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The Intelligent Investor, Benjamin Graham


The Intelligent Investor
by Benjamin Graham,  published 1949, last Revised 2003
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First published in 1949 when investing in stocks were synonymous with speculation and “gambling” – and when books published on the stock market were few and far between – “The Intelligent Investor” has amazingly withstood the test of time and till today, remains the definitive “bible” of value and sound investing.  Warren Buffett calls it “… the best book on investing ever written.”  Yours truly have read the book more than four times over.  The book has also sold over a million copies since it was first published, and sales are still going strong.

And yet, “The Intelligent Investor” is not without its share of detractors.  For example, many professional money managers regard the book's concepts as “basic,” or worse yet, unworkable in today's “institutional model” – a model where “guaranteed” and steady inflows into equities from global pension funds, sovereign wealth funds, company buybacks, and retail investors have moderated the volatile cycles of yester-years.  A prominent hedge fund manager (whose hedge fund operations have “blown up” twice in the last decade) even went as far as calling one of Graham's value investing methods (that of buying a company for less than its net current asset value) “ridiculous” in today's environment.

But like most typical detractors of Benjamin Graham's teachings (incidentally, the performance record of the vast majority of these detractors will never come close to Graham's impressive record), their complaints about the book is misplaced.  In my humble opinion, there are three major reasons why “The Intelligent Investor” is as relevant as ever, if not more:

  1. The teachings within “The Intelligent Investor” still forms the foundation of all types value investing practiced in the world today.  To get a sense of how the concept of “value investing” has evolved (Graham's fundamental tenets are still very much applicable today) over the last 60 years, it is imperative for investors to go back to the true source.  Moreover, the book's teachings are easily accessible to both the lay investor and the professional investor alike.

  2. Like the vast majority of the general population, many professional investors are not immune to temporary lapses in investment discipline.  Having a copy of “The Intelligent Investor” sitting on your desk or the nearest book shelf is a great antidote to such lapses – especially in trying times such as what we are currently experiencing (October 2008).

  3. Benjamin Graham – aside from other investment giants such as Philip Fisher and Gerald Loeb – remains the only figure who was actively invested in the stock market during the 1920s and 1930s, and that have lived to write about it.  While the probability of another “Great Depression” scenario occurring in our lifetimes is very low, it is not outside the realm of probability.  As demonstrated by the global financial crisis over the last 18 months, the global adoption of capitalist systems can be very destabilizing – much akin to the boom/bust cycles of the 19th century.  As I am writing this review (October 12, 2008), it is clear that the modern “institutional model” of steady inflows into global equities has broken down.  No doubt, Graham's experience and teachings remain as relevant as ever.

The primary purpose of the book, according to Graham, is “to supply, in a form suitable for laymen, guidance in the adoption and execution of an investment policy.  Comparatively little will be said here about the technique of analyzing securities; attention will be paid chiefly to investment principles and investors' attitudes.”  The first ten chapters do just that – with discussions on topics such as inflation, stock market history, creating an appropriate investment policy to suit one's temperament, and market fluctuations/cycles.  Chapter 8, entitled “The Investor and Market Fluctuations” is an especially good read for our subscribers, as it pertains to the dangers of stock market timing and forecasting (there is even a page devoted to the Dow Theory).  The second half of the book – chapters 10 to 20 – provides a brief overview of security analysis, such as the importance of sound, fundamental analysis, dividend policy, as well as examples of sound investments.  By far the most important chapter in the second half of the book is Graham's famous “margin of safety” concept – which is central to managing risk in an investor's stock portfolio.  Throughout the book, Jason Zweig – senior Money editor – provides his own colorful commentary to each chapter, overlaying Graham's concepts with more recent examples, primarily those that occurred during the 1990s.

Graham's messages in the “The Intelligent Investor” are obvious: Practice risk management (through the “margin of safety” principle and diversification), know your own temperament, and educate yourself in the ways of the stock market before putting a dime into stocks and other risky financial instruments.  That Graham's basic concepts and messages were conceived during the late 1940s – and remain as relevant as ever – says a great deal about not only Graham's vision, investment prowess, but his character as well.

 

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