Intelligent Investor Ch 1-5 Flashcards
Financial success of your investments
Depends more on how you behave, compared to how the market
Behaves
Margin of safety, in a nutshell what does it allow an investor to do?
Never overpaying, no matter how exciting an investment seems
Can minimize you odds of error
Defensive investor
Places chief emphasis on avoidance of serious mistakes/losses
2nd aim is freedom from effort, annoyance and need to make
Frequent decisions
Determining trait of enterprising investor
Devote time and care in selection of securities that are both
Sound and more attractive than average
2 important choices in the art of successful investment
1 industries with growth prospects
2 identify most promising companies in those industries
Tangible asset value
Includes physical property (property, plant, equipment, inventories)
And financial balances (cash, ST Investments, A/R)
Practical to buy investments selling not far above their tangible asset value. What does this allow?
An investor in a company of about their net asset value can
Always consider himself owner of sound and expanding
businesses
Acquired at rational price, regardless of what stock market might
Say to the contrary
How does graham characterize an intelligent investor? 5 things
1 patient 2 disciplined 3 eager to learn 4 harness emotions 5 independent thinker
What is being an intelligent investor more a matter of?
More a Matter of character than brain
How much did the market drop between March 2000 and October 2002? How much wealth was destroyed?
The market dropped 50.2% and lost $7.4 trillion
On Wall Street enthusiasm usually leads to…
Disaster
Prospects for physical growth in business…
Don’t translate into obvious profits for investors
If it seems easy to foresee which industry will grow the fastest, when is there no real value?
When most other investors are already expecting the same thing
How investment is distinguished from speculation?
Thorough analysis of promises safety of principal and
Adequate return
3 supplementary practices of a defensive investor
1 dollar cost averaging
2 placing money in mutual funds
3 25-75% between equities and bonds inversely reacting to the
Market
For a reasonable chance for continued better than average results, that investor must follow policies which are…
Inherently sound and promising and not popular on Wall Street
Special situations which over many years could bring over 20% returns at minimal risk include? 3 things
1 inter security arbitrages
2 payouts or workouts in liquidations
3 protected hedges
Thorough analysis
Study of facts in light of established standards of safety and value
Safety of principal
Protection against loss under all normal or reasonably likely
Conditions or variations
Adequate returns
Rate of return investor is willing to accept provided he acts with
Intelligence
3 elements of investing
1 thoroughly analyze soundness of company and soundness
Of its business
2 deliberately protect yourself against serious losses
3 aspire for adequate, not extraordinary performance
Investors judge the market price by…
Established standards of value
Comfortable investing in a stock even if you had no way
Of knowing its Daily price
What do Formulas experience over time
Diminishing returns occur especially when published if the
Formula worked in the first place (January effect)
Graham’s 3 rules on speculation
1 never delude yourself into thinking you’re investing when
You’re speculating
2 speculating becomes mortally dangerous when you’re taking
It seriously
3 put strict limits on amount you’re willing to wager
The only way inflation can add to common stock values is by…
Raising the rate of earnings on capital investment
What is the break down of compounded returns from the s&p from 1915 to 1970?
8%, 4% from price appreciation and 4% from reinvested dividends
What happened to price levels between 1915 and 1920?
They doubled
A little inflation
Helpful to business profits
Inflation and investments
It’s important to measure your investment success based on how
Much you keep after inflation
What happened to price levels between 1973 and 1982?
They more than doubled from $100 to $230
Since 1960, 69% of countries have experienced what rate of inflation in a single year?
25%
What price level changes produce poor stock returns?
Deflation and inflation exceeding 6%/year (high inflation causes
Consumers to cut spending)
2 suggestions by Jason zweig to fight inflation?
Vanguards REIT fund and TIPS
3 factors that influence stock market’s performance? With numerical example
1 real growth rise of companies earnings and dividends (1.5%)
2 inflationary growth (2.4%)
3 dividend yield on stocks (1.9%)
Stocks can be expected to grow at 5.8% = 1.5 + 2.4 + 1.9, stocks over Longterm will provide 5.8% return
Graham’s view on the rate of return an investor should expect
Rate of return should be dependent on amount of intelligent
Effort investor brings
Call provisions on bonds
Usually screw over investor, because they miss out on most of
price Appreciation of bond after company buys it back
Investor should check terms to make sure of period in which the
Bond is not callable
What is Graham’s recommendation about callable bonds
Investor should sacrifice small amount of yield to obtain the
assurance of noncallability for 20-25 years
What do preferred stock dividends depend on?
Company’s willingness and ability to pay common stock dividends
2 Characteristics preferred stock lacks
1 lacks the legal claim of the bond holder (or creditor)
2 lacks the profit possibilities of the common shareholder (or partner)
When is the best time to buy preferred stock?
When price is unduly depressed by temporary adversity
Should be bought on bargain basis or not at all
Tax advantages and disadvantages on preferred stock
Corporations pay lower taxes on preferred stock dividends
Individuals pay higher taxes, as they get taxed at ordinary
Income rates
When is a preferred stockholder entitled to a dividend?
Before common stock dividends are payed
Income bond interest
Interest does not have to be paid unless earned by the company
Unpaid interest may accumulate as a charge against future
Earnings, but the period is often limited to 3 years
What are income bonds associated with
Financial weakness and poor investment status
2 benefits that an investor should find in a good income bond investment
1 unconditional right to receive interest payments when they are
Earned by the company
2 right to other forms of protection than bankruptcy proceedings
If interest is not earned and paid
Chief benefit to companies that issue income bonds
Deductibility of interest paid from company’s taxable income
Cuts the form of cost of capital in half
Tax on treasury securities
Subject to federal but free from state
Best annuities, where are they bought?
Ameritas, TIAA-CREF and Vanguard
Graham’s recommended diversification of stocks for the defensive investor
10 to 30 stocks
Defensive investor 4 aspects of common stock investing
1 diversification
2 select large prominent companies
3 10 year consecutive history of dividend payments
4 investor should not overpay
How does a defensive investor not overpay for a stock?
Never pay more than 25 times average earnings over 7 years
And no more than 20 times earnings over last 12 month period
Growth stocks
The stock price always grows a lot faster than earnings, when
Earnings disappoint the price drops a lot faster
The kind of securities purchased and the rate of return sought by the investor depend on…, what do they not depend on?
His financial equipment in terms of knowledge, experience
And temperament
Do not depend on his resources
What is the primary risk for a Longterm stockholder?
The underlying business will lose money
When are an industrial company’s finances considered conservative?
When is this true for railroad or public utility?
Common stock at book value represents at least half of total
Capitalization, including all bank debt
30% for railroads or public utility
As of 2003, large cap companies had market caps of?
$10 billion
Even if you feel familiar with a company because it’s local, or your employer you still need to…
Research it’s financial statements
