I thought “The Intelligent Investor” by Benjamin Graham was probably one of the more boring and tedious books I have ever read. It was a real chore to get through, but I finally did. As with other books I have read that were equally painful to read, there are always at least a few golden nuggets. Most of it I already knew and regularly practice but there were a few that I plan to take a closer look at. Here are the notes I that I thought were the most worthwhile to capture which might be helpful to some of you out there:
The stock market is a pendulum that swings between extremes. The Intelligent Investor sells to extreme optimists and buys from extreme pessimists. JOE BRENNAN COMMENT: For example, back in 2020, I bought from extreme pessimists during the Covid-19 Pandemic when everybody told me I would lose a lot of money due to the depression era scenario people were projecting. Instead, I had my best year ever in the stock market – ending the year with a 164% gain and nearly tripling my savings (my second best year ever was a 73% gain back in 2015). You can see my annual gains by scrolling through the following post: https://brighterdayslifecoaching.com/final-stock-market-score-joe-57-2-spx-24-2/?fbclid=IwZXh0bgNhZW0CMTAAAR2NxxPprNNXvETFlCdOfnAo3XrJhm-ftT4126p0ffFDwW0hDxljtD283Os_aem_UkGQjO1yZfmZofmHzWP5Jg . Back in 2021, I sold to extreme optimists and got completely out of the bond market – avoiding a 46% loss over nearly 3 years. This was very unusual for the bond market when considering its longer-term history as a low-risk, safe haven investment. Those losses were more typical of a stock market decline than a bond market decline. You can read all about that here: https://brighterdayslifecoaching.com/a-break-in-the-clouds-the-return-of-low-risk-safe-haven-investments-via-the-bond-market/?fbclid=IwY2xjawH2rGlleHRuA2FlbQIxMAABHdx_gloyTm9no0SWUH8TGpFE2vZZswZT093eCilUTfhWytmhlahiw1zJOg_aem_fG69Yr-CMag1UE-QiQV9QQ (the link to the previous bond market post is also contained in that post).
If you invest with patient confidence, you can take steady advantage of even the worst bear markets. By developing discipline and courage, you can avoid letting other people’s emotions and mood swings influence your longer term gains. The way your financial investments behave is much less important than how you behave as an investor.
Frequently bullish investors have historically said things like: “Is the stock market riskier today than two years ago just because prices are higher? The answer is no.” Well, no. The answer is yes. It always has been. It always will be.
One way to value stocks is: % earnings growth (perhaps use a historical average: 1.5%-2.0% in 1972 looking back) + Annual Inflation Rate (perhaps use a historical average – 2.4% per year in 1972) + Dividend Yield (1.9% in 1972 for SPX?) = 1.5%-2.0% + 2.4% + 1.9% = 5.8% – 6.3%. For this scenario, that means you can reasonably expect stocks to average about a 6% return (3.6% after inflation).
To the extent that the investor’s funds are placed in high-grade bonds of relatively short maturity – say, of 7 years or less, he will not be affected significantly by changes in market prices and need to take them into account. Longer-term bonds can have wider price swings during their lifetimes.
Price fluctuations have only one significant meaning for the true investor. They provide the opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. True investors can pretty much ignore all other price points and simply wait patiently.
If you put much of your portfolio on permanent autopilot, you can fight the prediction addiction, focus on the longer-term, and tune out Mr. Market’s mood swings. JOE BRENNAN COMMENT: I rarely make predictions because people tend to become married to their predictions which could lead to substantial losses when the predictions are wrong or badly timed.
Top performing mutual funds and stocks from previous years are frequently the investments of choice by newer investors which leads to underperformance due to newer investor money being put to work at higher prices of the underlying stock issues and other reasons. JOE BRENNAN COMMENT: High performing stocks tend to generate strong interest from newer investors which leads to underperformance since newer money is being invested at higher levels which invariably leads to underperformance over time. The opposite could be said about certain low performing stocks.
Beware of excessive one-time expenses and charge offs when the stock market has a bad year. When the overall markets are doing bad, investors expect poor individual stock performance. So many companies will make the losses in that year appear so substantial that the profits in following years will be artificially high. One way to overcome this year-to-year fluctuation due to special one-time charges and such is to use the average earnings over the past 7-10 years when attempting to value a stock via its PE ratio and such.
A good way to determine earnings growth can be taking the average earnings over the past 3 years and comparing that to the average over 10 years. Another good thing to do is compare the PE ratio of the company with the PE ratio of the major market index it falls in. 15 or less is probably a good number to target for PE and a number substantially less than the PE ratio of the associated stock market index. A good way to calculate current PE is using the current price and dividing by the average earnings over the past 3 years.
E/P ratio (inverse of PE) needs to be at least higher than the interest rate of high-quality bonds at the time for the stock to even be considered.
An investor can always prosper by looking patiently and calmly through the wreckage of a bear market. If you build a diverse portfolio of stocks whose current assets are 2+ x their current liabilities, and whose long-term debt does not exceed working capital, you should end up with a group of conservatively financed companies with plenty of staying power.
Price/Book should be 1.5 or less.
Managers prefer doing share buybacks over increasing dividends because increasing dividends lowers the value of their own stock options while share buybacks increases the value of their own stock options.
Margin of Safety for Corporate Bonds: Compare the total value of the company with the total amount of debt. If the business owes $10B and is fairly valued at $30B then there is room for shrinkage of 67% in value before the bondholders will suffer loss.
There are large inefficiencies in the stock market and market prices are often nonsensical. By being a diligent investor, you can readily take advantage of gaps between price and value at both extremes – when prices are excessively high and when they are excessively low.
Credit ratings on bonds are frequently indicative of the quality of a company and its stock. The lower the yield on bonds or preferred shares, the more likely the stock is to provide a satisfactory investment, and the smaller the element of speculation involved in its purchase. However, be careful to ensure you buy the stock at a good price. Frequently, high quality companies are priced high due to investor excitement, excessive optimism, and such.
The higher the growth rate you project, and the longer the future period over which you project it, the more sensitive your forecast becomes to the slightest error.
The margin of safety is the difference between the earrings dividend (1/PE) + dividend of index or stock and comparing that to the interest rate on bonds. For example, for SPY [PE (trailing 12 months -ttm) of SPY is 27.45 and the dividend 1.21%] the present margin of safety to buying it today would be 3.64% + 1.21% = 4.85% – 4.65% =0.20/4.65 = 4.3% margin of safety which is far too small to risk putting money in the stock market. A good target is at least 33%.
You can learn about all of my investing techniques via my “Invest Like a Pro in 10 Minutes a Day!” series of 4 books where you can learn the “end to end” process to investing. So, use any downtime you might have to your advantage by gaining this knowledge and learning these skills and techniques (https://brighterdayslifecoaching.com/published-books-and-life-coaching-services/).
Make it your goal to learn these investment techniques so that you can progress towards achieving the financial freedom and independence you’ve always dreamed of. I would have done so much better if I had learned this stuff years ago!
Also, you can read all about my stock market activities here: https://brighterdayslifecoaching.com/stock-market-activities
I wish you much investing success for 2025 (and beyond).
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