on August 11, 2003
When I first came across the first edition of this book in my local library in 1959, I was a teenager. Back in those days there were only a handful of books about the stock market. And I've read all of them during my junior high and high school years.
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.
on July 28, 2006
This book is light reading compared to Ben Graham's seminal tome, Security Analysis. It's easier to read, and shorter. It's also more up to date. Highly recommended for investors of any stripe, value or growth. The appendix, from Warren Buffett's speech at Columbia University is particularly entertaining, as he debunks academia's love affair with efficient market theory. Jason Zweig, an obvious Graham disciple, does a fantastic job bringing the book's principles to life through modern examples. The only grating thing is his constant derision of brokers or anyone that actually gets paid to manage money. (full disclosure: I'm an analyst now and was a broker for 10 years).
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. "
on July 13, 2003
Graham's writing is clear, concise and level-headed. He warns against unreasonable financial expectations and proceeds to explain his theories in sufficient detail to be worthwhile, without being over the comprehension of the layman interested in investing.
The book is lengthy and "solid", as opposed to other finance books that hope to explain investment in 100-200 pages. Topics include stocks vs. bonds, inflation, security analysis, and margin of safety (Graham's analysis of the assets of a company in relation to its debt). Zweig's commentary is useful, with footnotes to clarify historical references and, occasionally, demonstrate instances where Graham's predictions proved untrue. At the end of each chapter, Zweig uses recent (up to early 2003) examples of Graham's concepts to make things clearer to modern readers. (Graham's text itself is his 1973 revision to the original 1949 edition.) Also helpful are numerous references to online articles at various sites (I cannot yet vouch for these links' present state.)
Based on my understanding, I highly recommend this edition to anyone interested in this book. I feel that I gleaned more from this annotated edition than I would have from the original, without having to conduct additional research.
on January 13, 2007
Since I am retired and trying to manage my own portfolio, I figured this would be the book to read. I know how to pick 4 or 5 star funds and diversify well enough, but I don't have enough theory or any formal financial background at all. I was looking for a classic book on the subject, one that a financial novice could understand, and decided to read this one.
Benjamin Graham is known as the Father of Value Investing and was the mentor of Warren Buffett, the most successful investor of all time. Warren Buffett called the Intelligent Investor `the best book about investing ever written.' He believed in defensive, value investing, and famously summarized his philosphy as follows: "An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative."
I found that `value investing' means that you buy only something that is being sold below its actual value, like buying dollar bills for 40 cents each, he said. One should take the quantitative (statistical) instead of the qualitative (predictive) approach, since no one can forecast the future anyway. Look at what a security is really worth in a business-like way, just like you would do for any purchase, ignoring what others might think. Do your homework is what he is saying!
According to Graham, almost everybody, me included, does investing wrong. You are supposed to buy low and sell high, but most folks buy when the price is going up and sell when it is coming down. `Mr. Market' is very emotional and encourages stampedes toward whatever looks good at the moment, and away from investments that seem spent. This very act of buying and selling creates updrafts and downdrafts in the market which causes disparity between what the price is and what the price should be for a given investment. Eventually the true value of an investment comes to fore when things settle down. The maxim he uses for this is: the market is a voting machine in the short run and a weighing machine in the long run. The investors `vote' for an investment which drives the price up; later, the investors find out what the investment is really worth, and the price settles into it's real value. He cited convincing examples in the tech-bubble era of the late 90's where stock prices ascended to ridiculously high levels and then came crashing down to almost nothing, and their stock shares became like Confederate money, worth only slightly more than the paper they were printed on.
In general, his theory runs counter to the speculative, get-richer-quick investing that seems standard for most of us. Stay away from gimmicks like market-timing and formula investing (chasing after perceived patterns in the market). Be boring, he says, and go for something steady and sure. Don't try to beat the market; just try to keep up with it. If you don't want to do the necessary homework, buy index funds. He touts ignored `secondary' or `unsexy' companies, the ones that don't have big names, or ones that produce boring products. It was interesting that when Graham was asked why he was unafraid of losing his edge by proclaiming value investing, he joked that his books are' the most over-read and under-used books on finances ever written'. If, indeed, everyone did value investing, there would be no bargains left out there. We are talking about something that works, but that no one wants to use!
