"The Intelligent Investor" by Ben Graham (1894-1976)

The Intelligent Investor is an absolute must read for the serious investor. It was first published back in 1949 and was revised and updated by Graham four times with the latest being initially published in 1973.

It provides the cornerstone to value investing and we believe it is the one of the best investment books ever written.

In its current edition, the words of wisdom Graham writes are interpreted chapter by chapter for us as modern readers by Wall Street Journal columnist Jason Zweig. This is a great help in drawing conclusions from Graham's text which he last updated several decades ago.


The Key Lessons we learned from "The Intelligent Investor"

1. Be an investor, not a speculator

We have written a separate page on this here but the key lesson here is to look to the underlying asset to produce the return for you as an investor not the movement in price of the asset.

This means that over time, increasing earnings and dividends that are purchased at a reasonable initial price should give you highly satisfactory returns in the long run, no matter what the stock market does on a day to day basis.

2. Decide to be either an Enterprising or Defensive Investor

The Intelligent Investor tells the reader to decide if he or she is an Enterprising Investor or a Defensive Investor. Effectively Ben Graham is telling you to realistically examine how much time and effort you are going to put into investing. It is important you define this properly for yourself.

Graham defines a defensive investor as someone who doesn't want to spend lots of time reading through annual reports and regulatory filings. The defensive investor is happy to have a portfolio of high quality stocks that quietly go about their business as the investor gets on with his/her life.

Index trackers were not around in Graham's day but we think a low cost index tracker that is regularly bought (through both the highs and lows of the market) is the perfect tool for a defensive investor. A S&P 500 index tracker means you are buying into some of America's greatest businesses and, over time, should serve you very well compared to other assets.

The Enterprising Investor is defined as an investor willing to devote a lot of time to investing. It is important they have a strong understanding of accounting, have the right temperament for investing, and have reasonable intellect.

The Enterprising Investor aims to outperform the index by looking at special situations (such as arbitrage), buying into certain businesses that sell below working capital, looks at small (or even micro) sized stocks and buys special value situations. The Enterprising investor can also benefit from owning companies that earn very high returns on equity over long periods of time and have strong rates of internal compounding.

Graham shows that an enterprising investor that goes about his/her trade in an informed and disciplined way will have a good chance of outperformance and can expect good results over long periods of time.

3. Learn how to deal with Mr. Market

Ben Graham writes an excellent chapter (8) in the "The Intelligent Investor" titled "The Investor and Market Fluctuations". Here is where Graham insists you must not get too caught up in the daily fluctuations of the market and focus on the underlying securities you own.

In this chapter, he introduces the concept of Mr Market who you can regard as your business partner. Mr Market throws you quotes on thousands of businesses every day and you have the option of dealing with him or not.

Mr Market is a very moody individual who can get very enthusiastic and throw very high quotes and quickly flip to a highly depressed person and offer you far lower prices despite no obvious change in the underlying business.

Graham insists that you need to form your own ideas of the values of businesses you are looking at and then decide whether you want to do business with Mr Market's quoted price.

4. Have a Margin of Safety

Chapter 20 talks about incorporating a "Margin of Safety" into your investments. Graham has a good quote in this chapter saying that "Investment is most intelligent when it is most businesslike."

If you pay sky high prices for your investments then you are adding some speculation (and therefore risk) into your purchases and this may or may not end well. The point is that a speculation is more of a gamble. An investment should provide you more safety against adverse developments and let you earn the rewards from the success of the underlying investment.

The Intelligent Investor is full of timeless thoughts and quotations that should aid all who have genuine interest in improving their investment performance.

"The best investing book ever written" - Warren Buffett on "The Intelligent Investor"

We will leave the final word with Warren Buffett who said "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."

We cannot leave a higher endorsement than that. It is now up to you to read the book and learn from it.


Mike - six-figure dividend earner

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