Tuesday, 20 March 2007

Book: The Intelligent Investor by Benjamin Graham

Reviewing this book is akin to judging Warren Buffett's stock picking prowess. In fact, it is so very directly, since Buffett was a student of Graham and states that he uses Graham's methods. The quote from Buffett on the cover says it all: "By far the best book on investing ever written." The proof is certainly in the pudding, as one learns that Graham himself was a tremendously successful investor. An appendix by Buffett details the phenomenal investing performance of a number of Graham disciples. The updates to 2003 by finance journalist Jason Zweig (Graham died in 1976) illustrate the timelessness of the book's investment principles by providing numerous examples from the Internet dot com bubble and frauds such as Enron and Worldcom. As well, Zweig repeats and amplifies Graham's points for anyone who may have missed the subtleties.

Apparently, the secret to success in investing is "don't lose". The book outlines in 600+ pages of detailed, practical advice, backed up with mountains of supporting data, how to put the odds on your side, avoid losing and make either reasonable/modest (the defensive, passive investor) or excellent gains (the enterprising, active investor). A key lesson is that unless one is willing to devote the time and energy into doing the investigation required, one should stick to a broadly diversified portfolio of bonds and stocks, such as buying the index directly like a portfolio of the Dow Jones stocks, Exchange Traded Funds and passive low cost index tracking funds.

Want to know how to actually carry out the famous "buy low, sell high" strategy, aka Value investing? Graham shows how to calculate when a stock is low (what current ratio, earnings per share, debt coverage etc - no vague waffling here!) and when it is too high. The trick is finding such companies and prices. Only problem for us investors is that this requires lots of never-ending work, there's no escaping it. That's for the enterprising investor. For the rest of us, the emphatic advice is, be a defensive investor who doesn't pretend to know where markets or particular stocks are going. Instead, we are told to put together a portfolio with both equities and bonds (no more or less than 75% in each) that is well diversified and regularly rebalanced (every six months according to Zweig).

Despite being replete with tables of numbers, footnotes on virtually every page, copious references, citations of academic research, appendices, there is not an oppressive feeling of density to the text and boredom does not descend. The writing flows very easily, the explanations are unambiguous and the presentation follows naturally and logically. There are constant juicy bits to copy and remember. e.g. "... the investor's chief problem - and even his worst enemy - is likely to be himself." or "... the chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions." or "... the function of the margin of safety is, in essence, that of rendering unnecessary an accurate estimate of the future."

No doubt my copy will get many re-readings. Just wish I had bought it twenty years ago. Maybe this book should be made compulsory reading, with a test, before anyone is allowed to buy securities. ... on the other hand, because most people don't apply Graham's investment principles, as Warren Buffett says in the appendix, "There will continue to be wide discrepancies between price and value in the marketplace, and those who read their Graham & Dodd (referring to the more technical book written by Graham with David Dodd called Security Analysis) will continue to prosper."

Buy this book at


Anonymous said...

Thanks for the review. I'm planning to buy a copy.

I'm currently reading Security Analysis and it is a tough read - interesting though.

Anonymous said...


I'm wondering which is a better book, Security Analysis or The intelligent investor?

CanadianInvestor said...

I have not read Security Analysis, though I understand it is a far more technical book than The Intelligent Investor. It seems to be for someone who really wants to get into stock analysis. Perhaps it would help you to read the reviews on bookvendor sites like Amazon, e.g.
Amazon-Security Analysis

I have a number of other books in the hopper to review so I may not get to Security Analysis for a while yet.

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