The Intelligent Investor

Would you like to learn from the teacher who taught Warren Buffet ‘Value Investing’? Benjamin Graham’s classic text, The Intelligent Investor, lays out the foundation of value investing. Buffett himself has called it “the best book on investing ever written.” Benjamin Graham was an American economist and professor of Columbia Business School. He was also the teacher of Warren Buffet. He devised the idea of ‘value investing’ and taught the principles to his students. In his book Security Analysis he elaborated about his idea and in the later editions, refined it. Security Analysis was co-authored by David Dodd and is considered to be holy book of investment, it was published in 1934. Here he defined investment that was distinguished what he deemed speculation. He said “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”

Later in 1949 he published The Intelligent Investor. In its 4th edition Jason wing added his comments to make it simpler for layman to understand. His commentary makes it more understandable for anybody who plans to invest at the times of recession. Jason makes the situation and themes of the by gone era, equivalent to the current scenario. It’s a wide-ranging book on investing and introduces concepts of building portfolios, evaluating securities, buying bonds and of course Graham’s famous margin of safety. It is text-bookish and is data-rich and numbers laden, it’s not exactly recreational reading. But nestled among are key lessons that every investor really needs to know in order to be successful. Jason Zweig’ commentary at the end of the chapter links the book to the current context which is very helpful.

The lessons embedded in The Intelligent Investor are an absolute must for anyone with money in the stock market. They can be boiled down to these four simple points:

Estimate a fair value for a company.

Buy only if the price is safely below that value.

Look for a strong dividend policy as a signal of financial strength.

Diversify appropriately to spread the risks.

Graham uses an allegory of Mr. Market. Mr. Market is a complaisant man who comes to your door everyday like a salesman. He offers to buy or sell shares; most of the times the price that’s quoted by him seems reasonable and on other times, unreasonable. Now the investor can ignore him or agree or trade with him, but he will be back again next day. The point is simple that investor should judge the value of shares he owns by the demands of Mr. Market. The investor should concentre on the performance of his company and receiving dividends rather then incoherent behaviour of Mr. Market. Beyond doubt, the last chapter of The Intelligent Investor is a must-read for anyone looking to make money in the stock market. In it, Graham describes the concept of the margin of safety — the three magical words that let the investors absolutely slaughter the market. If you invest, based on four key principles, the odds are quite high that you’ll do fine.

All in all, The Intelligent Investor is a superb reference book for those interested in being an investor, and one with which every investor should be acquainted.

Amit Dutta

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