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The Intelligent Investor: The Classic Text on Value Investing Hardcover – Deckle Edge, May 3, 2005
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Among the library of investment books promising no-fail strategies for riches, Benjamin Graham's classic, The Intelligent Investor, offers no guarantees or gimmicks but overflows with the wisdom at the core of all good portfolio management.
The hallmark of Graham's philosophy is not profit maximization but loss minimization. In this respect, The Intelligent Investor is a book for true investors, not speculators or day traders. He provides, "in a form suitable for the laymen, guidance in adoption and execution of an investment policy" (1). This policy is inherently for the longer term and requires a commitment of effort. Where the speculator follows market trends, the investor uses discipline, research, and his analytical ability to make unpopular but sound investments in bargains relative to current asset value. Graham coaches the investor to develop a rational plan for buying stocks and bonds, and he argues that this plan must be a bulwark against emotional behavior that will always be tempting during abrupt bull and bear markets.
Since it was first published in 1949, Graham's investment guide has sold over a million copies and has been praised by such luminaries as Warren E. Buffet as "the best book on investing ever written." These accolades are well deserved. In its new form--with commentary on each chapter and extensive footnotes prepared by senior Money editor, Jason Zweig--the classic is now updated in light of changes in investment vehicles and market activities since 1972. What remains is a better book. Graham's sage advice, analytical guides, and cautionary tales are still valid for the contemporary investor, and Zweig's commentaries demonstrate the relevance of Graham's principles in light of 1990s and early twenty-first century market trends. --Patrick O'Kelley --This text refers to the Paperback edition.
“By far the best book on investing ever written.” (Warren Buffett)
“If you read just one book on investing during your lifetime, make it this one” (Fortune)
“The wider Mr. Graham’s gospel spreads, the more fairly the market will deal with its public.” (Barron's)
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Top Customer Reviews
This latest updated 623-page paperback (the index alone is 33 pages) version updated by Jason Zweig is a welcome addition to this classic. The original chapters are intact, but with footnoted comments by Zweig. Moreover, he provides his own commentary on each chapter contents in a separate chapter following each original chapter. He provides extensive research, charts, tables and commentary that updates the book to the present years. He is not afraid to take on the big guns of Wall Street and show how wrong they were in some of their extremely bullish predictions during January-March 2000, when the market was at its peak.
The first nine chapters cover investing basics that all investors could benefit from. There are many truisms spouted on Wall Street that are not really true. These chapters provide the investor with a realistic picture of how Wall Street works and what investors need to do to come out ahead.
Chapters 10-20 focus strictly on fundamental analysis, stock selection, convertible issues and warrants, and other subjects. Investors who plan to invest directly in stocks should make sure to read these chapters. However, for readers more interested in investing in mutual funds, and in particular index funds, they need not concern themselves with all the detail in these chapters unless they have the time or interest in the subject matter presented.
In conclusion, the combination of pioneer Ben Graham?s original work coupled with Zweig?s meticulous and enjoyable update, make this a remarkable book about investments and investor behavior that every new and experienced investor should read. Of the 500 investing books that I?ve read, this one certainly is one of the greats of all time.
Ben Graham clearly invested in the stock market during a period of hustlers, crooks, crashes, and frauds. Brokers, investment bankers and analysts back then were not much more than fast-talking salesmen. Wait a minute, that sounds just like the way things are today on Wall Street! Things may not have changed as much as we would like to think. Due to his travails as an investor in difficult markets, Ben Graham's investment style evolved into a systematic, logical approach which became the basis for value investing. In "The Intelligent Investor", Graham lays out the foundation of value investing by three introducing key principles: the idea of "Mr. Market", a value-oriented disciplined approach to investing, and the "margin of safety" concept.
The stock market on a daily basis resembles a casino, only without the comfort of free cocktails. Watching the stock ticker is like having a business partner that is totally schizophrenic; Graham calls him "Mr. Market." One day he loves the business and wants to pay a ridiculous price to buy out your half. The next day, all hope is lost, and he wants to sell you his portion for pennies on the dollar. Graham argues that this daily liquidity is an advantage that most investors turn against themselves: (p. 203) "But note this important fact: The true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all; for he would then be spared the mental anguish caused him by other persons' mistakes of judgment." This is profound. It's not a question of whether our stocks will drop; they will: the trick is how we respond to that eventuality.
Ben Graham's Stock selection for the defensive investor.
Graham lays out some important characteristics of "value" stocks. (p. 348). Some of the metrics are dated, but the principles are still valid. Even deep value investing today would seem like GARP investing to Ben Graham. Investors are now more focused on future earnings than they were in his day, and valuations reflect that. Graham recommends:
a. Adequate size of the enterprise (>$100M revenue, old figure)
b. Sufficiently strong financial condition (2:1 current ratio)
c. Earnings stability (some earnings every year last 10 years)
d. Dividend record (uninterrupted payments for at least 20 years)
e. Earnings growth (1/3 increase in per share EPS past 10 years)
f. Moderate price/earnings ratio (P/E < 15x average last 3 years EPS)
g. Moderate ratio of price to assets (price/book < 1 1/2 times)
h. Overall stock portfolio, when acquired, should have an overall earnings /price ratio- the reverse of the P/E ratio - at least as high as the current high-grade bond rate. A P/E no higher than 13.3 against an AA bond yield of 7.5%
Margin of Safety as the central concept of value investing.
This is an investment rule that was written by a man who had been deeply bruised by bear markets. I believe he came up with this by learning from his losses. When the market turns into a storm of feces, like it inevitably will, if the stock has no earnings to rely on, you have nothing to grab onto. You can't make yourself stay in the stock when the price is down. Graham says: (p. 515) "The margin of safety is the difference between the percentage rate of the earnings on the stock at the price you pay for it and the rate of interest on bonds, and that is to absorb unsatisfactory developments". Furthermore he writes: (p. 518) "The buyer of bargain issues places particular emphasis on the ability of the investment to withstand adverse developments. " You can and will still lose money in the market with value-oriented investing, but according to Graham: (p. 518) "The margin guarantees only that he has a better chance of profit than for loss-not that loss is impossible."
So that's it, those are the three basic points of the book, but you should still buy it and read it, it's a very enjoyable experience, Shakespeare for the investing crowd. Despite being a realist, Ben Graham wasn't a total pessimist. Late in the book Graham makes a point that is one of my favorites: (p. 524) "A fourth business rule is more positive: "Have the courage of your knowledge and experience. If you have formed a conclusion from the facts and if you know your judgment is sound, act on it- even though others may hesitate or differ. You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right. Similarly, in the world of securities, courage becomes the supreme virtue after adequate knowledge and a tested judgment are at hand. "