Intelligent Investor Summary

- IQ, insider tip or luck is not required for successful investing

- What needed is a sound intellectual framework for making decisions combined
with keeping emotions from ruining it

1. Meet Mr. Market

- Market Value ≠ Market Price
- Buy when price is low and sell when price is high

2. How to Invest as a Defensive Investor

- Create an investment with a mixture of stocks and bonds
- Allocation between stocks and bonds should depend on the average yields
- Invest a fixed amount of capital at regular intervals (payday)
- For Stocks:
o Diversify (10-30 companies and should not be concentrated in a single
industry)
o Large Companies (Sales > 700 USD)
o Conservatively financed (Current Ratio > 200%)
o Dividend (No missed dividends in the last 20 years)
o No Earning Deficit (last 10 years)
o Earning Growth (>30% in last 10 years; or >2.9% annually)
o Cheap Assets (Market Cap <Net Asset Value1 x 1.5)
o Cheap Earnings (Price/Earnings<15)

3. How to Invest as an Enterprising Investor

- Requires: Patience, Discipline, Eagerness to Learn, and Lots of Time
- Avoid Growth Stocks because the investment decisions are based relatively
more on future earnings and future earnings are less reliable than current
valuations
- If Price < Networking Capital; In that case you pay nothing for Buildings,
Machine and Goodwill (These Opportunities are rare today)
- For Stocks:
o Diversify (Some Diversification is enough)
o Conservatively financed (Current Ratio > 150%)
o Dividend (Given dividends this year)
o No Earning Deficit (in the last 5 years)
o Earning Growth (>0% annually)
o Cheap Assets (Market Cap < Tangible Assets – Liabilities) x 1.2
o Cheap Earnings (Price/Earning<For himself to decide)

1 Net Asset Value = Assets – Liabilities

 4. Insist on a Margin of Safety
- A margin of safety minimizes the risk of being wrong
2
- 3 𝑀arket Value < Market Price is enough margin of safety
- Value = 8.5 x Current Normal Earnings + 2 x Expected Annual Growth Rate2

5. Risk and Reward are not always correlated

Recap:
- (1) The market tends to be over-optimistic and too pessimistic from time to
time. Don’t let this influence what you think the true value of your assets are
instead see it as a business opportunity where you get to deal with a person
who had no idea of what he is doing.
- (2) The Defensive Investor should go for a diversified portfolio of stocks and
bonds where stock stocks category consists of primarily low priced issues
- (3) The enterprising investor should also aim for stocks with lower price
tendencies. If he can find a company that is trading below its Networking
Capital he have found his El Dorado.
- (4) An Intelligent Investor should insist on a margin of safety when acquiring
an asset
- (5) Risk and reward are necessarily correlated.

One Up on Wall Street Summary (Peter Lynch)

1. Why the Individual Investor can beat the Pros
2. If you like the store, chances are you’ll love the stock
3. The 6 categories of Stock Investments
- Slow Growers (Usually large; +1-4% growth/year; bought usually for
dividend; Lynch doesn’t like this category of stocks too much as he thinks that
if a company aren’t going anywhere fast neither will its stock price)
- Stalwarts (Inbetweeners ; +10-12% growth/year; under normal conditions you
want to sell these companies off if they may a quick 30-50% gain
- Fast Growers (Aggressive new enterprises;>20% growth/year but priced
thereafter so be careful with your assumptions)
- Cyclicals (Companies whose revenues and profits rise and fall with the
business cycle typically the produce services and/or products that the
consumers will postpone consumption of in times of financial uncertainty.;
Timing is everything here, if you can identify early signs of a booming or
busting cycle, you’ll have the advantage)
- Turnarounds (Potential Fatalities; companies with declining earning and/or
problematic balance sheets. If the company doesn’t go down and instead

2 Expected Growth of Earnings in the next 7 – 10 years

 manages to flourish once again, stock owners are rewarded thereafter. An
interesting characteristic about Turnarounds, is that their ups and downs
aren’t as related to the market in general as the rest of the categories. A
situation where a company has gotten a temporary bad reputation is usually a
profitable turnaround case.)
- Asset Plays (Situation where the value of the company indicates that the
market has missed out on something valuable that the company owns are Asset
Plays; Such undervalued assets could be: real estate, patents, natural resources,
subscribers or even company loses (as these are deductible from future
earnings; Search for companies where the value of the assets were higher
than the market cap of the stock)

