Intelligent Investor Ch 1-5 Flashcards by leo Gottlieb

Financial success of your investments

Depends more on how you behave, compared to how the market

Behaves

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Margin of safety, in a nutshell what does it allow an investor to do?

Never overpaying, no matter how exciting an investment seems

Can minimize you odds of error

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Defensive investor

Places chief emphasis on avoidance of serious mistakes/losses

2nd aim is freedom from effort, annoyance and need to make
Frequent decisions

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Determining trait of enterprising investor

Devote time and care in selection of securities that are both
Sound and more attractive than average

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2 important choices in the art of successful investment

1 industries with growth prospects

2 identify most promising companies in those industries

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Tangible asset value

Includes physical property (property, plant, equipment, inventories)
And financial balances (cash, ST Investments, A/R)

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Practical to buy investments selling not far above their tangible asset value. What does this allow?

An investor in a company of about their net asset value can
Always consider himself owner of sound and expanding
businesses

Acquired at rational price, regardless of what stock market might
Say to the contrary

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How does graham characterize an intelligent investor? 5 things

1 patient
2 disciplined 
3 eager to learn
4 harness emotions
5 independent thinker

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What is being an intelligent investor more a matter of?

More a Matter of character than brain

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How much did the market drop between March 2000 and October 2002? How much wealth was destroyed?

The market dropped 50.2% and lost $7.4 trillion

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On Wall Street enthusiasm usually leads to…

Disaster

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Prospects for physical growth in business…

Don’t translate into obvious profits for investors

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If it seems easy to foresee which industry will grow the fastest, when is there no real value?

When most other investors are already expecting the same thing

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How investment is distinguished from speculation?

Thorough analysis of promises safety of principal and

Adequate return

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3 supplementary practices of a defensive investor

1 dollar cost averaging

2 placing money in mutual funds

3 25-75% between equities and bonds inversely reacting to the
Market

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For a reasonable chance for continued better than average results, that investor must follow policies which are…

Inherently sound and promising and not popular on Wall Street

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Special situations which over many years could bring over 20% returns at minimal risk include? 3 things

1 inter security arbitrages

2 payouts or workouts in liquidations

3 protected hedges

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Thorough analysis

Study of facts in light of established standards of safety and value

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Safety of principal

Protection against loss under all normal or reasonably likely
Conditions or variations

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Adequate returns

Rate of return investor is willing to accept provided he acts with
Intelligence

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3 elements of investing

1 thoroughly analyze soundness of company and soundness
Of its business
2 deliberately protect yourself against serious losses
3 aspire for adequate, not extraordinary performance

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Investors judge the market price by…

Established standards of value

Comfortable investing in a stock even if you had no way
Of knowing its Daily price

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What do Formulas experience over time

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Diminishing returns occur especially when published if the

Formula worked in the first place (January effect)

Graham’s 3 rules on speculation

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1 never delude yourself into thinking you’re investing when
You’re speculating
2 speculating becomes mortally dangerous when you’re taking
It seriously
3 put strict limits on amount you’re willing to wager

The only way inflation can add to common stock values is by...

Raising the rate of earnings on capital investment

What is the break down of compounded returns from the s&p from 1915 to 1970?

8%, 4% from price appreciation and 4% from reinvested dividends

What happened to price levels between 1915 and 1920?

They doubled

A little inflation

Helpful to business profits

Inflation and investments

It's important to measure your investment success based on how Much you keep after inflation

What happened to price levels between 1973 and 1982?

They more than doubled from $100 to $230

Since 1960, 69% of countries have experienced what rate of inflation in a single year?

25%

What price level changes produce poor stock returns?

Deflation and inflation exceeding 6%/year (high inflation causes Consumers to cut spending)

2 suggestions by Jason zweig to fight inflation?

Vanguards REIT fund and TIPS

3 factors that influence stock market's performance? With numerical example

1 real growth rise of companies earnings and dividends (1.5%) 2 inflationary growth (2.4%) 3 dividend yield on stocks (1.9%) Stocks can be expected to grow at 5.8% = 1.5 + 2.4 + 1.9, stocks over Longterm will provide 5.8% return

Graham's view on the rate of return an investor should expect

Rate of return should be dependent on amount of intelligent | Effort investor brings

Call provisions on bonds

Usually screw over investor, because they miss out on most of price Appreciation of bond after company buys it back Investor should check terms to make sure of period in which the Bond is not callable

What is Graham's recommendation about callable bonds

Investor should sacrifice small amount of yield to obtain the assurance of noncallability for 20-25 years

What do preferred stock dividends depend on?

Company's willingness and ability to pay common stock dividends

2 Characteristics preferred stock lacks

1 lacks the legal claim of the bond holder (or creditor) 2 lacks the profit possibilities of the common shareholder (or partner)

When is the best time to buy preferred stock?

When price is unduly depressed by temporary adversity Should be bought on bargain basis or not at all

Tax advantages and disadvantages on preferred stock

Corporations pay lower taxes on preferred stock dividends Individuals pay higher taxes, as they get taxed at ordinary Income rates

When is a preferred stockholder entitled to a dividend?

Before common stock dividends are payed

Income bond interest

Interest does not have to be paid unless earned by the company Unpaid interest may accumulate as a charge against future Earnings, but the period is often limited to 3 years

What are income bonds associated with

Financial weakness and poor investment status

2 benefits that an investor should find in a good income bond investment

1 unconditional right to receive interest payments when they are Earned by the company 2 right to other forms of protection than bankruptcy proceedings If interest is not earned and paid

Chief benefit to companies that issue income bonds

Deductibility of interest paid from company's taxable income Cuts the form of cost of capital in half

Tax on treasury securities

Subject to federal but free from state

Best annuities, where are they bought?

Ameritas, TIAA-CREF and Vanguard

Graham's recommended diversification of stocks for the defensive investor

10 to 30 stocks

Defensive investor 4 aspects of common stock investing

1 diversification 2 select large prominent companies 3 10 year consecutive history of dividend payments 4 investor should not overpay

How does a defensive investor not overpay for a stock?

Never pay more than 25 times average earnings over 7 years | And no more than 20 times earnings over last 12 month period

Growth stocks

The stock price always grows a lot faster than earnings, when Earnings disappoint the price drops a lot faster

The kind of securities purchased and the rate of return sought by the investor depend on..., what do they not depend on?

His financial equipment in terms of knowledge, experience And temperament Do not depend on his resources

What is the primary risk for a Longterm stockholder?

The underlying business will lose money

When are an industrial company's finances considered conservative? When is this true for railroad or public utility?

Common stock at book value represents at least half of total Capitalization, including all bank debt 30% for railroads or public utility

As of 2003, large cap companies had market caps of?

$10 billion

Even if you feel familiar with a company because it's local, or your employer you still need to...

Research it's financial statements

Intelligent Investor Ch 1-5 Flashcards

(57 cards)