The Intelligent Investor
Introduction by Warren Buffett
Warren Buffet thinks that it was by far the best book about investing ever written.
To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework. This book precisely and clearly prescribes the proper framework. You must supply the emotional discipline.
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 from your investments.
Several years ago Ben Graham, expressed to a friend the thought that he hoped every day to do “something foolish, something creative and something generous.” The aim of that first goal is for packaging ideas in a form that avoided any overtones of sermonizing or self-importance.
He is the founder of a discipline and his work is not eclipsed by successors. His book brought structure and logic to a disorderly and confused activity of security analysis. Ben’s principles remained sound — their value often enhanced and better understood in the wake of financial storms that demolished flimsier intellectual structures.
He does not have that narrowness of mental activity that concentrates all effort on a single end. His intellectual breadth almost exceeded definition. He has virtually total recall, unending fascination with new knowledge, and an ability to recast it in a form applicable to seemingly unrelated problems.
Ben was my teacher, my employer, and my friend. In each relationship — there was an absolutely open-ended, no-scores-kept generosity of ideas, time, and spirit. If clarity of thinking or encouragement or counsel was required, there was no better place to go. Ben was there.
Walter Lippmann spoke of men who plant trees that other men will sit under. Ben Graham was such a man.
A Note About Benjamin Graham by Jason Zweig
Graham was not only one of the best investors who ever lived; he was also the greatest practical investment thinker of all time.Graham’s Security Analysis was the textbook that transformed the musty circle of money management into a modern profession.
The Intelligent Investor is the first book ever to describe, for individual investors, the emotional framework and analytical tools that are essential to financial success. It remains the single best book on investing ever written for the general public. Graham’s certainty is that, sooner or later, all bull markets must end badly.
Graham came by his insights the hard way: by feeling firsthand the anguish of financial loss and by studying for decades the history and psychology of the markets.
After graduation, he decided to give Wall Street a shot. He started as a clerk at a bond-trading firm, soon became an analyst, then a partner, and before long was running his own investment partnership.
Booms and busts would not surpris Graham.
Graham became a master at researching stocks in microscopic, almost molecular, detail.
How did Graham do it? Combining his extraordinary intellectual powers with profound common sense and vast experience, Graham developed his core principles, which are at least as valid today as they were during his lifetime:
- A stock is not just a ticker symbol or an electronic blip; it is an ownership interest in an actual business, with an underlying value that does not depend on its share price.
- The market is a pendulum that forever swings between unsustainable optimism (which makes stocks too expensive) and unjustified pessimism (which makes them too cheap). The intelligent investor is a realist who sells to optimists and buys from pessimists.
- The future value of every investment is a function of its present price. The higher the price you pay, the lower your return will be.
- No matter how careful you are, the one risk no investor can ever eliminate is the risk of being wrong. Only by insisting on what Graham called the “margin of safety”—never overpaying, no matter how exciting an investment seems to be—can you minimize your odds of error.
- The secret to your financial success is inside yourself. If you become a critical thinker who takes no Wall Street “fact” on faith, and you invest with patient confidence, you can take steady advantage of even the worst bear markets. By developing your discipline and courage, you can refuse to let other people’s mood swings govern your financial destiny. In the end, how your investments behave is much less important than how you behave.
Like all classics, this book alters how we view the world and renews itself by educating us. And the more you read it, the better it gets. With Graham as your guide, you are guaranteed to become a vastly more intelligent investor.
Introduction: What This Book Expects to Accomplish
The purpose of this book is to supply guidance in the adoption and execution of an investment policy. Comparatively little will be said here about the technique of analyzing securities; attention will be paid chiefly to investment principles and investors’ attitudes.
Much of our space will be devoted to the historical patterns of financial markets, in some cases running back over many decades. To invest intelligently in securities one should be forearmed with an adequate knowledge of how the various types of bonds and stocks have actually behaved under varying conditions — some of which, at least, one is likely to meet again in one’s own experience. No statement is more true and better applicable to Wall Street than the famous warning of Santayana: “Those who do not remember the past are condemned to repeat it.”
Our text is directed to investors as distinguished from speculators.
There are no sure and easy paths to riches on Wall Street or anywhere else. Lets begin with the scenario: In 1929, savings of only $15 per month invested in good common stocks—with dividends reinvested- how much would it product in 20 years against total contributions of only $3,600? Our rough calculation — based on assumed investment in the 30 stocks making up the Dow Jones Industrial Average (DJIA) — indicates that, if the prescription had been followed during 1929–1948, the investor’s holdings at the beginning of 1949 would have been worth about $8,500. We should remark that the return actually realized by the 20-year operation would have been better than 8% compounded annually — and this despite the fact that the investor would have begun his purchases with the DJIA at 300 and ended with a valuation based on the 1948 closing level of 177. This record may be regarded as a persuasive argument for the principle of regular monthly purchases of strong common stocks through thick and thin — a program known as “dollar-cost averaging.”
This book is not meant for speculators - those who trade in the market. Most of these people are guided by charts or other largely mechanical means of determining the right moments to buy and sell. The one principle that applies to nearly all these so-called “technical approaches” is that one should buy because a stock or the market has gone up and one should sell because it has declined. This is the exact opposite of sound business sense everywhere else, and it is most unlikely that it can lead to lasting success on Wall Street. In our own stock-market experience and observation, extending over 50 years, we have not known a single person who has consistently or lastingly made money by thus “following the market.” We do not hesitate to declare that this approach is as fallacious as it is popular.
The underlying principles of sound investment should not alter from decade to decade, but the application of these principles must be adapted to significant changes in the financial mechanisms and climate.
The belief that leading common stocks could be bought at any time and at any price, with the assurance not only of ultimate profit but also that any intervening loss would soon be recouped by a renewed advance of the market to new high levels is an illusion. That was too good to be true.
While enthusiasm may be necessary for great accomplishments elsewhere, on Wall Street it almost invariably leads to disaster. Some investment funds have large commitments in highly speculative and obviously overvalued issues.
There are two kinds of investors to whom this book was addressed — the “defensive” and the “enterprising.” The defensive (or passive) investor will place his chief emphasis on the avoidance of serious mistakes or losses. His second aim will be freedom from effort, annoyance, and the need for making frequent decisions. The determining trait of the enterprising (or active, or aggressive) investor is his willingness to devote time and care to the selection of securities that are both sound and more attractive than the average. Over many decades an enterprising investor of this sort could expect a worthwhile reward for his extra skill and effort, in the form of a better average return than that realized by the passive investor. We have some doubt whether a really substantial extra recompense is promised to the active investor under today’s conditions.
It has long been the prevalent view that the art of successful investment lies first in the choice of those industries that are most likely to grow in the future and then in identifying the most promising companies in these industries. But this is not as easy as it always looks in retrospect. We draw two morals for our readers:
- Obvious prospects for physical growth in a business do not translate into obvious profits for investors.
- The experts do not have dependable ways of selecting and concentrating on the most promising companies in the most promising industries.