The Intelligent Investor By Benjamin Graham

In this episode, Preston and Stig discuss billionaire Warren Buffett’s favorite investing book, The Intelligent Investor by Benjamin Graham. The world’s most successful investor read this book when he was 19, and Warren Buffett has several times praised it as the very foundation for shaping his investment philosophy.

IN THIS EPISODE, YOU’LL LEARN:

0:00:00 - Intro
0:08:19 - When and how you should conduct active and passive investing
0:11:16 - Why The Intelligent Investor is Warren Buffett’s favorite book
0:13:45 - Why inflation is perhaps the most overlooked macro investing metric
0:16:20 - Why Warren Buffett thinks that chapter 8 and 20 are the two most important chapters of
0:25:25 - How to calculate the intrinsic value of a stock and why Preston and Stig disagree with Warren Buffett
The Intelligent Investor in investment literature

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DISCLAIMER: This show is for entertainment purposes only. Before making any decisions consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.

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[MrKodsine]

Fantastic summary with practical insights 🙏, thank you!

[sammurphy]

Great show guys! Make this book sound simple!

[timfsr]

Thank you for making this valuable forum.

[Bigagoo]

Question: You mentioned that the yield on the S&P500 is an appropriate discount rate to determine intrinsic value. Well, the yield on the S&P today is, like, 4%. But if I use 4% I end up with a nonsensical intrinsic value. What am I doing wrong? Specifically I am valuing LKQ by plugging in the following numbers...

free cash flow = $147.4,
average annual growth rate of free cash flow = $41.29,
short term = 10 years
discount rate = 4%,
growth in perpetuity = 3%,
shares outstanding - 309

The resulting intrinsic value per share is $1466.57 at a 4.00% annual discount rate (huh??? doesn't make sense. The stock trades at $32 and I don't think I have a $1400 margin of safety here.)
But if I use a 15% discount rate (the minimum return I want), I end up with a more believable intrinsic value of around $57 per share.

By the way, I have become a big fan of your website, Youtube channel and book. Great material!!!

[LittleMew]

The website for book guide is not up and running

[Harihar_Patel]

@40:00 regarding the discussion between using the discount rate, Buffett uses the 10 year treasury because for one it is a long term investment and two, it is considered "risk free". The S&P 500 is not risk free, you can have 30-40% market crashes and it can take years for the market to reach the original levels. What if you need the money next year or the year after? It's a bad investment then. The 10 year treasury will pay out risk free forever and that is what you need to discount by. A long term risk free asset.

[donpeters]

You have to use the following components to come up with the Discount Rate for a Stock: The Risk Free Rate + The Market Risk Adjustment + The Country Risk Adjustment + The Industry Risk Adjustment. See Valuation by Dr. Aswath Damadoran.

[BossChronicles]

How does one get started ? Whats the name of the book?

[stratxo-opportunitymanagem]

Preston, share your concerns. I assume you're also of the Austrian School of Economic thought. I agree with the nuanced definition of investor versus speculator, but I don't believe risk is automatically commensurate with reward and one CAN use value techniques with technicals to trade for "high returns" (5-15%) in shorter time horizons, thus resulting in a more vigorous annual return but lower risk versus reward b/c trade can be allowed to run longer based on fundamentals should the technicals fail.

[yazdanahmed]

Hey man I live in maryland. I was wondering if you guys have any meetings or groups on investing

[MultiCalligula]

Have added way to much confusion to this and have misunderstood the "risk-free" and the "discount rate", these are 2 very different things that you speak of interchangeably. Buffett is 100% correct, the 10 year is the best baseline for the risk free rate, it would be absurd to use the S&P yield, due to the fact it fluctuates and is NOT risk free. The discount rate is an entirely different concept. The risk free rate is a layer in the consideration of it.

[alexruan]

Right on about the qualitative side which was essentially not there in his work. It does deserve a discussion on its own. How bargains based on qualitative catalysts in the market like the recent scandal with Wells Fargo can provide opportunities despite the quantitative side operating at sound principles. It is rare, but it does deserve a discussion on its own.

[arifmd]

Great Author always writes great things to improve standard of living ...

[lordparmar]

Hi
Buffett using 10year treasury because that’s the interest rate which is likely to be in the coming years (which is what affecting the revenue or borrowing cost for the company).

If interest rate is higher company is less likely to keep the same free cash flow, while if you use 10year treasury rate and if interest rate remain within that range then company is more likely to generate that free cash flow you have calculated

[michaelwright]

Preston - I would agree that the Shiller yield is a better discount rate than the 10-year treasury. But, I think that a risk premium should be built in to consider the business and sector risks of owning a single stock. Additionally, the Shiller yield is assuming today's market earnings shouldn't be higher than past earnings. Although Shiller adjusts for inflation, hasn't the market growth in earnings outpaced inflation? Bottom-line, I would want a higher discount rate than even the Shiller yield.

[ashusingh-okcc]

Just wanted to add one point on discount rates, that buffet once said in his annual meeting that there is threshold of discount under which he does not invest no matter what is treasury yield same can be reflected through his investment.

[almamatermit]

I think it's the best book ever written. I completely understand the book. I thought the book was a easy read.
Here is my background: I have a degree in Economics from MIT and a degree in Finance from Harvard. I read two newspapers and annual reports daily. A couple of weeks ago, I went to the Berkshire Hathaway Annual meeting in Omaha, Nebraska. In fact, I have gone every year for the past 5 years.
I have a strong background in
mathematics. The only TV channels I watch are Bloomberg and CNBC.
I do not have a social life.
I am a Data Scientist for a company. I am 30 years old.

[JacobafJelling]

Your Name is “Brodersen”?? Do you know that Its a 100% Danish name

[bikashshrestha]

Fake guru ad on intelligent investor education video. Wow what a generation we are in.