The Intelligent Investor

Zweig asserts that while mutual funds have great upsides, they “aren’t perfect; they are almost perfect, and that word makes all the difference” (242). Due to their flaws, he says, they tend to underperform compared to the market average.

He highlights how difficult it is for funds to outperform the market. Managers who perform well tend to get poached by rival funds; actively managed funds have high operating costs; funds tend to copy each other’s portfolios; and there are inefficiencies inherent in trying to beat the market.

According to Zweig, some of the markers of successful funds include managers who own significant numbers of shares in their fund; funds with low expenses; funds that have a long-term focus; and funds that have a disciplined investment process.

Graham discusses the types of people who amateur investors usually turn to for investment advice: relatives, friends, bankers, brokerage firms, financial advisors, and investment counselors.

He views investment counselors as conservative, cautious, competent, and therefore trustworthy. These professionals do not promise clients extreme results and instead aim for modest returns, which Graham regards as reasonable and prudent. While investment counsel firms are geared toward wealthier people who do not want to manage their own financial decisions, financial services are not limited to individuals with high income or financial assets. They generally serve those who are managing their own portfolio. In Graham’s experience, some financial advisors base stock selection on near-term outlook, without regard to price. He sees this as antithetical to the philosophy of the intelligent investor.

In discussing brokerage houses, Graham points out that Wall Street benefits greatly from individuals who speculate, and therefore brokerage firms are motivated to encourage speculative behavior. He advises any investor who seeks counsel from a brokerage house to explicitly state their intentions and their investing philosophy and make clear that they do not wish to speculate.

Graham discusses the role of financial analysts, highlighting their ability to provide valuable information to individual investors. He comments on the importance of the CFA (chartered financial analyst) certification, which was newly instated in 1963, and which served to formalize the standards and ethics of the financial analyst profession.

Lastly, Graham addresses advisors who may play a more informal role in the lives of investors. He views local bankers as a potential source of reliable advice, as they have a good understanding of their clients’ financial situations. On the other hand, he believes that the investor who turns to family or friends for advice typically relies on emotional biases rather than objective analysis. He recommends discernment when seeking advice from such sources.

Zweig highlights a handful of ways to tell whether an investor should seek advice from outside sources. One indication is significant losses in previous investments. Another indicator is a lack of portfolio diversification. Furthermore, an individual who is facing difficulties in effectively managing their budget should seek help. And lastly, investors who have experienced major life changes, such as retirement, should also consider seeking advice from outside sources.

Zweig advises the intelligent investor to do their due diligence in selecting a reliable source of investment advice. He instructs investors to determine whether an advisor is qualified and caring and whether they follow the investment principles outlined in The Intelligent Investor. This can be done by carefully preparing questions and interviewing any potential advisor. Zweig also mentions that investors should, in turn, be prepared to give good answers to any questions that an advisor poses to them as they will likewise try to discern whether the investor is a good fit for their services.

Graham provides advice for analyzing securities to determine their value. While security analysis is complex, Graham aims to convey to the non-professional investor a basic understanding of how to assess stocks and bonds, so that they will be equipped, at the very least, to understand professional security analysts and discern between valid and invalid analysis.

Graham begins by reviewing bond analysis. He notes that when investing in bonds, the key factors are the issuer’s financial strength and the bond’s terms and conditions. He provides various tests that one can apply to determine the strength of a bond investment. These tests include examining the size of the company, stock-to-equity ratio, and property value.

When analyzing stocks, Graham recommends estimating future earnings and multiplying that figure by a “capitalization factor.” This capitalization factor is determined by the strength and structure of stock, the dividends, the management of the company, and the company’s growth potential. Furthermore, Graham emphasizes the importance of conducting a thorough financial analysis of a company before making any investment decisions.

Graham also stresses the need for investors to have a margin of safety when purchasing stocks. He gives a general formula for assessing growth stocks: Multiply the expected annual growth rate by 2, add 8.5 to that figure, and multiply the sum by current earnings to receive the estimated value of the growth stock. This valuation will be conservative, which ensures an adequate margin of safety.

Graham discusses the practice of industry analysis. Industry analysis involves examining the overall trends and market conditions of a specific industry to gauge the future performance of companies within that industry. By analyzing industry conditions, investors can determine which industries are more likely to thrive and which ones may face challenges. Graham does not find industry analysis to be as crucial as analyzing individual securities, but he acknowledges its importance in identifying potential investment opportunities, specifically in rapidly growing fields like technology.

Zweig lists factors to consider when evaluating investment opportunities such as competitive advantage, management, debt, acquisitions, research and development, and growth trajectory. When examining a company’s management, Zweig recommends asking whether they have demonstrated a consistent ability to overcome obstacles and generate value for their investors. Additionally, he highlights the importance of analyzing a company’s capital structure as it can impact its profitability. Concerning dividends, Zweig believes that “the burden of proof is on the company to show that you are better off if it does not pay a dividend” (309). In general, companies that underperform and do not pay dividends are not putting their money to good use.