Mission and Philosophy --- The-Intelligent-Investor.Org

A stock certificate is an active ownership interest in an actual business with
an underlying value that, in the short run, is unrelated to its price. If the
general value of the business can be determiend, as well as some prospect for
the probability that the company will continue to be profitable, then you can
arrive at a value for the company. To do this, long-term, gradual straight-line
trends of fundamentals can often be relied on, as long as the final point on
the trend-line does not predict the company exceeding all known value
metrics, as all accelerating and very steep trends necessarily predict. Finally,
by comparing the underlying value to the market price, you can decide if the
stock is underpriced. Graham says that stock market prices forever swing
between untenable optimism (resulting in overpriced securities) and illogical
pessimism (resulting in under-pricing). The intelligent investor sells to optimists
and buys from pessimists, and also buys stocks with characteristics of
high-grade bonds.

Since market extremes can take a lifetime to "correct" (pushing our underlying
belief structures and self-control abilities to the limits) this website is focused
on stocks that look like bonds. In other words, stocks that yield a very
satisfactory dividend that appears to have a high probability of continuing
indefinitely. In addition, we will limit our purchases to stocks that are close to
their book value to increase the probability for safety of principal. Think of it
as getting "rent" while you wait for the market to realize what your asset is
really worth.

Our goal is to end up with a permenant and very well diversified portfolio of
the worlds largest companies paying high, consistent dividends, forever. At
that point, other than to gradually add new desireable issues and remove
companies with poor balance sheets, we should be able to sleep well at night
and only have to worry about how to spend our constant income stream.

The future value of every investment is a function of its present price. The
higher the price you pay, the lower your return will be. Graham put it very
well: "Buy your stocks as you buy your groceries, not as you buy your
perfume." Think of it as buying a machine that creates a specific amount of
money over time. What you pay for it does matter.

At times you will be wrong in your analysis, therefore you must purchase an
investment with a built in "margin of safety" to ensure that you never
overpay, thus increasing the odds of success. This means that when you
calculate value, price or earnings ability, always subtract some percentage
that seems reasonable to you to ensure that you don't even come close to
overpaying for the asset. This will increase the likelihood that you will not lose
principal as well as increase the likelihood that you will obtain adequate gains.

With careful analysis, and by ignoring the Wall Street "Talking Heads" you can
take advantage of the worst bear markets and the wildest "blow off" market
tops. Your behavior, not your investments behavior, is critical. "The fault,
dear Brutus, is not in our stars, but in ourselves …" (Shakespeare).
Self-control such that you do not succumb to the irrational herd mentality
(and the need to speculate) is key.

The only stocks that qualify for investment: 1) are very large; 2) have a very
long record of consistent profits; and 3) are in excellent financial health.
Anything less reduces the probability that your principal will be safe or that
you'll obtain consistent gains. Increasing your odds like this can make the
difference between comfortable success and financial ruin, although it does
not assure it.

An alternative to investing in a group of self-picked stocks are the ultra-low
expense index funds, but again, value, price and dividend is important. This
scenario can actually be more difficult to analyze than common stocks since
funds often return-of-capital that at first inspection appears to be dividend
income.

Dollar-cost averaging in to your stocks or funds is an excellent strategy,
especially when the market does not appear over or undervalued.

Great stories from news sources or "experts" about the hottest industries do
not correlate consistently with future stock price appreciation. If anything,
the opposite may be true as great industries attract fierce competition, which
lowers profit margins, decreases earnings and lowers the rate of stock price
increases. The opposite can be true as well in which certain industries fall out
of favor and are said to be lackluster, leaving only a handful of ignored
companies to reap solid profits for many years.

Never, ever, ever (NEVER!) use margin in your investment accounts. Margin
will take a portfolio that normally would just be experiencing a heavy
drawdown, and compeletly wipe it out. Graham had first-hand experience wth
this. Also be careful, or just completely avoid, funds that use leverage.

Understand that your investment performance is not measured on any one
particular equity that took off like a rocket. Your performance is measured by
taking your total gains and dividing it by your total net worth. Therefore, if
you're worth $1M, and you bought one hot stock for $1K that doubled in a
year, your investment return is really 1/10th of 1% annually. This does not
mean that you should put your entire net worth into one hot stock. It does
mean that you must choose a basket of safe stocks that will perform well. In
addition, your performance should always be compared to the "risk-free
return" which would include T-bills or FDIC insured CDs of your entire liquid net
worth. If you have doubts about your ability to significantly outperform the
risk-free return using your entire investable net worth, then you should not
try.

Graham's Asset allocation advice: 25% to 75% high-grade bonds with the
converse in stocks. 50/50 is the simplest and ok. Rebalance at 5%
discrepancy. You can change the percentage up to the limits of 25/75
depending on how you feel about the market being over vs. undervalued
based on sound analysis. Possibly 25% stocks until the DJIA dividend yield is
about two-thirds of the bond yield before 50-50 division between bonds and
stocks.

The final test for purchase of a particular stock is to ask yourself if you would
buy it even if there were no liquid market for it. This would basically limit you
to stocks paying very satisfactory dividends.

You will constantly be bombarded with brokerage encouragement to speculate
under the guise of "investment" since brokers make huge amounts of money
from speculators. Intelligent Investing makes almost no money for brokers.

Gold is an appropriate tool for asset allocation, but do not buy metal. Do buy
low expense, well-diversified mutual funds specializing in the stocks of
precious-metal companies. 2% of your total assets (5% ok if over age of 65).
This can take some very carefull analysis since the balance sheets of many of
the mining companies are less than stellar. Picking individual mining stocks may
be appropriate as well as funds that hold gold.

Diversification is key, because without it, your stock picking errors WILL haunt
you. Graham recommends a minimum of ten different stocks and a maximum of
about thirty. The goal is to take on "market risk" as opposed to individual
stock risk.