The Intelligent Investor

Zweig reiterates Graham’s belief that second-grade bonds (or, as Zweig calls them, “junk bonds”), are not worth the risk. When addressing foreign bonds, he recontextualizes Graham’s advice in modern times by admitting that bonds from emerging markets may now have a place in the intelligent investor’s portfolio. He cautions that no more than 10% of the enterprising investor’s portfolio should be dedicated to foreign bonds but says that this kind of security can provide diversification due to their low correlation with domestic bonds and stocks.

Zweig warns the enterprising investor against day trading, which can eat away at profits due to transaction costs and emotional decision-making. He then discusses IPOs, which he says are often overhyped and overpriced—at least for the average investor. He says that those who profit most from IPOs are “members of an exclusive private club”—usually investment banks and other entities that have access to shares before they become widely available to the public (152). For the average investor, IPOs are usually overpriced once shares hit the market, and they should only be considered potential investments if the company is solid and the stock price is reasonable.

Graham outlines four areas that the enterprising investor can exploit when trying to obtain better-than-average results from the stock market. These areas are market timing, growth stocks, bargain issues, and “special situations.” First, Graham says that the enterprising investor may choose to engage in active trading and attempt to time the market to generate higher returns. However, he cautions that market timing is a difficult and risky strategy, prone to failure.

Second, he discusses investing in growth stocks—stocks with better-than-average growth that are expected to perform well in the future. Graham sees two problems with this approach: stocks with good prospects usually sell at high prices, and there is a high level of uncertainty associated with predicting growth. He argues that rapid growth is hard to sustain and that once a company becomes larger and more established, its growth rate tends to slow down.

Third, Graham explores the technique of buying bargain issues. The enterprising investor can search for stocks that are undervalued and trade at a significant discount to their intrinsic value. This approach involves conducting a thorough analysis of the company’s fundamentals, such as its earnings, assets, and cash flow, to determine its true worth. He recommends looking for “the relatively unpopular large company” that is temporarily out of favor but has strong potential for recovery (163). He gives the example of Chrysler, which was deemed a bargain issue in the 1970s when it was facing financial difficulties but later experienced a successful turnaround.

Fourth, Graham discusses “special situations” such as arbitrage or merger and acquisition opportunities. These special situations involve taking advantage of temporary market inefficiencies to generate profits. Graham concludes by emphasizing the difference between the defensive and the enterprising investor and clarifying that there is no middle ground between them. He claims that the enterprising investor must treat their investing as a serious business and that “as an investor you cannot soundly become ‘half a businessman’” (176). It is important to commit fully to one approach or the other.

Zweig comments on market timing as an investment strategy, declaring that “for most investors, market timing is a practical and emotional impossibility” (180). While hindsight may be 20/20, he says, attempting to predict the future movements of the market is often a futile endeavor.

He also discusses growth stocks, providing a modern context for Graham’s advice by analyzing popular growth stocks of the 1990s such as General Electric and Home Depot. In drawing conclusions about these stocks, Zweig paraphrases Graham’s philosophy on prices by saying, “A great company is not a great investment if you pay too much for the stock” (181). He reiterates Graham’s claim that growth stocks can be a reasonable investment if purchased at a reasonable price but cautions investors against overpaying for the potential growth. He cites a price/earnings ratio of about 25 to 30 as the threshold for a growth stock to still be considered reasonably priced.

Additionally, Zweig addresses a common belief that wealthy people make their fortunes by investing heavily during the early days of a single high-growth company and then holding onto their shares for the long term. He points out that while this strategy may make some individuals rich, many people from the late 20th century who became wealthy this way did not hold onto their money over time.

Graham discusses market fluctuations and how investors’ behavior can be influenced by these fluctuations. He believes that the intelligent investor should “be prepared for them both financially and psychologically” (188). According to Graham, market fluctuations are inevitable and can have a significant impact on investors’ mindsets. He warns that following the market closely and seeking advantageous times to buy and sell can easily lead an investor into speculative behavior.

Graham sees two main ways in which one can attempt to profit from market fluctuations: by paying attention to timing or by paying attention to price. Paying attention to timing means trying to predict when the market will reach its high or low points and making investment decisions accordingly. Paying attention to price, on the other hand, involves analyzing the intrinsic value of a security and buying or selling based on whether it is under or overvalued.

He believes that the investor who focuses on timing is more likely to fall into speculative behavior and suffer losses. Timing is only useful when it aligns with pricing, enabling an investor to take advantage of undervalued securities by capturing a good stock at a low price. Graham discusses a popular Wall Street theory that concentrates on finding a “breakthrough” signal to identify changes in market trends and make investment decisions accordingly. He argues this process often results in investors buying stocks at high prices and selling at low prices when the rational behavior would be to buy stocks at low prices and sell at high prices.

Graham introduces the concept of “Mr. Market,” a fictional character who serves as a personification of the stock market. As the stock market presents investors with different stock prices every day, Mr. Market can be thought of as a person who knocks on an investor’s door every morning and offers to buy or sell shares at a particular price. It is up to the investor to determine whether Mr. Market’s price is fair; if it is not, the investor has the option to decline the offer and wait for a better opportunity.

Mr. Market is described as being emotional and prone to mood swings, offering investors the opportunity to take advantage of these fluctuations. The investor can ignore any unfair prices offered by Mr. Market and can take advantage of low purchase prices or high sales prices when they are available. At no point is the investor “forced” to buy or sell shares or to cave to other people’s opinions on the value of these shares. If the investor is confident in their analysis of the security’s intrinsic value, they can make rational decisions based on that analysis, regardless of the market sentiment.

Zweig uses Graham’s concept of Mr. Market to emphasize that an intelligent investor should think rationally and independently rather than being swayed by the emotional ups and downs of the market. While an investor cannot control stock market fluctuations, they can control their reaction to them. The intelligent investor, Zweig says, should “recognize that investing intelligently is about controlling the controllable,” including factors like brokerage costs and tax strategy as well as emotional elements like expectations and behavior (219).