“I read the first edition in 1950, when I was nineteen. I thought that it was by far the best book about investing ever written. I still think it is.” – Warren Buffet.

Benjamin Graham’s The Intelligent Investor

There are literally (no pun intended) hundreds of books that have been written about becoming a better investor. This one, The Intelligent Investor, is practically the granddaddy of them all.

First published in 1949, Graham’s book has maintained its prominence. Early on, because it was the first book of its kind to recommend “value investing” and later, because Warren Buffett had endorsed it in flowery and flattering prose.

Well, I’m no Warren Buffett, but here are my thoughts after re-reading the Fourth Revised edition (copyright 1973) of this investment classic.

Psychology

In an earlier post, I questioned whether one could “play” the market better. Graham established the intellectual framework for critical thinking about investments and recognized the importance of maintaining some emotional discipline, especially when stock prices dropped too low or rose too high, due to either extreme pessimism or optimism.

Prudent Investing

He took a prudent approach, by clearly distinguishing between investment and speculation. “An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”

He emphasized the impossibility of knowing what the future holds and mentioned, more than once, the difficulty (some would say impossibility) of achieving higher returns than the average. His answer was to include a healthy amount of bonds in a portfolio, up to what would now be considered an astounding 75%.

Forecasts, Timing the Market and Financial Advisors

In a quote that warms my heart, Graham said, “It is absurd to think that the general public can ever make money out of market forecasts.”

Graham questioned whether or not anything could be accomplished by trying to “time the market.”

It is far from certain that the typical investor should regularly hold off buying until low market levels appear, because this may involve a long wait, very likely the loss of income, and the possible missing of investment opportunities. On the whole, it may be better for the investor to do his stock buying whenever he has money to put in stocks, except when the general market level is much higher than can be justified by well-established standards of value.

Most of that quote is dead on, although I disagree with the last phrase, because it can lead to the market timing that he advises against.

In discussing the role of seeking financial advice, Graham was pragmatic about what investors could reasonably expect from their financial advisor, “Perhaps their chief value to their clients lies in shielding them from costly mistakes.”

Although Graham was a visionary and a sage, some of his conclusions are, in my opinion, no longer correct. These will be discussed in future posts.

Please visit Wikipedia for more information on Benjamin Graham’s background and views.