Lessons from the "Intelligent Investor" (part 3)

This is the third post in a mini-series on one of the greatest investment books ever written by a world famous investor, Benjamin Graham. To read the first part of this mini-series follow the link to part one. To read part two.

The Intelligent Investor part 3

This post is part three in a series that outlines some of the key lessons that I took away from reading "The Intelligent Investor".  If you believe that this or any of my posts on this subject have a smidgen of use then you MUST read the "Intelligent Investor". The lessons are invaluable and I will not do them justice here. In this post I will try to outline what you can reasonably expect to earn as a return on your investment and why if you follow Benjamin Graham's value investing technique. I would also like to credit the work of Jason Zweig. His commentary on the "Intelligent Investor" is invaluable.

The Investment Returns Formula

Figuring out what you can expect to earn on your investment is a pretty intuitive formula. Primarily we make investments for a return. Dividends are the return we expect on or capital. The rest of investment return is the nominal growth in our capital. This is the real growth in earnings per share plus inflationary pressure pushing up share prices. So the investment formula is: Return on Investment (ROI) = Dividend return + Nominal growth in Share Price

Dividend Return

According to the Financial Times data files, the FTSE 350 (the top 350 firms by size, listed on the UK stockmarket) currently distributes an average dividend of about 3.35% per annum.

Real Growth

Graham suggested that the long-run average for real growth in the Western World for the last decade is about 1.5% to 2% per annum. To err on the side of caution I would suggest that the long-run average real growth is about 1.5%, a more accurate figure given the fact that we are still emerging from a period of stagnant growth.


The most recent figures for inflation stated that it is currently about 2.9%. This means that for every £100 invested, 2.9% of the growth is purely the effect of price rises.

Return on Investment

If we put all of this data together the Current Return on Investment in the stockmarket is: 3.35% + 1.5% + 2.9%, which equals 7.75%. This is about equal to the generally accepted, long run, average rate of return for investing in the stockmarket (estimates vary between 6% - 8% depending on the level of dividends).

I must emphasise the fact that this is what can be reasonably expected over the long-run. This should mean that you should expect this sort of return over decades, and not necessarily over years! Since this is a long-run average based on the whole FTSE 350, the most effortless way to capture this growth would be with a FTSE 350 equity index tracker. This sort of passive fund tracks the whole market growth of the FTSE 350. More ambitious investors may try investing using some of the valuation techniques as explained in part 1.

For more on this series:

Lessons from the Intelligent Investor Part 1
Lessons from the Intelligent Investor Part 2

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