The Intelligent Investor

Zweig updates Graham’s examples with eight pairs of his own: Cisco and Sysco; Yahoo! and Yum!; Commerce One and Capital One; Palm and 3Com; CMGI and CGI; Ball and Stryker; Nortel and Nortek; and Red Hat and Brown Shoe. Zweig underscores the irrational behavior of investors during the late-’90s tech boom. In his eighth case study, he illustrates how software company Red Hat became extremely overvalued, while footwear wholesaler Brown Shoe, which belonged to a less glamorous industry, produced steady sales. However, Zweig notes, “The market scoffs at Graham’s principles in the short run, but they are always revalidated in the end” (486). Red Hat continued to lose money and its stock eventually fell, whereas Brown Shoe went on to produce consistent profits.

Graham discusses shareholder activism, or the actions taken by shareholders to influence the governance of companies. While he previously advocated for shareholders to exercise their agency and hold management accountable, he now writes that:

In the last 36 years practically nothing has actually been accomplished through intelligent action by the great body of shareholders. A sensible crusader—if there are any such—would take this as a sign that he has been wasting his time, and that he had better give up the fight (487).

Looking back on the previous decades, Graham concludes that the notion of shareholders exercising their voices now seems too romantic, and he claims it proved to be futile.

Graham goes on to explore various dividend policies such as regular dividends, extra dividends, or no dividends at all. Previously, he notes, companies that did not pay dividends (while claiming to use the money for growth) were often met with criticism and faced pressure from shareholders. However, he sees that the landscape has evolved and companies that retain earnings rather than paying out dividends are now more accepted. Nevertheless, Graham has observed that companies that do not pay dividends tend to underperform their dividend-paying counterparts in terms of stock price appreciation.

Graham examines the concept of stock splitting and its impact on shareholders. Stock splitting, as Graham explains, is the practice of dividing existing shares into multiple shares, resulting in a lower price per share. He states that while stock splits may seem attractive to shareholders, as it lowers the price per share and may lead to increased liquidity, the actual impact on shareholder wealth is negligible.

Zweig explores why Graham gave up the fight to encourage shareholders to exercise their voices. He notes that this chapter was the one that was changed the most from the original edition of the book. Graham cut out a huge portion of his arguments, reducing it to a brief passage on the futility of shareholder activism followed by a discussion on dividends.

Zweig goes further by chastising modern investors for having “forgotten Graham’s message,” saying that they “put most of their effort into buying a stock, a little into selling it—but none into owning it” (499). Zweig exhorts investors to read companies’ proxy statements, vote against managers they believe are incompetent, attend annual shareholder meetings, and connect with other shareholders via message boards.

The margin of safety refers to the difference between the intrinsic value of a share and the price at which it is bought. Graham emphasizes the importance of purchasing stocks at a significant discount to their intrinsic value to protect investors from potential downturns in the market. He connects the concept of “margin of safety” with the practice of diversification. Graham believes that by diversifying their investments, investors can further mitigate risks and increase their margin of safety.

He reiterates his views on investment versus speculation. Graham emphasizes that investing should be approached as a long-term, rational process based on analysis and sound principles. By contrast, speculation is characterized by short-term, emotional decision-making driven by market fluctuations and rumors. Graham talks about the importance of price when evaluating the attractiveness of an investment. He argues that price is a crucial factor in determining the margin of safety.

He concludes that intelligent investment is similar to running a business. Investors should approach their investments with the same diligence and rationality as a business owner would. He emphasizes research, caution, and confidence based on sound analysis—even if this analysis contradicts what is popular in the market. Finally, he affirms that the investor who seeks modest—not astronomical—results will achieve long-term success and financial security.

Zweig emphasizes avoidance of loss, saying that “to be an intelligent investor, you must take responsibility for ensuring that you never lose most or all of your money” (526). He illustrates how difficult it is to break even again after a loss in capital. Zweig says that the best way to avoid loss is to avoid overpaying for stocks in the first place: “By refusing to pay too much for an investment, you minimize the chances that your wealth will ever disappear or suddenly be destroyed” (527). He concludes by reiterating the importance of managing one’s emotions when investing, saying that “financial risk resides not in what kinds of investments you have, but in what kind of investor you are” (528). Ultimately, self-awareness and adequate risk management are crucial for successful investing.