Essential Takeaways From Chapter 14 of The Intelligent Investor: Stock Selection for the Defensive Investor

In chapter 14: "Stock Selection for the Defensive Investor," Graham outlines his strategy for selecting stocks for investors who are more interested in safety than in high returns.

The Defensive Investor:

Graham starts by defining the defensive investor as someone who is more concerned with preserving their capital than with achieving high returns.

This type of investor is typically risk-averse and is looking for investments that are safe and stable.

Graham believes that the best way for a defensive investor to achieve their goals is through a combination of bonds and stocks.

Stock Selection Criteria:

Graham believes that defensive investors should select stocks based on several criteria, including:

Adequate size of the company: Graham believes that defensive investors should only invest in large and well-established companies. These companies are more likely to be stable and have a proven track record.

Strong financial condition: Defensive investors should only invest in companies that have a strong financial position. This includes companies with a low debt-to-equity ratio, a high current ratio, and consistent earnings.

Earnings stability: Defensive investors should look for companies with consistent earnings over the past 10 years. These companies are more likely to be stable and less prone to fluctuations in the market.

Dividend record: Defensive investors should look for companies that have a long history of paying dividends. These companies are more likely to be stable and profitable.

Moderate price-to-earnings ratio: Defensive investors should look for companies with a moderate price-to-earnings ratio (P/E ratio). A P/E ratio that is too high may indicate that the stock is overpriced, while a P/E ratio that is too low may indicate that the company is not growing.

Graham also recommends that defensive investors diversify their portfolio by investing in at least 10 different stocks from different industries. This helps to reduce the risk of a single stock or industry affecting the entire portfolio.

Conclusion:

In conclusion, Graham's strategy for stock selection for the defensive investor is focused on safety and stability rather than high returns.

Defensive investors should focus on investing in large and well-established companies with a strong financial position, consistent earnings, and a long history of paying dividends.

Diversification is also important, with defensive investors encouraged to invest in at least 10 different stocks from different industries.

By following these guidelines, the defensive investor can create a portfolio that is less prone to market fluctuations and is more likely to preserve its capital.