A cornerstone of the defensive investing philosophy involves building in a good margin of safety by buying investments at as far below actual worth as possible. He also talks a lot about managing risk by patience and self-control; he says: `Don't just do something, stand there!' In some sense, this book is more about the person making the investments than the investments themselves. In essence, if you want to know what risk is, look in the mirror! In other words, it's not about how much risk you can tolerate; it is about how much investigation you are willing to do. He mentioned Pascal's Wager as a graphic example of how to think of the consequences when taking on risk - - - if one wagers as to whether God exists or not, he is better off betting He does; otherwise, though the rewards could be a little better, the consequences could be eternally worse! (This was, to me, a fairly heavy-handed but instructive parallel.)
Watch out for the shenanigans of the accountants when you read the financial reports. Words and phrases like pro-forma, nonrecurring charges, special charges, and good will could be euphemisms for a smoke screen. I also learned the phrase `kitchen sink accounting', which puts all possible losses into one year, which distorts the picture but gives good tax results for the company. The lesson is to not ignore the footnotes and to read the statements to the end.
Consistent with his philosophy, Graham does not believe in the prevalent Efficient Market Theory (or EMH), which says that investments have the correct prices because there is so much, widespread information readily available on every investment. He basically believes, and gives many good examples, that the public is not interested in digging into the nuts-and-bolts financial information, but is only interested in what is popular. In a word, an investor needs to make sure he understands what he is investing in, and make business decisions instead of emotional decisions about it. He says that the finances are really not very complicated, and it's more about character than brain.
The first edition of this book, written in 1950 and was revised several times before Graham died in 1976. Since it was a little dated as far as market history is concerned, Jason Zweig wrote commentaries on each chapter to bring it into the 21st century. Graham, as a product of his day, talked mostly about stocks and bonds, and less about funds, and he over-emphasized, in my opinion, the importance of dividends. Zweig says that diversity has replaced value today. Also, dividends are no big deal today for most investors since the total return (NAV + dividends) is what really matters. Another thing is that Graham lived through the Depression and saw that it took 25 years (to 1954) for the market to reach the levels of pre-Crash 1929; this might have made him defensive.
I'm glad I read the book. It gave me perspective on how the market works, though I'll still stick with diversity over value, especially since I invest almost entirely in funds. He did not have to scare me off on individual stocks, but he did convince me to do more homework and to try to be more business-like in my financial decisions, and - - - to look in the mirror first.
on June 29, 2004
I was deciding between getting this edition or the more expensive hardbound edition (which does not contain the Jason Zweig commentaries). I naturally thought, why not go for the cheaper one and get the commentary for free? After all, I could just ignore the commentary if it doesn't help.
Bad bad choice. It was like choosing between a Beethoven CD and the same CD but with free shrieking commentary by a Damon Wayans movie character during and in between each symphony.
Zweig's writing when inserted between Graham's is like the annoying paperclip in MS Office, except there is no way to turn it off. He's in the footnotes (virtually every page!), he's in between every chapter. Open the book at a random page, and most likely you'll open it to a Zweig page.
The content and style of his writing feels condescending and contrasts so much with Graham's. When reading Graham you have elegant timeless prose by a humble, wise man who makes you feel he is sincerely interested in your well-being. By contrast, Zweig feels like someone who wants to impress you with his word plays, and puns. He really should have attempted to recede into the background and limited his voice.
I would recommend everyone to just buy the hardcover edition.
Buy Graham only. If you cannot read Graham, Zweig will only help marginally, and you still need to verify his comments against other contemporary Graham commentators. Get another book. If you *can* read Graham, then you do not need the commentaries in this book. Any questions you may have can be answered in thousands of sites on the net.
on July 10, 2007
As the title of this review indicates, do yourself a favour and buy the original Ben Graham version not this one with Zweig.
Let me start by saying that Warren Buffett had nothing to do with this book, the preface and appendix are extracts from the Financial Analysts Journal and transcripts of a 1984 talk at Columbia University.
The orignal Ben Graham material is mostly intact in each chapter. It is not full of calculations, so it is not difficult to read, but it is a slow and deliberate building of an argument on investing. As such people who are interested in the book for its investment advice will find it logical and sensible. Zwieg however has decided that his own footnotes are far more valuable than Graham's so he has moved Graham's footnotes to the appendix and put his notes under the original text - which is why I say that the chapters are "mostly intact", but not completely.
