The Intelligent Investor
by Benjamin Graham,
Jason Zweig (Contributor),
Warren Buffett (Contributor)
Vital and indispensable, this HarperBusiness Essentials edition of ‘The Intelligent Investor’ is the most important book you will ever read on how to reach your financial goals.
The greatest investment advisor of the twentieth century, Benjamin Graham taught and inspired people worldwide. Graham’s philosophy of “value investing” — which shields investors from substantial error and teaches them to develop long-term strategies — has made The Intelligent Investor the stock market bible ever since its original publication in 1949.
Over the years, market developments have proven the wisdom of Graham’s strategies. While preserving the integrity of Graham’s original text, this revised edition includes updated commentary by noted financial journalist Jason Zweig, whose perspective incorporates the realities of today’s market, draws parallels between Graham’s examples and today’s financial headlines, and gives readers a more thorough understanding of how to apply Graham’s principles.
Benjamin Graham (1884-1976) began his career as investor in 1914. The Intelligent Investor is a compilations of the lessons he learned as a young investor who flourished after the financial crash of 1929.
Purpose of the Book
Graham writes that he aims to produce a book for laymen, non-experts, a book that will guide them in adopting and executing an investment policy. It is not a book about analyzing securities, it is about investing at a more abstract level (although he will reference securities occasionally to make a point).
And, he proposes to explore the historical patterns of financial markets. As Graham says, if you plan to invest intelligently, you must know how various bonds and stocks have behaved in different conditions over the years.
Though it’s an investing book, Graham places a lot of emphasis on psychology and temperament. A great investing strategy won’t succeed in practice if the investor doesn’t have the right temperament.
Who is it for?
- Anyone who wants to invest, but doesn’t want to risk losing it all
- Investors who want to improve their performance
- Anyone who wants be able to control his emotions in order to put all energy into investing
Investors versus Speculators
The second topic compares investors and speculators (also called traders by Graham). Of the speculators, he dismissingly says, “In our own stock-market experience and observation, extending over 50 years, we have not known a single person who has consistently or lastingly made money by thus ‘following the market.’ We do not hesitate to declare that this approach is as fallacious as it is popular.” He also takes on the notion that dollar-cost averaging is a sure way to riches, pointing to a famous investor and businessman of the 1920s whose advice to do so turned out to be very wrong after the passage of 20 years.
Overall, Graham is making the point that there are no free passes, that investors must not only know about stocks and bonds, but must understand how they have acted and interacted over the years. It’s an interesting point when considered from a 2018 perspective: the bull market has gone well past its typical five- to seven-year span, and bonds have almost disappeared from the radar of most investors. One further point, in the first pages of the introduction he warns readers that his is not a book about making a million dollars.
Defensive and enterprising investors
Graham distinguishes between Defensive Investors — investors who are passive and will be satisfied earning the average market return — and Enterprising Investors — who are willing to put in the work to try to beat the market. Graham believed most people are not temperamentally suited to be Enterprising Investors and recommended the vast majority of us be Defensive.
He goes on to challenge the idea that the art of successful investing lies in finding growth industries and identifying the most promising companies within those industries. From this point, he goes on to offer “two morals” for readers:
- “Obvious prospects for physical growth in a business do not translate into obvious profits for investors.”
- “The experts do not have dependable ways of selecting and concentrating on the most promising companies in the most promising industries.”
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Graham is embarking on a voyage of what we now mostly call “behavioral finance” many years before that idea became embedded in standard investment advice. He introduces us to a historical perspective on securities, pointing out that while stocks may be this cycle’s flavor, it’s quite possible bonds may be the flavor of the next cycle. For 2018, it is a reminder that stocks may be replaced by bonds in an upcoming cycle.
While his principles remain intact cycle after cycle, his application of the principles needs to change to suit the seasons, so to speak. Like the rest of us, Graham is influenced by the times and the book often reflects the events of the early 1970s. Similarly, Zweig’s commentary (his edition was published in 2003) reflects the lead-up to and consequences of the dot-com crash. And, we read it with the mindset of people living in 2018.
Graham shares a great deal of wisdom that is applicable to both styles of investing. I’m going to share a few of my favorite insights first, then distill the key points of Graham’s (and Zweig’s) tactical advice for the two types of investors.
“The Intelligent Investor” is easy to read and contains the key kernels of value investing. I encourage readers of this article to read the book; it is available at many booksellers.