Notes on the Intelligent Investor by Benjamin Graham


General Guidelines

  • don’t listen to Mr. Market
  • no one’s tombstone reads “He Beat the Market”
  • Risk depends not on age but on individual circumstances
  • Keep stock:bonds ratio to ~25:75
  • Max 10% speculation in sep acct
  • If investing in gold, buy a maximum of 2% in a well-diversified mutual fund specializing in stocks of precious metals ETF charging less than 1% in annual expenses
  • Protect against inflation with REITS & TIPS for long-run
    • TIPS best for tax-deferred retirement acct
    • For retirement funds that would be held as cash 10%


  • keep an index fund as the foundation of portfolio
  • ideal formula is to value an issue and compare with current price to det if it is attractive; done by estimating avg earnings over a per or yrs in the future and multiplying by a capitalization rate
  • don’t buy preferred stock
  • shareholder = owner
  • keep a margin of safety
  • investing is most intelligent when it’s most business-like
    • know the business
    • do not let anyone else run your business
    • don’t enter upon an opportunity unless a reliable calculation shows it has fair chance to yield reasonable profit
    • have the courage of your knowledge & experience
  • find out who owns the company
  • always ask “how much?”


  • mutual & index funds
  • stay away if institutions own over 60%
  • don’t short
  • mind your investment contract
  • index funds are great if held for 20+ yrs w/ new money every mo
  • keep 10-30 stocks of companies with these criteria
    • large ($2B minimum total market cap)
    • prominent
    • conservatively financed
      • assets:liabilities should be 2:1
      • long-term debt not to exceed net curr assets
    • earnings stability
      • earnings growth - min inc at least 1/3 in per share earnings in past 10 yrs using 3-yr avgs
    • at least 10 yrs of continuous dividends
    • stock price less than 25x avg of last 7 yrs earnings and less than 20x those of last 12 months
    • moderate price/earnings ratio - not more than 15x avg earnings of past 3 yrs
    • moderate ratio of price/assets
      • current price not more than 1.5 x book val
      • or product of P/E and price/assets not more than 22.5
    • stock portfolio w/ overall earnings/price at least as high as current high grade bond (eg 7.5% <- -> 13.3 PE)
  • check out S&P’s Stock Guide
    • narrow down by current assets at least 1.5x curr liabilities
    • debt no more than 110% of net curr assets
    • no earnings def in 5 yrs
    • some curr div
    • last yr’s earnings > 5 yrs ago
    • price less than 120% net tangible assets
  • EPS often distorted, try using ROIC = owner earnings/invested capital
    • Owner earnings = operating profit + depreciation + amortization of goodwill - fed income tax (paid at company’s avg rate) - cost of stock options - “maintenance” (or essential) capital expenditures - any income generated by unsustainable rates of return on pension funds (anything greater than 6.5%)
    • Invested capital = total assets - cash (as well as short-term investments and non-interest-bearing current liabilities) + past accounting charges that reduced invested capital
    • 7-10% is good


  • don’t buy preferred stock or inferior bonds unless they can be bought at 30% below par
  • don’t buy gov’t bonds
  • be wary of IPOs, eg VA Linux, FB
  • don’t buy stock of companies expected to report increased earnings or other short term favorable dev’t
  • don’t buy for long-term selectivity, ie based on past record of growth expected to continue to future
  • rebalance portfolio every ½ yr
  • dollar-cost average
  • kryptonite for bear markets
    • “But note this important fact: The true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons’ mistakes of judgment.”
  • closed-end funds discounted 10-15% from net asset value better than open-end w/ premium (eg 9% above NAV)
  • factors affecting cap rate
    • general long-term prospects (can’t be predicted reliably)
      • download at least 5 yrs annual and quarterly reports (10-K & 10-Q) from EDGAR to answer What makes this company grow? And Where do (and where will) its profits come from?
      • Bad things:
        • Serial acquirers - avg more than 2-3 per yr
          • Find in “Management’s Discussion and Analysis” in 10-K
        • Corporate bulimics - acquire and vomit back with losses
        • OPM addict - borrowing debt, selling stock; labeled “cash from financing activities”
          • Check “statement of cash flows” for consistently neg cash from op activities and consistently pos cash from financing activities
        • Johnny-One-Note - relying on one customer for most of rev
      • Good things:
        • Wide moat - competitive advantage
          • Porter’s 5 forces
        • Marathoner not sprinter - steadily growing rev and net income over last 10 yrs
        • Sower and reaper - making money and spending it
    • financial strength and capital structure
      • good business gen more money than it consumes
      • read statement of cash flows from annual report to see if cash from ops grown steadily through last 10 yrs
      • check [owner earnings = net income + amortization + depreciation - normal capital expenditures - costs of granting stock options - “unusual, nonrecurring, extraordinary” charges - income from company’s pension fund] grows at steady avg of at least 6-7% over past 10 yrs
      • check bal sheet for debt (including pref stock); long-term debt should be under 50% of total capital
      • must have high “ratio of earnings to fixed charges”
      • burden of proof on company to show that investor is better off if divs are retained
      • stay away from repeated stock splits that are hyped
      • companies should buy back stock when they are low not high; really a ploy by execs to sell own stock options for their own multi-million $ payday
    • div record (cts payments for last 20+ yrs)
    • cap rates for growth stocks
      • value = current (normal) earnings X (8.5 + twice expected annual growth rate)


