Notes from The Intelligent Investor

1. An investment operation is one which upon thorough analysis, promises safety of principal and an adequate return. The complement of this is speculation which should be avoided.

2. Invest only if you would be comfortable owning a stock even if you had no way of knowing its daily share price.

3. It is important to measure your investing success not just by what you make, but by how much you keep after inflation.

4. Future growth of a stock market index depends upon three things :

   (i) Real growth (the rise of companies earnings and dividends)

   (ii) Inflation

   (iii) Speculative growth – or decline (any increase or decrease in the investing public’s appetite for stocks)

5. Becoming more familiar with a subject does not significantly reduce it people’s tendency to exaggerate how much they actually know about it. The more you know going in, the less likely you are to probe a stock for weaknesses. This is “home bias”. Familiarity breeds complacency.

6. Dollar cost averaging – buy a fixed amount into index funds every month as a defensive investor.

7. Our brains are designed to perceive trends, even when they might not exist.

8. What factor determines how much you should be willing to pay for a stock? The five elements are:

• The company’s general Long term prospects
• The quality of its management
• It’s financial strength and capital structure
• It’s dividend record
• And it’s current dividend rate

Download at least 5 years worth of annual reports and comb thru the statements to help answer two overriding questions.

1) will this company grow?

2) where do profits come from?

Problems to look out for

• Serial acquirers: an average of 2–3 acquisitions per year is a sign of trouble. It would rather invest more in other’s business than its own
• Company is OPM Addict. “other people’s money”. Keeps raising money from selling stock or debt.
• Company is Johnny one note – relying on one customer or a handful for most of its revenues.

Good signs

• Company has a wide moat – or competitive advantage. Such as a strong brand identity (Nike, Apple), a monopoly economics of scale (Amazon), intangible asset (Coca cola formula), resistance to substitution (banks, utilities)
• Company is a marathoner, not a sprinter. growth rates are controlled at sustainable rates
• The company sows and reaps. Companies generally also invests in R&D at a % of sales

The quality and conduct of management (blame culture vs accountability).

• Do they do what they say?
• Are they looking out for number 1?.. high ceo pays, reevaluating options..
• Are they managers or promoters?

Financial strength and capital structure

• Any costs of granting stock options which divert earnings away from existing shareholders into the hands of inside owners
• Any unusual nonrecurring or extra ordinary charges
• Any income from company’s pension fund
• Long term debt should be < 50% of company’s capital
• Look for ratio of earnings to fixed charges
• Burden of proof is on company to show that your are better off not paying dividends, if business is still under performing, means managers are misusing cash instead of paying a dividend
• Companies should buy back shares when it is cheap, not overpriced
• Beware of companies who keep splitting stock

1. Learn how to interpret financial statements.

2. Read financial reports backwards, anything that company doesn’t want you to find is hidden at the back.

3. IV=E(8.5+2G)* 4.4/Y

   IV = Intrinsic value.

E = Earnings per share

G = Expected growth rate

Y = current yield on AAA-rated corporate bonds

1. Successful investment professionals have 2 things in common. 1) they are disciplined and consistent, not changing approach even when it is unfashionable 2) they think a great deal about what they do and how to do it, paying little attention to what the market is doing.

2. The difference between the intrinsic value and the current market price is the margin of safety. The greater the margin of safety the safer the investment.