Thursday, 19 February 2009

The Intelligent Investor


Source: http://www.frankvoisin.com/?p=4

The Intelligent Investor: Introduction
May 6, 2008 – 10:00 pm

I recently started reading Benjamin Graham’s The Intelligent Investor. For those of you who may not have heard of Benjamin Graham, he was a professor at Columbia Business School where he created an approach to investing known as Value Investing, which he first laid out in The Intelligent Investor in 1949. He and David Dodd revised the book several times over the subsequent years before Graham’s death in 1976.

Benjamin Graham taught many of the greatest investors of all time. Among Graham’s students are Warren Buffett, William J. Ruane, Irving Kahn, Walter J. Schloss, and Charles Brandes.
Jason Zweig, a senior writer for Money, Time and CNN, edited and updated the book in 2003 to show Graham’s methodology as applied to events since his death. I will discuss each chapter as I progress through the book, to give you an idea of the key lessons and maybe turn you on to Value Investing.

Warren Buffett, currently the richest person in the world, prefaced the book by saying the following:
“I read the first edition of this book early in 1950, when I was nineteen. I thought then that it was by far the best book about investing ever written. I still think it is.”

How’s that for a reference? When the greatest investor of all time says your book has been the best investment book ever written, you know you’re on to something good!

Graham writes the book with five core principles in mind that should guide all investing:



  1. A stock is not just a ticker symbol. It is an ownership interest in a business with an underlying value that does not depend on its share price.

  2. The market always swings between unsustainable optimism (making stocks too expensive) and unjustified pessimism (which makes them too cheap). The intelligent investor is a realist who sells to optimists and buys from pessimists.

  3. The future value of every investment is a function of present price. The higher you pay, the lower your return will be.

  4. No matter how careful you are, no investor can eliminate the risk of being wrong. You must build in a margin of safety - never overpay.

  5. The secret to financial success is inside yourself. Be a critical thinker with patient confidence. Develop discipline and courage.
I reproduce in part these core principles as they govern the remainder of the book, and the basis of value investing. According to Graham, the success of an investor is based as much on his attitude as it is on the investments.

Graham does not, like many of today’s authors of investment books, promise to teach you how to beat the market. Instead, he says the book aims to teach you:



  • how to minimize the odds of suffering irreversible losses;

  • how to maximize the odds of achieving sustainable gains; and

  • how to have the right attitude and behaviour for achieving your potential.
The introduction is straightforward and helps set the tone for the remainder of the book. Graham uses present-day (at the time he was writing) trends to illustrate the core principles and proper behaviour for an intelligent investor.

Jason Zweig points to the failure of many investors and analysts (including Mad Money’s Jim Cramer) to follow these principles in the lead-up to the dot com bubble. These investors failed to recognize that the tech stocks were not based on real underlying value and instead were being pushed ever higher by irrational optimism. Once the market corrected to represent that real underlying value (or lack thereof), a great deal of wealth was destroyed. Warren Buffett and other Graham disciples never got involved in the tech bubble and escaped largely unscathed.

More Information:
Benjamin Graham Wikipedia Article
The Intelligent Investor Wikipedia Article
Chapter Review Navigation:Introduction Ch 1 Ch 2 Ch 3 Ch 4 Ch 5 Ch 6 Ch 7 Ch 8 Ch 9 Ch 10 Ch 11 Ch 12 Ch 13 Ch 14 Ch 15 Ch 16 Ch 17 Ch 18 Ch 19 Ch 20

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