The Intelligent Investor by Benjamin Graham, first published in 1949, is a widely acclaimed book on value investing. The book provides strategies on how to successfully use value investing in the stock market. Historically, the book has been one of the most popular books on investing and Graham’s legacy remains.
The Intelligent Investor Summary
After graduating from Columbia University in 1914, Graham went to work on Wall Street. During his 15-year career, he was able to cultivate a sizable personal nest egg. Unfortunately, Graham, like many others, lost most of his money in the stock market crash of 1929 and the subsequent Great Depression.
Those experiences taught Graham lessons about minimizing downside risk by investing in companies whose shares traded far below the companies’ liquidation value. In simple terms, his goal was to buy a dollar’s worth of assets for $0.50.
To do this, he utilized market psychology, using market fears to his advantage. These ideals inspired him to write Security Analysis, which was published in 1934 with a co-author, David Dodd.
In Security Analysis, Graham’s first task is to help stock market participants distinguish between an investment and speculation. After a thorough analysis, it should be clear that an investment is going to protect the principal and provide an adequate return. Anything that does not meet these criteria is speculation.
Graham also advocated for a different perspective in regards to stock ownership; equity stocks confer part ownership of a business. For Graham, in the short-term, the stock market acts like a voting machine, and in the long-term, the stock market acts like a weighing machine—so, in the long run, the true value will be reflected in the stock’s price.
Graham’s method focused on determining the value of the operating company behind a stock. Security Analysis enumerates several examples where the market under-valued certain out-of-favor stocks which ended up being important opportunities for the savviest investors.
These and other concepts, including “margin of safety” and “period of financial distress,” helped to lay the groundwork for Graham’s later work in The Intelligent Investor and helped to pioneer some of his pivotal investing concepts.
Graham’s favorite allegory was that of Mr. Market. This imaginary person, “Mr. Market,” turns up every day at the stockholder’s office offering to buy or sell his shares at a different price. Sometimes the proposed prices make sense, but other times, the proposed prices are off the mark, given current economic realities.
Graham also advocated for an investing approach that provides a margin of safety—or room for human error—for the investor. There are a couple of ways to accomplish this, but buying undervalued or out-of-favor stocks is the most important. The irrationality of investors, the inability to predict the future, and the fluctuations of the stock market can provide a margin of safety for investors.
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About the Author
Benjamin Graham was a British-born American economist, professor and investor. He is widely known as the “father of value investing”, and wrote two of the founding texts in neoclassical investing: Security Analysis with David Dodd, and The Intelligent Investor.
