The Intelligent Investor is the portfolio management book written for the masses, made famous, in part, by the fact that it was what attracted legendary investor Warren Buffett to study under author Benjamin Graham at Columbia University. There are several different versions, updated to reflect the time in which they were published, all offering unique perspectives on a variety of situations.
The first version I read was the 4th revised edition, published in 1973, but it is no longer available in print so you’d need to follow that link to get a used copy.
Instead, there is an revised version that includes special passages updating the information for the modern world. This is the very first version Aaron read.
There is also a nice reprint of the 1949 edition, which I am reading now, because it gives a perspective very close to the aftermath of The Great Depression.
This version of The Intelligent Investor has been updated by Jason Zweig with end-chapter commentary and explanations about the time period for greater clarity. It’s very well done.
Me? I own them all. In different formats, in different bindings, including original editions. They are fantastic. Each offers unique examples and specifics, though the philosophy that underscores them all is the same.
There are three major contributions that The Intelligent Investor can bring to your financial life.
The first is the concept of Mr. Market. Graham said to imagine that you have a business partner. He is manic depressive. Somedays, he comes in and offers you his ownership stake at dirt cheap prices relative to profits and assets. Other days, most of the time, in fact, he offers you a fair price. Sometimes, he gets euphoric and demands insane valuations. You are free to completely ignore him or take advantage of his offers, at your discretion, based on your own interpretation of the facts.
By changing your mindset this way, there is no “stock market”. There is a counterpart to you – a business partner – who, five days a week, for a few hours, is willing to buy or sell ownership stakes in roughly 15,000 different firms.
The second concept is the idea of a margin of safety, borrowed from engineering. Graham said that the best way to help protect against losses is to be like an engineer designing a bridge. You might label it for 10,000 pounds but it is really designed to hold 30,000 pounds. That 20,000 pound excess is the margin of safety. It is there to keep it from collapsing and causing destruction, pain, and misery.
Graham suggested buying businesses once they had reached 2/3rds of intrinsic value. That 1/3rd difference is the margin of safety. (One of Graham’s operations included buying businesses at 2/3rds net working capital so you essentially got the enterprise itself for free. By the 1970’s, he was convinced (rightly) that this was no longer possible because the post-Depression fears of stocks had faded from memory and reasonable efficiency returned to the market.)
The third concept is for those who don’t want to spend their days reading annual reports all the time. Graham lays out a portfolio management strategy for what he calls “defensive investors”. Graham believed “that the majority of security owners should elect the defensive classification. They do not have the time, or the determination, or the mental equipment to embark upon investing as a quasi-business.”
He talks about valuing cyclical stocks, finding good candidates for a defensive portfolio, and other important ideas. This book is one of the cornerstones of investing. I cannot recommend it enough. To this day, I always strive to re-read it every autumn, reminding myself that even though the world appears different, it’s all the same story, repeating over and over with different actors.
About this post: Among the top requests I constantly receive on the site is to write a list of the “must have” books that I would recommend to my own family members if I were trying to teach them about finance, investing, business, etc. I have published a long list of the titles, which you can find in the book recommendation section. To make sure you get the version I am talking about in the post, click the image, which will take you to the correct copy at Amazon.
