Notes to The Intelligent Investor Preface Stocks are ownership interests that have an underlying value independent of share

are price Intelligent investors sell to optimists and buy from pessimists Take no financial opinion on faith do not give into market hype

Introduction Although successful investments may depend upon choice of industry, selecting the right industry with obvious prospects of growth does not translate into obvious profits for investors think about it, if everyone expects the same industry to grow, there is less for you to get out of it The habit of relating what is paid to what is being offered is important Purchase issues that are selling not far above their tangible asset value (TAV) Stocks become more risky as prices rise and vice versa

Ch. 1 Investment v Speculation An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return invest only if you would be comfortable owning a stock even if you had no way of knowing its daily share price Speculation (activities which do not qualify for investment operations) can be intelligent provided you have the proper knowledge and can afford to lose more than you invest Never mingle investment money with speculative money try to maintain a 25-75 split between bonds and common stock respectively keep this flexible i.e. shift to 75-25 if market looks too pricey (risky) but no higher than 75 on either end (i.e. no less than 25 on either end) Never put more than 10% of your assets into speculation The defensive investor must confine himself to shares of important companies with a long record of profitable operations and strong financial conditions The defensive investor has three main tactics: (1) to buy shares of wellestablished investment funds; (2) utilize common trust funds or the like; (3) or pursue the dollar cost averaging in selected common stock

Ch. 2 Investor & Inflation There is no close time connection between inflationary or deflationary conditions and the movement of common-stock earnings and prices The only way inflation can add to common stock values is by raising the rate of earnings on capital investment more often than not, it increases

other things like corporate debt, which serves to lower common stock values if not offset by say, increased earnings on capital There is no certainty the stock component will insure adequately against inflation but it should carry more protection than the bond component Conversely, in a time of deflation, investors should keep a small portion of assets in bonds as a form of insurance Between 1926 and 2002, during periods of severe deflation, stocks performed very poorly; during periods of mild deflation or moderate inflation, stocks performed well; during periods of hyper-inflation, stocks performed erratically For inflation hedges outside of stocks and bonds, consider real estate investment trusts or treasury inflation protected securities (A-REITs, a type of ASX recognized listed investment company [LIC] and TIPS)

Ch. 3 A history of investing An intelligent investor must never forecast the future by exclusively extrapolating the past Focusing on the markets recent returns when they have been rosy, will lead to dangerous conclusions The value of any investment is and must always be a function of the price you pay for it The stock markets performance depends on three factors: (1) real growth from the companies rise in earnings (measured as corporate earnings per share) and dividends (measured as dividend yield on stock); (2) inflationary growth; (3) speculative growth

Ch. 4 General portfolio policy for the defensive investor Stock bond mix of 50-50 may seem to be the best if the investor is not confident about the market either offering pessimistic or optimistic prices Regarding the bond component, the investor should try to obtain tax-free bonds if possible, whether to purchase short or long term maturities will depend on the investors confidence in the market in the short and long run (discussed more in Ch. 8), and whether to buy bonds or bond funds will depend on how much you have available to invest (if < $100,000, bond funds are more affordable) The investor should also stay away from bonds which have too high a yield or call provisions within their contract; non-callability > yield i.e. low coupon bond selling at discount > high coupon bond selling at par but callable in a few years Regarding the stock component, preferred stocks (a stock with bond-like characteristics) should only be bought on a bargain basis or not at all When managing your portfolio, do not buy more stocks because the stock market has gone up, nor sell if it has gone down; the key is to rebalance on a predictable, patient schedule (maybe every six months) With cash on hand, shift it from interest accounts into treasury securities or savings bonds

Ch. 5 Investment merits of common stock There should be adequate but not excessive diversification minimum of 10 different issues, and a maximum of 30 (in as many different industries as possible) Each company selected for share investment should be large, prominent and conservatively financed (i.e. primary companies Each company should have a long record of continuous dividend payments The investor should impose some limit on the price he will pay for an issue in relation to the companys average earnings over the past seven years (look to the P/E ratio) Graham suggests the limit be set a no more than 25 times such average earnings and not much than 20 times those of the last 12 month period The defensive investor should obtain, at least once a year, some professional advice regarding changes in his portfolio it is essential he make clear to the broker that he wishes to adhere to the court rules of stock selection given above Dollar cost averaging is probably the best way to go about long term stock investment ideally into a portfolio of index funds When stocks are priced reasonably enough to give you future growth, then you should own them regardless of the losses they may have cost you in the recent past Invest in what you know, but then also make sure you have studied its financial statements and business value

Ch. 6 General portfolio policy for the enterprising investor the negatives Ch. 7 General portfolio policy for the enterprising investor the positives Ch. 8 The investor and market fluctuations