The Intelligent Investor

By Benjamin Graham

Reviewed by Tom Winnifrith of t1ps.com

The Intelligent Investor costs 12.99 pounds in the Square Mile Bookstore and can be bought by clicking here

My partner is studying for an MBA at INSEAD - Europe's top MBA school. Her lecturers seem to insist in class after class that one should base investment decisions on the basis that markets are perfect. If these guys (not good enough to create wealth just to teach about wealth creation were correct) you would not have heard of Warren Buffett or the man who taught him, Ben Graham, as they could not exist. Every year hundreds of books are churned out on investment matters. 99% are written by the sort of people who view an MBA as a badge of honour and are total rubbish. None will ever be as good as this one. Benjamin Graham was the man who taught Warren Buffett. He was a great investor himself and this is the timeless bible of value investing - something your average MBA student is taught cannot exist.

If there is only one investment book you really must buy it is The Intelligent Investor by Benjamin Graham and it costs just 12.99 pounds. I read a copy a few years ago and I don't think it really sank in. I re-read the book every year and every year I get more out of it.

Benjamin Graham died in 1976 but contrary to what we are always told (by idiot pundits) about how markets change, they don't. Anyone who has invested during the highs and lows of the past decade will read BG and realise that in a flash. Graham is as relevant today as he was in 1949 when The Intelligent Investor was first printed and as he will be in 2050. Graham was one of the most successful investors of the last 100 years - right up there with Warren Buffett. In fact WB started his career working for Graham and describes him as his mentor. BG was the man who put intellectual rigour into the practice of value investing. That is to say, looking at the real value of a company and buying it to take a long term view.

That is what I try to do although since I - like all investors - are now exposed to more real-time data than ever before - it is hard to do. One of the numerous invaluable points made by Graham is that the more information investors have the less they are likely to become good investors and the more likely they are to become speculators. But this charge is not levelled against private investors only. When the average time that a fund manager holds a stock is 11 months he too cannot claim to be a long-term value. investor. The obsession with share price rather than fundamental value which is all too prevalent in what one reads today is an indication that most of the pros (as well as the vast majority of amateur investors) have rather lost the BG plot they have become speculators not investors..

The 2003 Edition of the Intelligent Investor (it has been reprinted many times since its first publication in 1950) comes with contribution from Buffett himself and also with a superb chapter by chapter commentary from Jason Zweig which both summarises BG's thoughts but also takes in how the great man (who died in 1976) would have viewed the events of the late 1990s and early 2000s - the dotcom boom and crash.

Writing in 1973 (the last of the four editions of this book to be published by Graham himself), BG deplores the way that 90% of what is termed investment is in fact speculation. If you buy a stock because you are buying at a discount to net assets or a small premium and you buy on a low earnings multiple and could afford for it to go private because you did not wish to sell you are an investor. If you buy a stock simply because you think it will go up in price you are a speculator. And speculators always over-trade and lose money in the end. This Zweig demonstrates quite clearly with up to date data.

The market is always right is one of the cliches trotted out by media tarts (mentioning no names) when the FTSE moves sharply higher or lower. Given that such people spout such tripe at the drop of a hat they will always remain media tarts because they clearly are not smart enough to be long term value investors. Those who believe in perfect markets will tell you that the market is always right. This is of course utter tripe. Mr Market swings from a sort of cocaine fuelled enthusiasm when nothing can go wrong to the deepest of depressions when nothing is going to go right. He does this for individual stocks and he does it for the market as whole. Pricing in the short-run is determined by sentiment, nothing more. It should also show that those who try to make predictions based on either future fundamentals which are impossible to predict (i.e. macro-factors) or past indications of something as changeable as sentiment (namely chartists) are just whistling in the wind.

What applies to the market as a whole applies even more dramatically to individual stocks. Thought it may sound like a statement of the obvious, this tells us that the time to buy stocks is when the market has got it wrong and is marking them down irrationally and vice versa. For example had you sold all your shares in mid 2007 when all the pundits were bullish and everyone said that shares would go up forever and that CDOs were the new plastic (see The Graduate) and then bought them back in October 2008 (when experts were talking about 'the end of capitalism' or the 'demise of the banks') you would have made a killing. This is common sense but, oddly, it flies in the face of perceived wisdom in many quarters. For instance, the whole basis of charting is to buy stocks in an established uptrend and sell into a downtrend. i.e. to buy high and sell low. This is quite clearly insanity. Equally, many rather formulaic systems of stock picking (which BG shows never work) essentially amount to the same pattern of foolishness. It is, as Graham admits, very hard to steel yourself to buy a stock that has fallen sharply especially as all those around you will be telling you that you should 'dump this loser' and back a winning horse - a stock that has risen sharply. But to make decent returns that is exactly what you must do. MBA students and lecturers who believe in perfect markets will of course thing that the price of an equity is always right. In fact it is always wrong.

Many stocks do fall sharply for a very good reason - notably that they are fundamentally bad businesses. BG is pretty clear about what makes a good business and also what is a fair price for a good business. BG would never have backed blue-sky hopefuls because a) most of them never deliver what they promise and b) if they do deliver at an operational level that is invariably more than discounted in the share price. The key point about Graham is that he recognises that to be truly successful you must set yourself a relatively modest target. If you aim to make a 100% return a year you might just do it one year or perhaps for two but only by taking extra-ordinary risks - that is by buying 'exciting' stocks which may be whipped ahead by market madness. But sooner or later you will come a cropper and lose all your gains and more. If you aim much lower (to beat the market by a few percentage points) you can succeed and you can do so consistently. Compound that added growth over a few years and you will prosper. Because the BG strategy actually demands that you buy into what the market thinks sucks your short-term performance can be rotten but his key point is that if you have bought a bargain (say a company valued at a discount to its net current assets minus its long term liabilities) then at some stage you will be rewarded handsomely.

The key point here is that it is not price that you should focus on but value. All those people who invest thousands in Level-2 or super-duper software are focussing on price not value. They will never beat a BG disciple over the long run. Those who say that because a stock has followed a certain pattern over the past year it will do so over the next year are like those who argue that because I flipped a coin and it came up heads 10 times on the trot it is likely to come up heads next time as well. Some things do not change however. After each crash, there are demands for tighter regulation which is indeed enacted and then circumvented just as investors forget the lessons of the last upset and get greedy again. Reading Graham's scathing attacks on those banks who raised cash for AAA enterprises in 1968 brings to mind the events of the past year or so rather too vividly.

There is just so much about this book which commends it: asset allocation, valuation techniques, observations about human nature and Zweig's chapter by chapter commentary on Graham and how his thoughts relate to the world of today including the dotcom lunacy. If you want to make money from shares buy this book and read it. If you don't care about your returns go and buy some new software package instead or blow all your cash on doing an MBA..

The em>Intelligent Investor costs 12.99 pounds in the Square Mile Bookstore and can be bought by clicking HERE