5 Key Lessons Learned from The Intelligent Investor


Awhile back my Dad issued a challenge for me to start reading investment books. While personal finance has become one of my biggest passions, it’s mostly through reading blog posts, listening to podcasts, and writing. I have read very few personal finance books all the way through. In fact, one of my New Years resolutions for 2017 was to read more books.

It took longer than I would have liked (my excuse is the many hours spent on my side hustle), but I have finally completed the first book in the challenge: The Intelligent Investor by Benjamin Graham.

Clocking in at 640 pages and originally published in 1949, honestly it was a difficult read. It required a slow and steady pace to be sure I was soaking in the content, but it ended up being a very worthwhile read. Even though it was published almost 70 years ago the main lessons still hold true. I can see why it’s often called one of the best investing books of all time.

Here are 5 of my key lessons learned from reading The Intelligent Investor:

1. Two types of investors: Defensive and Enterprising

Graham talks about how there are two types of investors, and it’s important to evaluate which type you are. An Enterprising investor continuously researches stocks and bonds and then selects and monitors the “best” available. This investing style takes significant time and energy – both physically and mentally. A Defensive investor creates a permanent portfolio that runs on autopilot and requires no further time or effort. This requires the ability to remained disciplined to a plan and removing your emotions from the equation. Being a defensive investor is much easier to put into practice, but can be considered boring.

2. Formula investing/dollar cost averaging

A second key lesson Graham touches on is the concept of formula investing (also known as dollar cost averaging). This involves setting up a plan for how and when to invest and sticking to it consistently. For example, this can be put into practice by setting up automatic 401(k) deductions. Every two weeks you’ll be contributing to your investments, whether the market has been going up or down. Stick to this plan of consistency and don’t let the market dictate your actions. Buying regularly helps smooth out market fluctuations.

3. When analyzing stocks, take your emotions out of it.

Graham puts significant emphasis on this point and it involves one of the most well known sections of the book. He turns the stock market into a fictional character named “Mr. Market.” This character comes to his house every day in a different mood. Some days he’s ecstatic and some days he’s depressed. Graham tells readers that it’s better to ignore the market rather than focusing on it on a daily basis. Mr. Market’s mood swings between being overly optimistic and overly pessimistic. Don’t let him tell you what the value of a particular stock is, do your own research and make your own value assessment. Stocks represent ownership of businesses.

For example, if Coca Cola’s share price dropped 20% in one day does that mean it became a bad company overnight? Highly unlikely. This represents a potential buying opportunity. I also love the point Graham makes where he talks about as humans we have an innate tendency to search for patterns. We try to find them even when they don’t exist. Each time you flip a coin there’s a 50% chance of the coin landing on heads and a 50% chance of the coin landing on tails. If you flip the coin and it lands on heads 5 times in a row, what’s the probability it will land on heads again? Our human nature will try to convince us that heads is more likely due to a “hot streak” or pattern, or that tails is more likely since it hasn’t come up after 5 straight times. However, the true probability remains at 50/50.

We do this with stocks as well. If a stock continues to go up for multiple days straight, we try to identify a pattern and anticipate that it will continue to go up. Graham cautions that this is not the case. Think of shares of stocks as pieces of ownership in businesses and analyze the value of the business rather than just the share price. If you have confidence in the long-term prospects of the business, don’t let Mr. Market’s daily mood swings deter you.

Graham says it best, “In the short run, the market is a voting machine but in the long run, it is a weighing machine. The fundamentals always matter in the end.”

4. Value investing

Similar to the previous point, investors need to be focused on finding value, not merely buying into hype found in the media. Intelligent investors look beyond the share price and focus on a company’s true value. Consider the long-term factors of the company before investing, including the company’s history, industry, management, etc. Once you’ve done the research, practice a more passive investing style rather than actively trading. Graham advises to buy and hold for the long-term rather than reacting to market swings. This distinction is important because it’s what intelligent investors do. On the other hand, Graham calls people who buy into the hype without doing their own research “speculators.”

5. Safe and steady returns instead of big gambles.

Graham explains that it’s better to protect yourself from big losses than to pray for the big wins. Diversification is key, buy a mix of both stocks and bonds to help smooth out the ride. No one can predict the next huge hit like Google or Facebook, but everyone has the ability to play it safer and achieve quality returns. This is a prime reason why I invest in index funds rather than individual stocks. Right now our asset allocation is 80% stocks and 20% bonds.

Even though it was a tough read for me, this classic investing book is filled with gems that can help anyone along their journey towards building wealth.

I’ve already started reading the next book in the challenge, Common Stocks and Uncommon Profits and Other Writings

Which of these key lessons do you find most valuable?

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8 Responses

  1. Great info! I find that the less I try to time things, the better off I am emotionally. And that’s the key for me, I can’t let myself get worked up over investments, it’s too stressful for me. So, I’m a big believer in index fund investing in the entirety of the market.

  2. Dave says:

    You started with a classic. There is not much fluff in that book. I read it years ago. I always remembered the 75/25 rule. Nobody should have more or less than 75% in stocks.

  3. An oldie but goodie. Good job summarizing the book.

    Once we pay off the mortgage, we are going to bit less defensive and more enterprising. We will be able to take more risk since we will extra money we could afford to lose. Hopefully the strategy will pay off 😊.

    Btw, I wanted to also comment on some of your older posts but couldn’t. Check it out unless it’s intentional.

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