4. 10 Traits of the Tenbagger

- Company name is dull or ridiculous (such companies tends to be overlooked)
- It does something dull
- It does something disagreeable
- Institutions don’t own it, and it’s not followed by any analysts.
- It’s depressing (The burial company Service Cooperation International is a
classic example)
- The company’s industry isn’t growing
- It’s got at niche (Companies with moats3)
- It has reoccurring revenues (The product is a subscription or something that is
consumed so that the customers are forced to return for more)
- Insiders are buying
- The company is buying back shares (Lynch prefers share buybacks for
dividends)

5. 5 Traits of the Reversed Tenbagger

- It’s in a hot industry (competition is a bad omen for profits)
- It’s the next something
- It’s diworseifying (if the company is acquiring companies in unrelated
industries, stay away)
- It’s depended on a single customer
- It’s a whisper stocks4
Recap:
- The individual investors can beat the pros at their own game because the game
is rigged in the favor of the amateur.

3
a business' ability to maintain competitive advantages over its competitors
4
 - Use your consumption habits and your 9-5 to identify investing opportunities
in companies where you have an edge over the rest of the investing
community.
- All investment opportunities aren’t created equal.

The Most Important Thing (Howard Marks)

1. Risk: Understand, Recognize and Control it
- Riskier Asset doesn’t necessarily provide higher rates of return
- The most important thing is controlling risk
- Pay attention to risk
- Control risk by figuring out what an asset is worth, and compared that to what
it costs
- Insist in a margin of safety
2. Be aware of cycles
- Think about where the market is at right now
3. Mind your psychological influences
- Stick to the concepts of intrinsic value and margin of safety.
- Be greedy when other are fearful, and fearful when others are greedy.
- Avoid psychological errors by focusing on the fundamentals.
4. Don’t be a sheep in a herd
- To buy when others are despondently selling and to sell when others are
euphorically buying takes the greatest courage but provides the greatest
profits.
- Being a contrarian is not an easy task
o Apply second level thinking: (What do my peers miss?; Requires both
knowledge and confidence)
o Stamina and Conviction
- Zoom out and use the movement of the herd to your advantage.
5. The Role of Chance
- Randomness contributes to – or wrecks – investment records to a degree that
few people appreciate fully
- An investment decision can never be judged on its outcome alone.
- Anyone who finds investing easy is stupid.

Warren Buffett: The Snowball (Alice Schroeder)

1. The Power of Compounding Income
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2. Be very Skeptical of New Paradigms
- Be motivated ONLY if:
o Interest rate remain low or go even lower
 o Share of economy that goes to investors increase
o Economy starts to grow faster
3. Stay within your circle of competence
- You are investing on a business not on a stock
4. Use a margin of safety
5. Invest where there is a toll bridge

Interpretation of Financial Statements (Benjamin Graham)

1. Understanding the Income Statement and the Balance Sheet
- Income statement (Focuses on the revenues of a firm and its expenses during
a specific time period, normally quarter and year)
- Balance Sheet (Shareholder’s Interest = Assets – Liabilities)
2. Industry Specifics (all specifics differs from every industry a bad value in industry
A doesn’t mean a bad value in industry B)
- Net Margin = Net Income / Revenue
- Current Ratio = Current Assets / Current Liabilities; <1.0
- Price to Book Ratio (P/B) = Market Cap / Total value of Assets or Liabilities
3. Watered Stocks
- Shares of a company that are issued at a much greater value than its underlying
assets, usually as part of a scheme to defraud investors.
- Little to no importance at all should be given to the part of assets on the balance
sheet that are referred to as intangibles.
- It’s the income statement that reveals the real value of assets, not they’re
arbitrary figures in the balance sheet. Inflated numbers in the balance sheet
may cause problems in the future for the investors, as the company might be
forced to write down the value of these inflated assets which will result in
higher depreciation, which affects the net income of the company negatively.
4. The Liquidation Value of a Firm
- Book Value = Total Assets – Liabilities; Book Value > Market Cap is a very
interesting opportunity
- Assets of a company can be watered (overvalued)
- Guidelines in using Book Value Approach:
o Current Assets > Fixed Assets
o Assets will probably be valued lowered than market value
o Characteristics of Assets must be considered
5. Expected Returns of the Quantitative Investors
- Filter-out companies based on quantitative (financial statements and ratios),
and qualitative (market trends, competition, scalability and so on) approach.

