The Intelligent Investor by Benjamin Graham

[hodedofome]

Benjamin Graham was a professor, investor and money manager who is most famous for writing The Intelligent Investor, and for his most famous disciple - Warren Buffet. He passed away in the mid '70s, and this book was originally written in the '50s. Graham updated the book every few years or so to keep up with current market conditions and recommendations.

The Intelligent Investor is usually the first book given to a new investor, especially someone who seeks to be a value investor. It is directed towards the individual investor. Two investors are written to: the defensive investor and the enterprising investor. The defensive investor would be considered 'most people' these days. The strategy he describes would most likely be replaced with index funds in today's world. Essentially he recommends anywhere between a 75/25 to 25/75 stock/bond portfolio, depending on the investor and the current market environment. He recommends only investment-grade bonds for the defensive investor and high-quality companies with a long track record and are not too expensive.

For the enterprising investor he gives a few quantitative strategies to screen for stocks that are both cheap and good, but mostly cheap. He recommends 'diversified' portfolios however diversified for him could be only 10-30 stocks. Some of the strategies (like buying stocks that are selling for less than their cash balance!) are actually very profitable, but only come around after serious bear markets (like the '30s-'40s, the '70s, and '08) and cannot be relied upon on an ongoing basis. But overall he generally gives the theory behind value investing and the book is the foundation for pretty much all value investors out there.

Graham can be considered the father of value investing and it would be in your best interest to read the book. Even if you just stick to index funds, it's a great idea to get into the value investor's 'mindset' and always be looking for deals on good stuff. The opportunities don't come around often, but when they do, it's time to pull the trigger.

[clarkfan1979]

I read this book last summer and was very impressed. Ben Graham gives many examples of how most people are irrational when it comes to investing. I need to read it one more time next summer. There are a lot of charts and some technical language. However, the concepts in between are easy to understand. 

As far as I know, Ben Graham was a professor in business/finance. He did not study human behavior. However, his gut instincts about human behavior applied to investing are consistent with the science of human behavior. MMM had a post on Dan Ariely. I am also familiar with the science because I studied it for 7 years in grad school. It was so impressive that his judgments were so accurate as a business person just making estimations based on what he observed. I don't think most of the science on behavioral economics existed when he wrote the book for the first time. As a result, I strongly believe that he was ahead of his time.

I can't wait to read it again next summer.   

[Money Badger]

Thumbs up to this classic (started a thread and then found this older one).   If you can't beat Buffett/Munger's track record, then join 'em and read this one!    This one's not a short or easy read by any means, but after re-reading key parts and really studying the key concepts, it pays off on better risk vs. reward decisions on when/how/how much to invest.     And it will scare the ever lovin' hell out of you about key current stock markets' historical patterns and relative valuations (as of early 2015) but that's another topic for another section...

Even for those of us who mostly set things on auto pilot and self-manage through simple ETF fund portfolios, this will make you appreciate value situations when markets overreact and increase your "margin of safety" investing.   There are many other tools to use in investing of course and value investing has it's drawbacks if not used carefully, but it's a good tool for a portion of your portfolio to search the bargain bins to buy quality on sale and cash in on historical over confidence. 

[forummm]

I'm about halfway through. I've read that Graham later said that a lot of the advice and techniques he used are no longer very useful (even at the time of his death) because the markets changed and other people began to exploit them. But I don't have specifics on what exactly he meant by that. Given the number of people who've read the book and the ease of implementing many of his techniques with computers, I would be pretty surprised if anything (other than broad advice) that he said in the book could be viable to exploit something obviously undervalued. Still, it seems like a good book to read so far.

[WildJager]

While value investing today may be more challenging because, as has already been said, the knowledge is no longer new and has been optimized, I still made some fascinating revelations when I read it.  Graham's explanation that the inherent value of a company (assets) does not correspond to the stock price (emotional) really struck a chord in me.  He said the closer a company stock price was to its asset worth the better the value of the company relative to its peers (assuming the company is descent and will last).  Therefore, that's a great time to invest.

That was the first time I realized that even if stocks do poorly, there is still inherent value in companies that actually have assets (they can sell them!).  Therefore, even during awful bear markets like the dot.com bubble or subprime bubble, large asset based companies will most likely survive.  That gave me confidence in the concept of blue chips and drove my asset allocation towards more long range index funds. 

And then I learned about John Bogle and I could have just saved all of that time from the get go...

[forummm]

Good point WildJager. These are really profound insights into the markets. It's really helpful for me to keep that perspective.

[markbike528CBX]

 Compared with Graham and Dodd's "Security Analysis" or most any financial book, it is very readable.

Intelligent Investor made it clear how very hard work it is to select good value securities.
The background work is really tedious, and you never know if success/failure is a result of the work or just luck.

Since I'm fundamentally a lazy person, this book converted me to index funds. 
I don't have time or the energy to do the work required for real stock picking.

The book is great background, and pointed the way to my "value stock" orientation.

......Even for those of us who mostly set things on auto pilot and self-manage through simple ETF fund portfolios, this will make you appreciate value situations when markets overreact and increase your "margin of safety" investing.   ....

+1 well said.

[piccione88]

Forumm I just started reading this as well. I also heard, and had fears of the book being outdated. I would reccomend getting the revised edition. In it Jason Zweig provides footnotes on each page, and commentary after each chapter. On top of modernizing the investing techniques, it is really helpful for a novice like me. He gives a lot of real world examples that add context to theories I don't really grasp, and allows me to see how principles still carry over.

[forummm]

Forumm I just started reading this as well. I also heard, and had fears of the book being outdated. I would reccomend getting the revised edition. In it Jason Zweig provides footnotes on each page, and commentary after each chapter. On top of modernizing the investing techniques, it is really helpful for a novice like me. He gives a lot of real world examples that add context to theories I don't really grasp, and allows me to see how principles still carry over.

I actually do have the revised edition with Zweig's commentary. It does help update and relate it today. I had to take a break from it for a bit, so I haven't gotten into the security valuation parts of it that may be more outdated (or not as useful in the current environment).

[Indexer]

I just got done reading it.  Its a very good book.

It reinforced a lot of my current thoughts, and was a stark reminder to avoid 'hot' stocks.  I did like the part about margin of safety, and how he compares the earnings yield(E/P) of stocks to bonds to give you an idea the maximum you should spend on stocks.

[hodedofome]

Most people can just read the 2 chapters on Mr Market (I believe chapter 8 ) and the one on margin of safety and get the important stuff out of it. Those two chapters are the best at getting you into the investors mindset, which is more important than the details of how to find good stocks and bonds in the other chapters.


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[deek0146]

I'm currently halfway through reading the original 1949 edition. Did anyone else notice the somewhat old fashioned attitude towards women? I wonder if that has been removed from later editions.

[Chris Pascale]

Did anyone else notice the somewhat old fashioned attitude towards women? I wonder if that has been removed from later editions.

Like this little tid-bit:
"Marla wanted to take over the 4th controller as we stormed the elf kingdom, but then I was like, 'how are you gonna do that, toots, and make me a sammich?' She got the picture" (Graham, pg. 55).