AAAMP Value Blog

A Value Investing Blog

Slow and Steady Wins the Race

The Intelligent Investor Book Review in 30 Minutes

Benjamin Graham’s objective was to provide an investment policy book for the ordinary investor. He succeeded in putting seemingly hard concepts into terms that could be understood and, more importantly, implemented by the average investor.
The Intelligent Investor, by Benjamin Graham, is probably the most important and influential value investing book ever written. Warren Buffet described it as “by far the best book ever written on investing”.

Investment, Speculation, Inflation, and Market History – The Intelligent Investor Book Review (Chapters 1, 2, & 3)

One of the most important and basic rules is to keep the activities of investment and speculation totally separate. Intelligent investing involves: 1) analysis of the fundamental soundness of a business 2) a calculated plan to prevent a severe loss and 3) the pursuit of a reasonable return. Speculation involves basing decisions on the market price, hoping that someone will pay more than you at a later date.

Mr. Market & Fluctuations – The Intelligent Investor Book Review – Chapter 8

If every investor did their research and only bought stocks with a margin of safety below the intrinsic value of the company, the market would be efficient and fairly stable. But we know that this isn’t true. The market swings wildly from day to day and takes large swings in valuation over periods of euphoria and pessimism.

Graham used a parable with an imaginary investor named Mr. Market to illustrate how an intelligent investor should take advantage of market fluctuations. This is a parable about greed and fear, price and value, and how the intelligent investor will react.

Investment Funds & Advisors – The Intelligent Investor Book Review – Chapters 9 & 10

The most important objective of the advisor may be to save you from your own worst enemy, YOU. A good advisor will help you keep your emotions in control, especially at important moments. Instead of panic selling, are you going to be prepared to buy when prices have fallen? Instead of following the crowd, who might be buying at prices far above intrinsic value, are you going to look elsewhere for better values?

Investment Selection – The Intelligent Investor Book Review (Chapters 11, 12, & 13)

In investment selection, it is most accurate to be able to make judgments based on past performance. The greater the amount of assumptions that have to be made about the future, the greater the possibility of misjudgment or error. Graham is adamant about not putting any importance in short term earnings. The more an analyst relies on short term results, the greater the risk, and the more due diligence that is required.

Comparisons & Thoughts on Value – The Intelligent Investor Book Review (Chapters 16, 17, 18, & 19)

Graham urged shareholders to take an active role in being owners of the company. He thought management with good results should be rewarded, and management with poor results should be questioned and challenged.

He was particularly adamant about shareholders demanding a fair portion of their earnings returned in dividends. This is because much of the time companies squander past earnings. Just because management does a good job with current operations doesn’t mean they know the best use of excess company capital.

Margin of Safety – Chapter 20 – The Intelligent Investor Book Review

The margin of safety for an investment is the difference between the real or fundamental value and the price you pay. The goal of the value investor is pay less (hopefully, much less) than the real value. Ben Graham called margin of safety “the secret of sound investment” and “the central concept of investment”. He also devoted a whole chapter to the concept and, I am confident, placed it last because it is the most important.

Drawdown – The Most Tragic Investment Failure

Drawdowns destroy your future. They rob you of the investment capital you once had to grow your portfolio. Keeping drawdowns as small as possible is more important than high returns. This is why: Losing your principal is the biggest risk in investing. Most investors don’t realize how devastating a large portfolio drawdown is to their long term returns. I will demonstrate the importance of avoiding these drawdowns.

Asset Allocation Plan – 7 Factors to Consider

A well constructed asset allocation plan can lower portfolio volatility and increase returns at the same time! That makes asset allocation more important than which individual investments you choose for diversification.

Many financial firms give you standard platitudes about asset allocation plans. I’m going to challenge you to think skeptically about some of their commonplace thinking. Most of them leave out important aspects, such as expenses and valuation, because it doesn’t fit the products they sell. Here are the factors that are important and my thoughts on each.

5 Value Strategies For Asset Allocation

The average investor makes decisions that cause them to underperform average investment returns. The difference between average investment returns and average investor returns is often called the behavior gap.
The following value strategies will provide a framework for making your asset allocation investment decisions and avoiding many of the mistakes that create the behavior gap.

Market Timing for Value Investors

There is a behavior gap that affects investment returns. Instead of market timing based on valuation many let their emotions cause them to make detrimental asset allocation decisions. Trying to predict whether the market is going up or down in the short term is a bad form of market timing. Valuation timing is a completely different, longer term way of thinking about the market.

Investment Decisions Should Be Valuation-Based

Investment decisions should be valuation-based because the price you pay is the biggest determinant of your long term return on investment. All investment decisions are based on probability because no one has the ability to accurately forecast the future. Your best means of increasing the probability of higher than average returns is to make valuation-based investment decisions in your asset allocation and individual investments.

Perceived Risk vs. Real Risk: A Key to Successful Value Investing

Value investing is about purchasing investment assets at prices that put the odds of above average returns heavily in your favor. Excepting an investment that is going to go bust, almost any investment can be profitable if purchased at a low enough price.

The key to successful value investing is buying assets when the perceived risk is greater than the real risk. It’s equally important to avoid assets when the perceived risk is less that the real risk.

Geometric Average vs. Arithmetic Average: Which is Correct For Investment Returns?

Examples demonstrate that volatility lowers your investment returns. Arithmetic and geometric averages serve different purposes and only geometric averages will accurately reflect compounded investment returns.

Even small differences in investment returns can make huge differences in results over long periods of time. The consequence is investors need to put additional emphasis on the amount of volatility they are willing to accept. It may be that you can increase your long term investment returns by taking LESS risk!

Disadvantages of Diversification in Investing

You can avoid the disadvantages of diversification in investing by managing your own portfolio. Diversification is one of the most important concepts in investment portfolio management, but proper diversification is the key. While building your portfolio keep in mind the disadvantages of diversification in investing to help you achieve optimal diversification.



Ken Faulkenberry - Arbor Investment PlannerAs founder of the Arbor Investment Planner my passion is to educate and empower the individual investors to manage their own investment portfolio. The Arbor Investment Planner is a value investment portfolio management guide for those individual investors who choose to manage their own money. I focus on ideas and concepts important to the self directed investor; but put special emphasis on risk management, value investing strategies, and proper asset allocation and diversification.

- Ken Faulkenberry

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