Trading for a Living (Dr Alexander Elder)

1. Three Pillars of Trading
- Psychology; Market Analysis; and Money Management
2. How to keep your emotions in check
- Be realistic
- Keep a diary of your trades
- Set-up rules before entering
- Stop trading
- Don’t count money
- Practice sound money management
3. One Indicator to rule them all
- Long-term indicator - Moving averages, MACD, On-balance Volume,
Directional System (useful for identify and catching trends. It is usually
profitable to trade in the direction of these.
- Oscillators – Stochastics, rate of change, force index, elder ray, etc (useful for
identifying turning points. It is usually profitable to trade in the opposite
direction of these.
- There is no one indicator to rule them all, different indicators are used for
different purposes and in different situation, and it often pays to combine
them.
- 3 Rules of Thumb:
o Exponentials are better than normal averages
o Watch related markets
4. Triple Screen Trading System
- Applies 3 different tests to every trade:
o Market Tide (Identify long term trends by analyzing, for example, the
slope of a weekly MACD histogram.)

Enter only in the same direction as this indicator

o Market Wave (Identifies waves that go against the tide. You want to
time your entry well, even when going with the trend, otherwise, you’ll
risk being stepped out by your stop quickly. Use an oscillator such as
the two day exponential moving average over force index, to identify
good opportunity. Look for lows in the oscillators for buying
opportunities and highs for shorting opportunities)

o Intraday Breakout (Identifies ripples in the same direction as the tide. It

is a technique of entering, and when buying, it’s called trailing buy stop,
and when shorting trailing it’s called trailing sell stop. For buying, when
screen 1 and 2 allow for it, place a buy order one tick above the high of
the previous day. Buy only if the price if today’s price goes to that point,
or higher. Place a stop at the low of the previous day.)
 o Summary of Triple Screen Trading System

5. Money Management 101

- Survival (This should come first.
o Rules to ensure this:
 NEVER RISK MORE THAN 2% OF EQUITY IN A SINGLE
TRADE, this includes commission by your broker and slippage
when entering and exiting the trade
 Enforce a Stop-Loss
 Move the Stop in the direction of the trade NEVER and against
it

- Steady Returns
- High Returns

Trade Your Way to Financial Freedom (Van Tharp)

1. Trading that Fits
- How much money do you have?
 - Managing other people’s money?
- How much time do you have?
- How much money do you need?
- Build a system that fits your knowledge, character and situation
2. The Notion of R
- Cut your losses short, let winners run
- Always predefined risk (R) and express the expectancy of a system in multiples
of this
- Set-up an automatic stop-loss (% of your equity at max)
3. Exiting Techniques
- Exits are way more important than entries
- Build an exit strategy that matches your personality
- 3 Exiting Techniques
o Percentage Exits (Step-out at a 7-8% loss)
o Time Exit
o Volatility Exit
- Use an exiti ng system that maximizes the expectancy of your system, but
always remember that it must fit your personality.
4. Opportunity
- A system with a high expectancy per trade and a lot of opportunity can be
highly profitable in the long run.
5. Position Sizing
- Most important part of a system (most overlooked aspect of a trading system)
- How much of your total capital you’re willing to risk at every trade

How to Day Trade for a Living (Andrew Aziz)

1. Stocks in Play (Trading at a high relative volume; they have a fundamental
catalyst, such as an earnings reports, a merger, a major product release, major
contract, etc, etc.; Trading independently of the market and independently of the
market sector that they belong to)
- How to find them (Scanner)
 - Get in quick and get out even faster
2. The 2% Rule
- Never risk more than 2% of your total capital in any given trade, this will allow
for a lot mistakes and still survive. Because there will be time when you are
wrong and times when you need to accept defeat, and get out of the trade.
3. Understanding the Candlesticks
4. The Support and Resistance Strategy
- Don’t make it too complicated
- Support or Assistance Trading (Support means that a stock is showing respect
for a certain price point. If a stock has bounced back up from such a point
before, you can expect it to do so in the future as well.)
- Resistance (Opposite of Support)

o Draw Support & Resistance for your stocks in play.

o Look for indecision candles around the support area accompanied by
high trading volume, buy. Setup your stop-loss slightly below the
support area, on a five minute chart.
o Keep the trade until next support/resistance area
o If there’s an obvious second support or resistance area, you may sell half
of your position at the first level, move your stop-loss up to break-even,
and save the other half for that second level.
o Mirror this and you get how to short using the resistance strategy.
5. VWAP Strategy
- Means Volume weighted Average Price, and is the most important technical
indicator in learning how to day trade for a living.
- It’s a moving average and it takes to account the volume of shares that have
been traded.
- If the current stock price is currently above the VWAP, it’s a bullish
indication. And if the situation is reversed, it’s a bearish indication.
o See if the stock in play shows respect for VWAP as a Support
o Buy slightly above the VWAP and set up a trailing stop, slightly below.
o Keep your position until the next level of resistance.
o You may sell half of the position close to the resistance level, and move
up your stop-loss to your buying point.
o Mirror for short selling