Saturday, April 13, 2013

The Intelligent Investor

2:25 PM
I am currently reading The Intelligent Investor: The Definitive Book on Value Investing by Benjamin Graham, which Warren Buffett calls “By far the best book on investing ever written.”

While the book is mostly about investing in stocks and bonds, and the author admits that he is not an expert in precious metals or real estate, there is much good advice for anyone who invests in any asset class.

Here are a few of my favorite quotes so far:

On defining “investing:” An investment operation is one in which, upon thorough analysis, promises safety of principal and an adequate return. Note that investing, according to Graham, consists equally of three elements: you must thoroughly analyze a company, and the soundness of its underlying businesses, before you buy its stock (Wendy’s note: in real estate, we would call this “due diligence” and understanding value); you must deliberately protect yourself against serious losses; you must aspire to “adequate,” not extraordinary performance (Wendy’s note: Get rich slow).

On gold as an investment: The standard policy of people all over the world who mistrust their currency has been to buy and hold gold….[From 1935 to 1972] the price of gold in the open market has advanced…only 35%. But during all this time, the holder of gold has received no income return on his capital, and instead has incurred some annual expense for storage. Obviously, he would have done much better with his money at interest in a savings bank….

On real estate as a hedge against inflation: The outright ownership of real estate has long been considered as a sound long-term investment, carrying with it a goodly amount of protection against inflation.

On investing during inflationary times: When inflation shot above 6%, stocks…stank. The stock market lost money in eight of the 14 years in which inflation exceeded 6%; the average return for those 14 years was a measly 2.6%....Since Graham last wrote, two inflation-fighters have become widely available to investors: REITs [Real Estate Investment Trusts] and TIPS [Treasury Inflation-Protected Securities].

On forecasting the future based on past performance: The heart of Graham’s argument is that the intelligent investor must never forecast the future exclusively by extrapolating the past.

On active or passive investing: There are two ways to be an intelligent investor: by continually researching, selecting and monitoring a dynamic mix of stocks, bonds or mutual funds; or by creating a permanent portfolio that runs on autopilot and requires no further effort.

On investing only in stocks: Unless you can honestly pass all these tests, you have no business putting all your money in stocks: Have set aside enough cash to support your family for at least one year; will be investing steadily for at least 20 years to come; survived the [most recent] bear market; did not sell stocks during the bear market; have read chapter 8 in this book and implemented a formal plan to control your own investing behavior.

On investing in what you know: But first, let’s look at something the defensive investor must always defend against: the belief that you can pick stocks without doing any homework….[Peter] Lynch’s rule – “you can outperform the experts if you use your edge by investing in companies or industries you already understand” – can work only if you follow its corollary as well: “Finding the promising company is only the first step. The other step is doing the research.”

On the right price: A great company is not a great investment if you pay too much for the stock.

On diversification: Nearly all the richest people in America trace their wealth to a concentrated investment in a single industry or even a single company….The Forbes 400 list of the richest Americans, for example, has been dominated by undiversified fortunes ever since it was first compiled in 1982….[Yet] only 64 of the original [1982 Forbes 400] members – a measly 16% - were still on the list in 2002….When hard times hit, none of these people…were properly prepared. (Wendy’s note: OK, so maybe they were no longer in the top 400, but I am betting they were still way better off financially than most of the rest of us).

Please contact me directly at or 425.270.7292, if you would like to learn more about investing in real estate.

Happy investing!

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