Below are my reflections and answers to the discussion questions posted at Modern Graham for chapter 17 – Four Extremely Instructive Case Histories – of the Intelligent Investor written by Benjamin Graham.
1. What quote from this chapter do you think best summarizes the point Graham is making?
“Moral: Security analysts should do their elementary jobs before they study stock-market movements, gaze into crystal balls, make elaborate mathematical calculations, or go on all-expense-paid field trips.”
2. Do you think there are any exceptions to the rules that Graham mentions?
As always, I think there are exceptions. But, I also think that following the rules mentioned by Graham and always keeping some kind of a skepticism when looking at different kinds of businesses should help investors stay away from the worst pitfalls.
3. What steps have you taken to ensure you don’t buy companies like the ones in the chapter?
As a general rule, I do not invest in IPOs. I read quarterly and annual reports (for a company and its competitors). I also look for businesses that have been able to show high returns on invested capital (or high returns on equity achieved with no or low use of leverage) over the last 5 to 10 years, with consistent generation of free cash flow. Also look for a margin of safety, i.e., a reasonable price compared to intrinsic value among other things. Besides the financial analysis and valuation part, I try to be as humble as possible and to recognize the danger of behavioral biases that affects the decisions to buy (and sell) a business.
4. What did you think of the chapter overall?
Enjoyed the chapter since I think it was an interesting read due to the case studies Graham discusses and applies his analytical framework to.