Book Review: “The Intelligent Investor”, Benjamin Graham

Benjamin Graham is arguably the greatest investment philosopher of all time. He brought structure and logic to the business of security analysis. That is, the discipline of investing in companies via their common stock (i.e., equity) and, to a lesser extent, their debt securities (i.e., bonds). He is credited with founding the discipline of value investing, which is the process of identifying and investing in undervalued equity interests.¹ He was also teacher and mentor to the most successful investor of all time - Warren Buffett. Buffett explains that his secret to investing is simple - he follows the advice of Graham.

To the astounding benefit of you and me, Graham personally outlined his investment philosophy in The Intelligent Investor. Is it is written, as he says, "for the laymen" and is well within the intellectual reach of common folks like you and me.

What advice does Graham have for owners, and buyers, of private businesses? Well, Graham and Buffett primarily invest in publicly traded companies, but they also invest in private companies. And they will tell you that there's no difference in analyzing a private company vs. a public one. In fact, they explain that most buyers of publicly traded stocks err in that they focus their analysis (that is, if they do any at all) on the stock itself rather than the company in which they are buying an interest.

To the contrary, they urge investors to analyze prospective investments as if they were buying the entire company. After all, whether you are buying an equity interest that accounts for a small fraction of ownership, or 100%, you are still betting on the future performance of the company (if you are applying Graham's methods).

True investing is not simply "watching stocks go up and down and jumping in

when you think it's about to go up." Graham's philosophy is disciplined: buy interests in companies (as opposed to myopically buying shares of stock); do so only under certain, very special circumstances; and hold the position long-term.

Here are some other themes in The Intelligent Investor:

Investing is not "trading in the market": Trading based on analytics and/or technical or trend analysis, employs methodologies that are in stark contrast to sound business sense. It is unlikely to lead to lasting success (in investing).

Defensive Investor: If the proceeds of investing will be used to live, retire or serve some other important purpose, then the only logical approach is one that ensures safety.

Keep it simple: Buy only at a price that is very safe. Buy only very high-quality and stable companies with outstanding, stable management. Stay diversified (10 to 15 investments). Hold each investment as long as you logically expect the business (as opposed to the stock) to continue to perform well.

Nobody can predict the future. Not you; not "Wall Street Experts." So don't try, and don't rely on the predictions of others. Be a defensive investor, stick to the keep-it-simple suggestions, and include an ample "margin of error."

Buy companies, not stocks: This way, you'll focus on the intrinsic value of a company - the real stuff that underpins the value of a stock. That is, value based on the balance sheet and income generating performance of the company rather than an arbitrary stock price.

Margin of safety: Absolutely essential in investing. You must not lose principal, so the only prudent thing to do is invest only when there is a healthy margin of safety. In other words, even if your analysis is flawed or the business has some unforeseen problems (and it will), you will not be at risk of losing your investment.

Investing is not gambling or speculation: Investments are endeavors that hold promise, based on solid and thorough analysis, of safety of principal and an adequate return. Endeavors that don't meet these criteria are speculative.

Be willing to be different: To obtain a return higher than the average, you must be different. Follow the masses (even the "Wall Street Experts") and you'll get the results of the masses (poor ones).

Buffett says, "If you follow the behavioral and business principles that Graham advocates, and if you pay special attention to the invaluable advice in Chapters 8 and 20, you will not get a poor result ..."

The strategy outlined in The Intelligent Investor is fairly simple and easy to understand. It IS within the reach of most of us who have some education and experience in business, finance, accounting and investments. If you are looking for a sound investment strategy or a means for analyzing a purchase of stock in any company, here are suggestions from the "Oracle of Omaha" - the wealthiest man on the planet (literally) - who built his wealth simply doing what this book, and his teacher, say. What more do you want?

¹ Financial Analyst Journal, November/December 1976 issue

Note: The edition of The Intelligent Investor referred to in this review is the Fourth Revised Edition dated 1973.