  • Are they looking out for No. 1?
    • Stay away if they reissue or exchange stock options for insiders
    • How large is option overhang, pot for all to be converted to stock
    • Check Form 4 in EDGAR, repeated big sales by senior execs is big red flag
  • Are they managers or promoters?
    • Execs should not be pandering to investing public, hype-o-chondriacs spewing press releases
    • Ideal model is 8-K of Expeditors International of Washington
    • Are accounting practices designed to make finacial statements transparent or opaque; watch out for recurring “nonrecurring” charges, “extraordinary” items so frequent they become ordinary, and EBITDA appears more than net income, or “pro forma” earnings covering actual losses
  • is management reasonably efficient?
    • Are interest of avg outside investor receiving proper recog?
    • Judge management’s effectiveness by comp prof, size, competitiveness against sim firms
    • Read & vote on proxies
      • if against proxy, vote against directors
      • attend & speak at annual meetins
      • post online message boards
    • Daddy-knows-best is BS
      • Vote against giving more than 3% of outstanding shares to managers and against option grants not contingent on fair and enduring measure of superior results
        • Eg outperforming avg stock in same ind for per of at least 5 yrs

trickery with per-share earnings

  • pro forma earnings enable companies to show how well they might have done if they hadn’t done as badly as they did
  • read backwards
  • read the notes labeled “summary of significant accounting policies”
  • read more: Fridson and Alvarez’s Financial Statement Analysis, Mulford and Comiskey’s The Financial Number’s Game, Schilit’s Financial Shenanigans, Graham’s The Interpretation of Financial Statements


  • Bond funds are good
  • Buy tax free bonds only outside retirement accts
  • chief criterion: number of times total interest charges have been covered by available earnings for some years in the past
  • see Graham’s Security Analysis
  • min std in terms of volume of business for a corp and pop for a municipality
  • stock/equity ratio should be high - rough measure of cushion or protection
  • high property value

Investing Contract

I, , hereby state that I am an investor who is seeking to accumulate wealth for many years into the future.

I know that there will be many times when I will be tempted to invest in stocks or bonds because they have gone (or “are going”) up in price, and other times when I will be tempted to sell my investments because they have gone (or “are going”) down.

I hereby declare my refusal to let a herd of strangers make my financial decisions for me. I further make a solemn commitment never to invest because the stock market has gone up, and never to sell because it has gone down. Instead, I will invest $ .00 per month, every month, through an automatic investment plan or “dollar-cost averaging program,” into the following mutual fund(s) or diversified portfolio(s):

I will also invest additional amounts whenever I can afford to spare the case (and can afford to lose it in the short run).

I hereby declare that I will hold each of these investments continually through at least the following date (which must be a minimum of 10 years after the date of this contact): , 20 .

The only exceptions allowed under the terms of this contract are a sudden, pressing need for cash, like a health-care emergency or the loss of my job, or a planned expenditure like a housing down payment or a tuition bill.

I am, by signing below, stating my intention not only to abide by the terms of this contract, but to re-read this document whenever I am tempted to sell any of my investments.

This contract is valid only when signed by at least one witness, and must be kept in a safe place that is easily accessible for future reference.