VieThis is the 7th of 10 reviews of what I consider the top 10 Timeless Investment Classics that I keep within arm’s reach of my desk. My only criteria besides brilliant investing insights and accessible writing that still speaks to us today, is that, to be considered a “classic,” the book must have stood the test of time. These qualify; they were published as far back as 169 years and as recently as 40 years ago. I believe these books can teach us more about human nature, investing, and wealth and risk management than anything written before or since.. (Of course, if you want to buy my book as well, who am I to discourage you?)
In chronological order of publication, here are the preceding 6 reviews:
Extraordinary Popular Delusions and the Madness of Crowds, by Charles Mackay (1841)
The Crowd: A Study of the Popular Mind, by Gustave Le Bon (1896)
Reminiscences of a Stock Operator, by Edwin LeFevre (1923)
The Battle for Investment Survival, by Gerald M. Loeb (1935)
Security Analysis, by Graham & Dodd (1934)
Where Are the Customers' Yachts?, by Fred Schwed, Jr. (1940)
And now on to this month’s essential classic, The Intelligent Investor by Benjamin Graham…
Mr. Graham has the singular distinction of being the only author in the 169 years of Timeless Investment Classics discussed in these reviews to have two listings, the first for 1934’s Security Analysis (written with Thomas Dodd) and the second for 1949’s more approachable The Intelligent Investor. This is the book that Warren Buffett, in his preface to the Fourth Edition of The Intelligent Investor called "the best book about investing ever written."
You’ll recall from my review of Security Analysis that Mr. Graham did not care one whit about relative momentum or Bollinger Bands or Kondratiev waves or any other of what he would have considered speculative frippery. As he said, yet again in this book, “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”
Graham’s first concern is always preservation of principle. Or, as Warren Buffett took away from this approach, “Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.”
Think about it. If you always preserve your capital until good opportunities present themselves, the worst you can miss is an opportunity to “possibly” make some money. But your nest egg is still intact, waiting for an even fatter pitch, an even easier lay-up, an even better investment opportunity.
His second requirement is always gaining “an adequate return.” Notice he does not say “an outsized return” (which most often requires an outsized risk.) If you preserve intelligent, a total return between dividends and capital gains of 8% to 10% per annum will beat 90% of the pension fund managers, mutual fund managers, and even the supposedly smartest kids in the class hedge fund managers out there.
Where people get in trouble is they don’t earn these returns consistently. They lose 35% in one cyclical bear move so they take greater risk to get back to “whole.” According to Mr. Graham, The Intelligent Investor doesn’t paint himself into such a corner. He looks for solid companies that have their best growth ahead of them, pay some portion of their earnings to their shareholders in the form of dividends, and can be purchased for less than their “intrinsic value.” Forget the valuations as measured by current stock price – “intrinsic value” refers to the price at which, if a company were in bankruptcy, a competitor could buy all their land, equipment, brand names, factories, et al for less by scooping up all their outstanding stock than they could by buying those things on the open market.
Graham wrote that shareholders should think of themselves as part owners of their companies’ businesses. He exhorts investors not be concern themselves unduly with changeable fluctuations in stock prices since, to paraphrase his words, in the short term, the stock market behaves like a voting machine, but in the long term it acts like a weighing machine. That is to say, short-term, people can panic and vote with their feet or become irrationally exuberant and buy too high. But in the long run, the stock either offered valuye at your entry price or it didn’t.
Mr. Graham further writes in this most valuable resource that investment is most intelligent when it is most businesslike. That means, among other implications, that an investor is not right or wrong because others agree or disagree with his analysis in the short term; he is right because his analysis is sound in the long run.
Graham coined the term “Mr. Market,” a callow fellow who, every day, is willing to buy or sell shares to or from an investor at different prices – sometimes wildly different prices. Sometimes the price makes sense based upon your analysis, and sometimes it is preposterous. You may then either accept Mr. Market’s price or reject it. There is no offense taken -- Mr. Market will simply return the following day to quote a different price!
Mr. Graham was ever clear that Mr. Market had no clue as to the real intrinsic value of a business; he was a rather whimsical fellow. That’s why a thorough analysis of the company’s business and value (the keys to which he provides in his previous book and, in truncated form, in this one,) a commitment to preserve capital, and an adequate dividend stream, were so important to him.
During raging bull markets, Ben Graham’s calm and analytical approach is always disparaged as old-fashioned and no longer applicable; that he just doesn’t “get it.” Then all those critics who advocate modern portfolio theory, alpha ratings, beta ratings, Sharpe ratios, R-squared analysis, moving average convergence/divergence charts, relative strength analysis, Bollinger bands, and all manner of stochastics and such lose 30%, 40% or 50% of their value and whine that the index, chart or stochastic let them down.
The simple truth is, however, that if you average the good years and the bad, bull markets and bear, Ben Graham-style value stocks outperform the market over virtually all multi-year periods – and let you sleep a lot better at night, as well.
Besides, steady, dependable, (some would say boring) investing doesn’t mean you have to live the rest of your life in a boring manner. Professor Graham, in his private life, kept a mistress in France and split his time between his New York home and visits to her. Of course, if you’d rather get your excitement from the market, just eschew Ben Graham and go for the latest dingbat hot stock…
Pick up a copy of The Intelligent Investor. You won’t regret it.
Disclosure: No positions mentioned. This is about strategy, not tips!
Disclaimer: As Registered Investment Advisors, we see it as our responsibility to advise the following: we do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.
Past performance is no guarantee of future results, rather an obvious statement but clearly too often unheeded judging by the number of investors who buy the current #1 mutual fund only to watch it plummet next month!
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