Review of “The Intelligent Investor” by Benjamin Graham
If you take the time to read and study the Intelligent Investor, by Benjamin Graham, as updated by Jason Zweig, you will likely agree that this book is indeed the best book ever written for the individual investor.
If you want to make your own investment decisions, then this is the book for you. If you want to use a money manager or invest in mutual funds, it will still be worthwhile, as you need to constantly monitor and evaluate those persons to whom you have relied on and trusted to make investment decisions for you.
Jason Zweig has performed an amazing task in updating Graham’s philosophy to make it more relevant for today’s investor.
If you will devote a few hours of your time to read and study the Intelligent Investor, it may turn out to be the most important financial decision of your lifetime. Obviously, I am a fan of both Graham and Zweig. Very simply, they explain how to make money in the stock market. The answer that most people are searching for throughout their investment lifetime can be answered by studying this important book.
The theory espoused in the book makes sense. In a nutshell, if you can avoid major mistakes, you will find it unnecessary to achieve a substantial growth of your investments to be a winner. If you avoid the disasters, the upside will take care of itself. Simply, do not take any significant risks. If the opportunity for growth looks great and the opportunity of a given investment looks too good to pass up, it probably carries a disproportionate risk on the downside and should be avoided. Don’t worry about the missed opportunities. Think about risk.
Graham is a value investor. If the company has value, then consider it for a possible investment. How does he determine value? He looks at the company’s history of profits, dividends, earnings stability, earnings growth, and a reasonable price/earnings multiple. The reasonable price/earnings multiple is adjusted based upon the changes in the risk-free rate of return in the bond market.
If bonds pay a high percentage rate of return, the stocks to be held should also pay a higher rate of return (we are not talking about dividends); i.e. the stock would sell for a lower price/earnings multiple, so that the rate of return on the stock (the ratio of the earnings to the stock price) would be higher (and thus you will pay less) at a time when risk-free investments are paying a higher return.
Even though I personally prefer a more aggressive style for my own investments, Graham’s philosophy is safer. Being a value investor makes sense for most investors. He is the premier “value investor.”
The difficulty for the individual investor is that he or she is prone to take more risks in hopes of a larger upside. But, if you have the discipline to follow Graham’s philosophy, you will be better able to sleep at night.
It will require a huge gain on your stocks to make up for a few bad decisions. A bad decision is when you deviate from Graham’s philosophy.
The problem is that few investors will buy the book and study it closely, and thus many will then proceed to make a few foolish decisions. As Graham states, it is the investor and not the market itself that causes the losses.
The second important decision for the investor, according to Graham, is to have the courage of your convictions. You need the courage to act, even though others may hesitate. This is the portion of the Graham philosophy that has made Warren Buffett so successful. You too, need to learn to be a contrarian.
So, if you have not already read the Intelligent Investor, take time now to buy it and read thoroughly. It may be the most important investment decision you will ever make.