The Intelligent Investor by Benjamin Graham
In Chapter 4 of “The Intelligent Investor,” the author discusses the investment policies and practices of institutional investors such as pension funds and insurance companies. One key lesson is that institutional investors have a long-term investment horizon and focus on capital preservation and growth. For example, a pension fund may invest a significant portion of its portfolio in bonds and other fixed-income securities to preserve capital and provide steady returns for its beneficiaries. The pension fund may also invest in a diverse range of assets classes such as real estate and private equity to achieve growth over the long-term.
Another key lesson is that institutional investors have a large amount of capital to invest, which allows them to diversify their portfolio across a wide range of asset classes. For example, an insurance company may invest in a diverse portfolio of assets such as stocks, bonds, and real estate to spread risk and achieve a balance of returns. Additionally, the insurance company may invest a portion of its portfolio in socially responsible or impact investments to align with its values and support sustainable practices.
Institutional investors are also often subject to legal and regulatory constraints that limit their investment options. For example, a pension fund may be required to hold a certain percentage of its portfolio in bonds and other fixed-income securities to ensure the security of its beneficiaries’ future income. Additionally, a pension fund may be required to invest a certain percentage of its portfolio in its home country to support the domestic economy.
In Chapter 5, the author shifts focus to the individual investor and provides advice on how to develop and implement a successful investment policy. One key lesson is that the individual investor should focus on capital preservation and long-term growth, similar to institutional investors. For example, an individual investor may choose to invest in a well-diversified portfolio of high-grade bonds and blue-chip stocks such as AT&T and Johnson & Johnson to minimize risk and achieve steady returns over the long-term.
The author also advises individual investors to avoid common stocks of companies that are in poor financial condition or in industries that are in decline. For example, an individual investor may choose to avoid investing in a company like Sears, which has a history of consistent losses and a weak management team, in favor of a financially stable company like Amazon. Additionally, the individual investor should avoid companies that are overvalued or have high debt levels, such as Snap, which has a negative P/E ratio and large debt.
The author also advises individual investors to have a long-term investment horizon and be willing to hold on to investments through market fluctuations, and to avoid chasing hot stocks or trying to time the market. Additionally, the individual investor should be willing to study and understand the investment process and seek professional advice when needed.
In Chapter 6, the author discusses the stock market and its role and limitations in the investment process. One key lesson is that the stock market serves as a mechanism for raising capital for companies and allows investors to buy and sell ownership stakes in those companies. For example, an investor may choose to buy shares of a company like Apple, which has a strong financial performance and a history of providing good returns to its shareholders.
The author also notes that the stock market is subject to fluctuations in the short-term, but has historically provided a good return over the long-term. However, the stock market can be risky and unpredictable, and investors should be prepared for the potential for losses. Additionally, the stock market should not be relied on as the sole source of investment income and investors should diversify their portfolio across a variety of asset classes. The author also mentions that the stock market can be affected by events such as political changes and war, for example the situation of COVID-19 pandemic that has affected the stock market severely.