future of securities is never predictable. Sure, to me though this was an essential push into picking Claude’s brain on what is the mechanism with prices of bonds. The ending note for this section is that changes in bond prices are addressed in a later chapter in more detail.

Day 3 (08/24) - Investment vs Speculation 2/2

The discussion on bonds vs stocks continues. In the case of comparable taxable return on bonds and stocks - interest for bonds and dividend yield plus annual appreciation for stocks - interest and principal payments on bonds is much better protected money. Accelerated inflation tips the balance in favor of stocks, but commentator Jason Zweig makes a note that TIPS (Treasury Inflation-Protected Securities), first introduced in 1997, track the Consumer Price Index and immunize this bond’s investors. In any event, Benjamin Graham advises, it’s not wise to concentrate your investment 100% in bonds. A simple 50-50 division between stocks and bonds or a ratio in the range of 25% to 75% of either is fine. The defensive investor must confine themselves to stocks of the most important profitable companies with long established financial records. They should stick with investment funds (index funds in today’s speak) and practice dollar cost averaging. Then he addresses the enterprising investor, and starts off with rejecting trading as a domain of investment. Investment in this chapter was defined as an operation, which on thorough analysis, offers safety of principal and a satisfactory return, and trading is not such an operation. With that off the table, selectivity of stocks with near term or long term projections is quite challenging. Results of the current quarter or year and those predictable for the next one are already factored in the price, as everyone else has picked the same stocks as you. There can still be stocks that are undervalued simply due to lack of interest or some sort of unjustified yet prevelant prejudice. Buy them you can, but that’s one patience-trying experience. Shorting stocks that are overvalued in your opinion, on the other hand, is not for the faint of heart. John Maynard Keynes’ famous quote expresses this beautifully, “Markets can remain irrational longer than you can remain solvent.” The chapter ends on an encouraging note for the active investors. Amongst the thousands of marketable securities, there must be a fair number of them than can be identified as undervalued by some reasonably dependend standards. [I guess we’ll find out what those standards are later in the book]. Although the effort is only worth it if you can hope to add 5% to your annual return before taxes.

Day 4-5 (08/26-08/27) - The Investor and Inflation

This was a small chapter. I learnt that inflation has gone up to as high as 15% in the past. And twice! But the primary point the author is trying to drive home is that inflation has not had a direct impact (in either direction) on stock prices. He mentions that the rate of earnings on capital can’t be counted on to be much above 10% of the book value, i.e. net tangible assets of a company. That percentage is much lower for the market price, which is higher than the book value, commonly connected with earnings as a multiple “times earnings”. Corporate earnings are addressed to make the point that for inflation to impact stock prices favourably, it should raise the earnings rate on invested capital, but that has not been the case. Then he touches upon possible alternatives to stocks as inflation hedges and expresses not being convinced with either gold or real estate. He bashes gold for not returning even as much as interest from a savings account and costing on storage instead. The commentator references another investment philosopher calling Graham dead wrong about precious metals on his advice against investing in “things”. Their advice is to allocate a tiny portion, like 2% of your portfolio to gold. When it does poorly, the portion is too small to hurt your portfolio, but in case of spectacular returns it can lift the rest of your otherwise lackluster portfolio by itself. Suggestion for the intelligent investor is to put money in an ETF of sorts dedicated to precious metals with under 1% annual expenses. The author acknowledges his limitation of depth in the areas of valuable objects and real estate and leaves it up to the reader to make informed decisions. The chapter ends with putting stocks above bonds nonetheless as a protection against inflation.

Day 6-7 (08/29-08/30) - A Century of Stock-Market History

This chapter is all about the stock market cycles that transpired in the 20th century up to the year 1972 (current year of the book). Going through this review served as a desensitizing exercise for me. Like yeah, of course, we’re on the upward slope right now, sooner or later, it will all come down. No big deal. An interesting observation was that in the ten decades from 1871 to 1971, only two out of nine (after the first) had declines in earnings and average prices. Last chapter introduced the term multiple, and this chapter introduces price/earnings ratio (or P/E ratio, in short) - same concept from the other side of the equation. Here’s some context on P/E ratio - it’s value at the start of the greatest bull market run before 1972, i.e. in June 1949 was 6.3, and in March 2024 it was about 27.4. The commentator adds a note that a P/E ratio of below 10 is low, and greater than 20 is considered expensive. Apparently in previous editions of the book published in about five year intervals - 1948, 1953, 1959, 1964, Benjamin Graham had presented analyses of how securities performed in the preceding 5 years to lay down a guiding “What Course to Follow” policy. He reviews them here, and acknowledges although their advice in 1948 was favorable for the stock market, the caution that they advised in 1953 was nothing to write home about. The greatest bull market in history would double in the next five years. Their caution in the 1959 edition was better justified with fall of the invincible IBM in 1962 and the whole “growth stocks” bulk. New names that were offered as “hot issues” at very high rates tanked 90% in a few months. But the optimism on Wall Street was back not long after, with all forecasts bullish at the dawn of 1964. Their counsel for the 1964 edition, which they then reuse for 1972 was as follows, verbatim:
If the investor is in doubt as to which course to pursue he should choose the path of caution.

