The Intelligent Investor Series

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Here are all my notes in a single Mindnode

By Dan Gonzales

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By Dan Gonzales                February 12, 2019

The Defensive Investor

Chapter 14 in the book is titled, Stock Selection for the Defensive Investor. Having read the early chapters of the book one would know that Graham categorizes the investor into two categories: Enterprise and Defensive. He immediately notes that the majority of people will fall into the latter. Simply because it is easier and less time-consuming. There are several chapters that capture defensive strategies and outlooks but Chapter 14 pertains most to research and analysis.            

           One of my favorites excerpts of this chapter is when the example of two finance professors finding a twenty dollar bill on the ground and don't stop to pick it up. Initially, the analogy didn't make much sense, if I find five bucks on the floor I will happily pick it up and go to Subway... just kidding. However, after dwelling on the situation described in the chapter, I came to realize that what Graham had meant was that the selectivity of finding a stock to purchase was not to be made until doing your due diligence.

On the quantitative side of things, the chapter sheds light on how a defensive investor would analyze a company based off of their financial condition. Graham's criteria for stock selection here would require that the balance sheet reflect that assets are at least twice their current liabilities, these firms had a sizable cushion of working capital that on average should sustain them through tough times. For example, 

In addition, Graham would see that long term debt did not exceed the net current assets (working capital). Doing this would simply require looking directly at a balance sheet of a quarterly or annual filing and some quick arithmetic.

           

 

Chapter 14 in the book is titled, Stock Selection for the Defensive Investor. Having read the early chapters of the book one would know that Graham categorizes the investor into two categories: Enterprise and Defensive. He immediately notes that the majority of people will fall into the latter. Simply because it is easier and less time-consuming. There are several chapters that capture defensive strategies and outlooks but Chapter 14 pertains most to research and analysis.            

           One of my favorites excerpts of this chapter is when the example of two finance professors finding a twenty dollar bill on the ground and don't stop to pick it up. Initially, the analogy didn't make much sense, if I find five bucks on the floor I will happily pick it up and go to Subway... just kidding. However, after dwelling on the situation described in the chapter, I came to realize that what Graham had meant was that the selectivity of finding a stock to purchase was not to be made until doing your due diligence.

On the quantitative side of things, the chapter sheds light on how a defensive investor would analyze a company based off of their financial condition. Graham's criteria for stock selection here would require that the balance sheet reflect that assets are at least twice their current liabilities, these firms had a sizable cushion of working capital that on average should sustain them through tough times. For example, 

In addition, Graham would see that long term debt did not exceed the net current assets (working capital). Doing this would simply require looking directly at a balance sheet of a quarterly or annual filing and some quick arithmetic.

 

What are your thoughts?