After each of Graham's chapters, Zweig has included a commentary chapter of his own. These chapters and his footnotes will give you the feeling that "a high school science student was commenting on the PhD work of a professor". The commentary is a weak summary, mostly devoid of any insight and sometimes making statements about what Graham "would have said", which is nothing short of egregious.
Overall, I give Graham's original chapters five stars and Zweig's additions one star, resulting in an average of 3 stars.
This book is a clear example of someone jumping on the bandwagon and trying to associate himself with prominent people like Graham and Buffett. So do yourself a favour and buy the original Graham version, that way you won't feel like Zweig suckered you into buying his book, using Graham's name.
Link to the orignal version: The Intelligent Investor: The Classic Text on Value Investing
on November 27, 2003
Graham is without doubt an intelligent man whose insights into investing are worth reading. This book, while dated in its examples, is not dated where it counts - intelligent investing philosiphies. The essay written by Mr. Buffet at the end of the book is also very informative and also enjoyable to read.
However, as always with such books there comes a caveat. Mr. Zweig's commentary through the book is not of the continuously high standard with which Graham writes. It disrupts the flow of the book and detracts from the overall experience of reading Graham's fine work. My suggestion is to ignore Zweig's commentary and footnotes until you find there is something that you don't understand or want further thoughts on. Zweig provides a few cutting insights, but only a few.
Dispite this the books value is not diminished - it's well worth your time and your money.
on June 24, 2007
This is the 4th edition of Benjamin Graham's landmark book for the investing public, called "The Intelligent Investor." However, it's been "updated" for 2003 by Jason Zweig, a senior editor and writer at CNN/Money, and overall I think this detracts from, rather than improves, the book. I rate Graham's book 5 stars and Zweig's contributions get 3 stars: overall, 4 stars.
First off, there are 3 contributors to this book: Buffett, Graham and Zweig. Warren Buffett, the superinvestor who heads Berkshire Hathaway, is frequently pointed out as one of the world's great investors/stock pickers and also as Ben Graham's star student. Buffett's preface to this book consists of 2 pages: a biographical essay he wrote about Graham in 1976, saying nice things about Graham's personal qualities; and a recommendation to pay particular attention to Chapters 8 and 20. (Buffett, incidentally, cannot be honestly said to have been influenced by this book; his bible was Graham's landmark 1940 textbook for the professional security analyst, called "Security Analysis.") So Buffettologists should know that there will be little to interest them here.
Graham's text is level-headed and sane, and makes for wonderful reading. His distinction between speculators and investors, his way of viewing the markets, and his methodical approach to considering the inherent value of investments is required reading. In my opinion, any non-professional who's interested in investing money could benefit from reading it. Enough said about that.
However, Graham's book makes up only about 1/3 of the present volume. The format is the following: Graham writes a 6 page chapter; Zweig pads that chapter out to 8 pages with giant footnotes; and then Zweig appends a 10-15 page "commentary" to each chapter. Now who exactly is Jason Zweig? I'd never heard of him. His qualifications are very different from Graham's and Buffett's; he is a writer for CNN/Money magazine. I don't consider him to be an investment professional.
Unfortunately, this shows in his writing. Whereas Graham's text is even-handed, methodical, and rational, Zweig comes across as hysterical, emotional, and shrill. His annoying habit of flinging superlatives around (he frequently mentions Buffett as "the greatest investor of all time", and calls Graham the "greatest practical investment thinker of all time") is annoying and adds little to understanding. But much worse is his incessant habit of putting words into Graham's mouth. About 3 or 4 chapters in I began to chafe at this. "Who is this Jason Zweig exactly," I thought, "and how exactly does he claim to know how Graham would have analyzed the tech bubble of 1999-2000?"
As I started paying closer attention, I began to feel that Zweig was making comments - under the guise of "updating" Graham's ideas - that Graham himself would never have endorsed. This bothered me. I feel that, in a way, I was baited with Graham's name into buying a book by Jason Zweig, and it's not the book I thought I was buying.