  1. No borrowing to buy or hold securities
  2. No increase in the proportion of funds held in common stocks.
  3. A reduction in common-stock holdings if required to get it under 50% of the total portfolio. Capital gains must be invested in first-quality bonds or held as savings deposit.

The author then self-rated this conservative counsel as vindicated with the fall that transpired in 1970. But he acknowledges that, and this was the philosophy laid out in Introduction, a consistent policy to hold broad market stock funds, and to not try to “beat the market” and “pick the winners” is likely to be more useful than these granular pieces of advice every five years. He then notes that the stock dividend yield to bond yeild ratio of two completely flipped from from 1948 to 1972 in favor of bonds, and this adverse change offsets the better P/E ratios. Interesting to me so far in this book has been the emphasis on dividend yields, which I don’t really hear about much in today’s folklore. Are there fewer public companies doing divideds today, or is dividend yield very instrumental to Graham’s value investment philosophy?

Day 8-10 (09/01-09/03) - General Portfolio Policy: The Defensive Investor

I am not sure why this chapter is titled so. It was more about how various types of bonds are structured. It did take me some time to get through. Graham starts by reiterating his simple formula of a 50-50 allocation between stocks and bonds for the defensive investor. The context comes from his critique against strong confidence in a greater than half portion in equities, which is hard to justify at the then current levels of early 1972. The extremely simple 50-50 division gives the follower a feeling of moving forward with market developments, and a restraint against getting pulled down more heavily as the market rises to dangerous heights. Here he mentions “buying point”, a term I did not expect to see in this book. Nothing to do with stock-picking though, the context was rebalancing a portfolio with a low stock portion if the dividend yield of the broad market index gets to a certain point relative to bond yield.
Benjamin Graham notes that the two primary considerations when shopping for bonds are 1) whether they are taxable, and 2) shorter-term vs longer-term maturities. With this premise, there’s an elaborate description of the various types of bonds of the time and their properties. I am not sure if there were many timeless takeaways. Here’s one - deferral of income-tax payments on bonds over long periods if applicable can be of great dollar advantage. In describing state and municipal bonds, the author mentions an investor could turn to ratings by Moody’s or Standard & Poor’s to guide his selection - and either of the three highest ratings AAA, AA, or A should be “sufficient indication of adequate safety”. I couldn’t help but recall Big Short when I got to the end of that sentence - these two agencies were very much involved in the unfolding of the housing crisis and were later fined. Graham notes that while lower quality bonds can provide high yields, it’s wise for the ordinary investor to keep away from them. To this point the commentator notes that bond (mutual) funds today spread that risk to mitigate it. Coincidentally, I very recently invested in VBTLX (Vanguard Total Bond Market Index Fund) after coming across the recommendation by JL Collins in his stock series.
Next, there’s discussion about preferred stocks, mentions of which I’ve mostly heard in the context of start-ups. Graham finds the structure of preferred stocks inherently bad. The preferred holder lacks the legal claim of a bondholder and the profit potential of a common shareholder. He suggests the only time to buy preferred stocks is when their price is unduly suppressed from adversity. Additionally, preferred stocks don’t have any tax advantage for the individual investor like they have for corporations. Lastly, there are income bonds, with which interest doesn’t have to be paid unless the company has earnings. Graham champions income bonds suggesting that their terms can be tailored to both the borrower’s as well lender’s advantage, and that corporations should be using these much more then they do.

Day 11-14 (09/05-09/08) - The Defensive Investor and Common Stocks

This chapter makes some previously discussed ideas and other commonly floated investment-related terms more concrete. I am going to be using quite a bit of text verbatim for this chapter, simply unable to find better words than the author to express these ideas. It begins with an interesting observation on dividend yield, noted by Graham and then expanded by commentator Jason Zweig. Since 1957 the dividend yield on common stocks dropped below bond interest rates, and against the forecasts of most Wall Street pundits it hasn’t gone back to “normal” until at least the last revision of the book in 2003. Graham then lays out four simple rules for constructing a portfolio:

  1. there should be adequate though not excessive diversification - minimum ten and maximum of about thirty stocks
  2. large, prominent, and conservatively financed companies - respectively: a market capitalization of at least $10 billion (as of 2003), rank among the first quarter or first third in size with its industry group, with common stock (at book value) representing at least half of the total capitalization, including debt
  3. companies should have at least a ten year-long record of continuous dividend payments
  4. a limit on the stock prices in relation to the average earnings over, say, past seven years - 25 times; not more than 20 times those of the last twelve-month period

