This is the first in a weekly series of articles providing a chapter-by-chapter in-depth “book club” reading of Benjamin Graham’s investing classic The Intelligent Investor. Warren Buffett describes this book: “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.” I’m reading from the 2003 HarperBusiness Essentials paperback edition. This entry covers the introduction, which is on pages 1 to 11, and the Jason Zweig commentary, on pages 12 to 17.
Let’s start right off with the three big questions you’ll probably have if you see The Intelligent Investor on the shelves at your local bookstore or library – or if you see offhand mention of it in some magazine or online article somewhere.
What is The Intelligent Investor? First published in 1949 (and revised several times afterward), The Intelligent Investor is a very widely acclaimed book on value investing. Value investing refers to the practice of seeking out underpriced stocks as identified by some form of analysis, usually in comparison to various attributes of the company and its competitors. In its simplest form, everyone who bargain hunts is doing some form of value investing – you’re seeking out situations where particular items are undervalued compared to what they actually should be, and usually, you determine this value based on knowing what similar items are worth and how popular an item is.
Who is Benjamin Graham? Is he a legitimate expert with a worthwhile point of view? In a word, yes. Benjamin Graham was the inventor (along with David Dodd) of value investing. He began teaching the approach at Columbia Business School in 1928 and he published many books on value investing, including this one and Security Analysis (1934). Most notably, Graham was Warren Buffett’s mentor – Buffett actually attended Columbia Business School simply to learn from Graham. So, yeah, Graham knows what he’s talking about.
Is The Intelligent Investor a worthwhile read for me? The Intelligent Investor was Graham’s attempt to explain value investing to the layman. That doesn’t mean that it’s a simple book by any means – it’s very meaty, indeed. I think Warren Buffett’s comment on the book says it best: “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.” It’s meaty, tough, challenging reading – but it’s perhaps some of the most valuable reading you can invest your time in when it comes to the stock market.
So, let’s dig in right at the start.
Introduction: What This Book Expects to Accomplish
We must say at the outset that this is not a “how to make a million” book. There are no sure and easy paths to riches on Wall Street or anywhere else.
In short, if you want a quick and easy path to becoming rich in the stock market, you’re not going to find it here. Because it doesn’t exist.
The big point that Graham seeks to make in the introduction is that the stock market is at least somewhat unpredictable. He points out how World War I caused the New York Stock Exchange to shut down for a long time, whereas two months before no one saw America entering the war. I was reminded of 9/11, actually, and the impact that had on so many aspects of America, and how no one really saw it coming.
Graham offers up many, many examples of how the stock market had gone up and down between World War I and the early 1970s, sometimes for predictable reasons, sometimes for unforeseen reasons. Not only that, no one was able to predict how much the market would go up or go down during any of these changes.
Because of this unpredictability, Graham argues that the only way you can get ahead in investing is by sticking to a set of basic principles through thick and thin. He doesn’t guarantee that his set of principles will beat the market, but he does state that these principles have worked well over a long period of time (roughly 50 years) because the principles aren’t about timing the market, but about evaluating the businesses themselves.
Commentary on the Introduction
Each chapter in the book (at least, the HarperBusiness Essentials edition that’s commonly found in bookstores) features some additional commentary by Jason Zweig, written in 2003. Zweig is the author of several personal finance books and is a personal finance columnist for the Wall Street Journal after having previously written for Money Magazine, among other places. The point of the commentary is to attempt to put a more modern spin on the things Graham says and, for the most part, it’s a good supplement.
Zweig’s main focus is on the tech bubble bursting from 2000 and 2002, showing the irrational exuberance of people in late 1999 and early 2000 and showing what happened to them. My favorite:
After his Amerindo Technology Fund rose an incredible 248.9% in 1999, portfolio manager Alberto Vilar ridiculed anyone who dared to doubt that the Internet was a perpetual moneymaking machine: “If you’re out of this sector, you’re going to underperform. You’re in a horse and buggy, and I’m in a Porsche. You don’t like tenfold growth opportunities? Then go with someone else.”
If you had invested $10,000 in Vilar’s fund at the end of 1999, you would have finished 2002 with just $1,195 left – one of the worst destructions of wealth in the history of the mutual fund industry.
2008 is another great example of this, actually. The stock market is down 25%. People are panicking. Jim Cramer’s out there telling people to sell all their stocks unless they won’t need the money in the next five years. Of course, this follows on the tail of a five year bull market (2003 to 2007) where every single year saw double digit growth and the S&P 500 went up 80% in face value (not including all of the dividends paid out in that period).
The market goes up, the market goes down. How does The Intelligent Investor deal with it?
[T]his book will teach you three powerful lessons:
+ how you can minimize the odds of suffering irreversible losses;
+ how you can maximize the chances of achieving sustainable games;
+ how you can control the self-defeating behavior that keeps most investors from reaching their full potential.
And Graham’s ticket to that is value investing.
Next Friday, we’ll look at Chapter 1: Investment versus Speculation: Results to Be Expected by the Intelligent Investor.