To be fair, Zweig's commentary is often interesting. His commentary on Chapter 12 has nothing to do with Graham's chapter (on analyzing per-share earnings) at all; rather, it is a scathing, well-presented, easily understood, and fairly detailed analysis of certain examples of accounting irregularities that contributed to the tech blowup and led to Sarbanes-Oxley. (I wouldn't be surprised to learn Zweig had written a book of his own about this topic; if so, I may buy it.) But this only further strengthens the feeling, present always, that Zweig is less interested in explaining Graham's text and more interested in pushing his own agenda and ways of investment thinking. Now for the casual reader who enjoys CNN/Money's style and format as their principal source of investment advice, they may truly enjoy and benefit from this. But I wanted to read Graham's historical text as a whole and interpret it myself; Zweig's constant, harping interpolations severely detracted from my ability to do this.
Finally, there is little in the first 10 chapters of this book that has not become near-dogma for the conservative, value-oriented small investor, repeated ad nauseam in the pages of Money, Forbes, the Motley Fool, and elsewhere. The meat of the book is in the last half, where Graham touches - lightly - on issues that the conservative investor may be interested in valuing, and how to do it right. Frankly I was expecting him to go into more depth on these topics, and I will probably be picking up a copy of either The Interpretation of Financial Statements or Security Analysis (the 1940 edition seems to be the consensus pick) to learn more about his thoughts on these matters.
on April 10, 2005
I am just a family man, struggling with a mortgage, four kids, and college tuitions. I bought this book to help myself get more insight into investing as I have received poor investment advice in the past. Honestly, the best part of this book for me was the commentary by Jason Zweig. I would often go immediately to the after chapter commentary, sometimes instead of reading the original chapter, his commentary was that good!
I keep this book by my night table, and reread sections of it, while I work on my portfolio.
First, I just want to say that many of you might find this book boring to read. If that turn out to be the case, you can read the commentary (which uses more relevant and recent examples) for each chapter by Jason Zweig, which is worth the price of the book alone. I got tempted to read the commentary only but I forced myself to read the entire book and I'm glad I did it. Warren Buffett is right, this is the best book on investing ever written, by far. This is one of the reasons in my opinion why Warren himself never write an investment book (plus the fact that it is not easy to explain Warren's intelligent on a paper. Instead just learn from what he does).
Now about the content of this book, it tells you everything you need to know about the investing field (not only stocks, but business in general, bonds, macro economy to some extent, psychological factor of the market, strategy for defensive and speculative investors etc).
Secondly, Warren Buffett highly recommend this book and his favorites are chapter 20 (Margin of safety) and chapter 8 (Investor and market fulctuation). Margin of safety should be the central concept of your investment, and understanding how the market works (and the mood and inconsistencies of Mr Market) should be the second thing that you need to know before jumping into the market.
I also find the chapter 11 (security analysis for lay investor) very educating as it teaches us to value the future of a business (breaking down into 3 area:
1. Long term prospect
2. Quality and conduct of management
3. Financial strength and capital structure
Additionally the comparison of eight companies (chapter 18) very practical and eye opening. I won't spill the content right here but when I read them, it feels like common sense to me, but back (during the tech bubble) then I was involved in several similar stocks that I shouldn't have touched with a ten feet pole.
The bonus chapter "The Superinvestors of Graham-and-Doddsville" by Warren Buffett is a classic reading. This article shows how inefficient the market can be, and argue that most of the time the market is not efficient. I have become a believer that the market is not efficient (after many years believing that the market is very efficient as the business school has taught me)
This book also cover several useful metrics that we can use to value a company in addition to just looking at EPS or PE ratio, such as the ROIC (Return on Invested Capital) etc.
In general, Ben Graham focuses a bit more on capital preservation (shown by focusing on margin of safety, dividend policy, and stocks priced below its tangible book value strategy.) which I think are really important, but one need to understand that there's more to investment than just those things (such as long term groth/the business itself and management) which are also covered in book.
This book would not serve as your investing philosophy, but it should help you create your own investing philosophies. It will help you find what your strength (defensive or enterprising) is and find/form your circle of competence. And as a minimum, this book will increase your confident when dealing with the stock market.
Last but not least, also read "Common Stocks and Uncommon Profits" by Philip A. Fisher and "One up on Wall Street" by Peter Lynch to complement this book.