Next, the author defines the term growth stock as one that should be expected to double its per-share earnings in ten years, i.e. to increase at a compounded annual reate of over 7.1%. I wonder if that’s too low by today’s appetite. The commentator here provides a simple “Rule of 72” to estimate the length of time an amount of money needs to double - divide 72 by the annual growth rate. As per Graham, growth stocks have a considerable element of speculation, based on their high earnings multiples, and high multiples of their average profits in the past. And as a whole they are too uncertain and risky for the defensive investor. Not only can their price fall back significantly, but earnings as well. He gives examples of IBM and Texas Instruments, where the latter’s price advanced five times as fast as profits, which is characteristic of popular common stocks. And two years later they both dropped off by a similar magnitude. So instead, group of large companies that are relatively unpopular, and hence obtainable at reasonable earnings multipliers (P/E ratio) offer a sound choice.
Moving on, Graham suggests one should get their portfolio reviewed at least once a year by a professional of solid reputation. The next section showers praise on the practice of dollar-cost averaging - “a simple formula that can be used with so much confidence of ultimate success”, “The monthly amount may be small, but the results after 20 years can be impressive and important to the saver”.
The author then address the selection of securities based on one’s personal situation. To the young enterprising investor he advises to not try and beat the market, and instead, test out his judgement on price versus value with the smallest possible sums (play money is what comes to my mind).
Finally, Graham addresses the concept of “risk”. He points out the idea is often inaccurately applied to a possible decline in the price of a security, even though the decline may be temporary or cyclical, and, more importantly, the holder is unlikely to be forced to sell at such times. A properly executed group investment in common stocks should not be termed “risky” simply for price fluctuations. The market value is bound to fluctuate. If it shows a satisfactory overall return over a fair number of years, it has proved to be safe. There is risk, however, if there is loss of value from a significant deterioration in the company’s position or if the price could prove to have been clearly too high by intrinsic value standards, even if the following severe market decline may be recouped many years later.

Day 15-18 (09/11-09/14) - Portfolio Policy for the Enterprising Investor: Negative Approach

Benjamin Graham now turns to the enterprising investor, and addresses here what they should stay away from. The enterprising investor should stay away from inferior bonds and preferred stocks unless they sell at bargain levels - 30% under par (principal value) for bonds paying above-average interest rates (at least 8% in today’s markets) and much lower for the lower coupons. They should also stay away from foreign-government bonds, new issues like convertibles (bonds that can be converted to a pre-determined number of common stock shares) and stocks with great earnings but limited to the recent past. Graham reminds the reader that any well-defined and prolonged market conditions of the past may return in the future. In conditions as of late 1971, first rate corporate bonds yield 7.25% and more, so it would not make much sense to buy second-grade issues. The difference between the two is usually found in the number of times the interest charges have been covered by the earnings. He warns that it’s unwise to buy a bond or a preferred that lacks adequate safety for an attractive yield, all the more so if it’s not selling at a large discount and hence doesn’t offer the opportunity for a substantial gain in principal value. In bad times, these securities prove highly susceptible to severe sinking spells - interest or dividends are suspended or at least endangered, price weakness is exacerbated, even with decent operating results. So it’s bad business to accept an acknowledged possibility of a loss of principal in exchange for a mere 1-2% of additional annual interest, with no significant discount in principal. These securities will probably be available for 70 [in percentage of par value] or less in the next weak market.

Next, Graham tells some cautionary tales on Foreign Government Bonds. When trouble comes, the owner of foreign obligations has no legal or other means of enforcing their claim. Yet, every few years market conditions present themselves as favorable for the sale of new foreign issues at par. The author suggest the buyers would benefit from declining these opportunities.

The discussion then moves to IPOs, easily the most interesting section in the chapter for me. Graham recommends being wary of new issues - they are sold with an “underwriting discount”, implying higher commission for Wall Street, and under market conditions favorable for the seller and less so for the buyer. Bull-market periods are usually marked by the transformation of a large number of privately owned businesses into public companies. The commentator adds that in every case, the public has gotten burned on IPOs, has stayed away for the usual “swearing-off” period of at least two years, but has always returned for another scalding. Another interesting note by Graham is that most of the IPO stock is sold for the stakeholders to be able cash in on a favorable market - when money needs to be raised for the business, it comes from the sale of preferred stock. A predictive sign of the approaching end of a bull swing is when new common stocks of small and nondescript companies are offered at prices higher than those of many medium-sized companies with a long market history. There was another paragraph about how new common-stock offerings work for companies already listed. I didn’t quite understand the key concept of “rights” offerings therein. The chapter concluded with reiterating the core message in different words a couple more times - the ability to resist the blandishments of salesmen offering new common stock issues during bull markets is paramount for the intelligent investor. “For every dollar you make in the speculative atmosphere you will be lucky if you end up by losing only two.”