Friday, 20 July 2012

Book Review: The Intelligent Investor by Benjamin Graham

The Intelligent Investor is one of the most well known and most recommended investment books ever written – and with good reason. Written by Benjamin Graham this book summarises and distills the lessons that Graham and Dodds taught in their epic text-book like work Security Analysis. Warren Buffett is probably the most well known disciple of the value investment philosophy (see my review of The Essential Buffett) however there are many more value investors out there who all use this book as the foundation for their investment style.   I believe this is a must read book for all investors.

The Intelligent Investor For those who don’t know, value investing is all about buying companies that trade at a significant discount to their intrinsic value and waiting for the market to realise this discount. It relies on the fundamental valuation of companies and demands a ‘margin of safety’ for any purchase (to prevent against the risk of valuation error on the investors behalf).

The version I reviewed was the one with commentary by Jason Zweig however I found his commentary no value to the original text (it was the cheapest on bookdepository which is why I originally bought it – I didn’t realise however that he would replace the original footnotes with his own and relegate Graham’s to the end. In hindsight I would have bought the more expensive copy with no commentary).

I believe that, although the last version of The Intelligent Investor was written in the early 1970s, this book is still the best book out there for those looking for a foundation for their investment style. It provides sufficient information and guidance that the reader can go out and start applying the lessons learned straight away and it gives step by step examples of what the investor needs to do to make ‘abnormal profits’. The book is also good in that it acknowledges that not everyone wants to spend the time doing this – it therefore steps through what the investor who does not want to spend hundreds of hours trawling through Annual Reports, 10-Ks, 10-Qs, management commentary and industry research should do.

The book flows logically and the reader is never confused about the point Graham is trying to make. I normally try and summarise the lessons learned from the book but this book is simply too dense.  Below are the chapter headings which should give you an idea of what is covered in the book::
  • Introduction: What This Book Expects to Accomplish
  • Chapter 1: Investment versus Speculation: Results to Be Expected by the Intelligent Investor
  • Chapter 2: The Investor and Inflation
  • Chapter 3: A Century of Stock-Market History: The Level of Stock Prices in Early 1972
  • Chapter 4: General Portfolio Policy: The Defensive Investor
  • Chapter 5: The Defensive Investor and Common Stocks
  • Chapter 6: Portfolio Policy for the Enterprising Investor: Negative Approach
  • Chapter 7: Portfolio Policy for the Enterprising Investor: The Positive Side
  • Chapter 8: The Investor and Market Fluctuations
  • Chapter 9: Investing in Investment Funds
  • Chapter 10: The Investor and His Advisors
  • Chapter 11: Security Analysis for the Lay Investor: General Approach
  • Chapter 12: Things to Consider about Per-Share Earnings
  • Chapter 13: A Comparison of Four Listed Companies
  • Chapter 14: Stock Selection for the Defensive Investor
  • Chapter 15: Stock Selection for the Enterprising Investor
  • Chapter 16: Convertible Issues and Warrants
  • Chapter 17: Four Extremely Instructive Case Histories
  • Chapter 18: A Comparison of Eight Pairs of Companies
  • Chapter 19: Shareholders and Managements: Dividend Policy
  • Chapter 20: “Margin of Safety” as the Central Concept of Investment
  • Postscript
  • The book is well laid out and works through examples so the reader does not need to think about concepts in the abstract
  • Even though this book was last published ~40 years ago the lessons are still valid today
  • It is hard work getting through this book – it is certainly not a light read that you can curl up on a couch with however if you put the time into reading this book then you will certainly get the rewards
  • This book is a must read for all investors out there
  • I believe that all investors need a firm grounding in fundamental analysis. This book provides an excellent start point (though contains no motivational material so don’t buy this book if you want to be told that you can be a millionaire tomorrow)

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