Intelligent Investor: The Classic Text on Value Investing

Intelligent Investor: The Classic Text on Value Investing

by Benjamin Graham


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Product Details

ISBN-13: 9780060752613
Publisher: HarperCollins Publishers
Publication date: 05/03/2005
Pages: 304
Sales rank: 33,643
Product dimensions: 6.00(w) x 9.25(h) x 1.01(d)

About the Author

Benjamin Graham (1894-1976), the father of value investing, has been an inspiration for many of today's most successful businesspeople. He is also the author of Securities Analysis and The Interpretation of Financial Statements.

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intelligent investor
The Classic Text on Value Investing


Investment versus Speculation: Results to Be Expected by the Intelligent Investor

This chapter will outline the viewpoints that will be set forth in the remainder of the book. In particular we wish to develop at the outset our concept of appropriate portfolio policy for the individual, nonprofessional investor.

Investment versus Speculation

What do we mean by "investor"? Throughout this book the term will be used in contradistinction to "speculator." As far back as 1934, in our textbook Security Analysis,1 we attempted a precise formulation of the difference between the two, as follows: "An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative."

While we have clung tenaciously to this definition over the ensuing 38 years, it is worthwhile noting the radical changes that have occurred in the use of the term "investor" during this period. After the great market decline of 1929-1932 all common stocks were widely regarded as speculative by nature. (A leading authority stated flatly that only bonds could be bought for investment.2)

Thus we had then to defend our definition against the charge that it gave too wide scope to the concept of investment.

Now our concern is of the opposite sort. We must prevent our readers from accepting the common jargon which applies the term "Investor" to anybody and everybody in the stock market. In our last edition we cited the following headline of a front-page article of our leading financial journal in June 1962:


In October 1970 the same journal had an editorial critical of what it called "reckless investors," who this time were rushing in on the buying side.

These quotations well illustrate the confusion that has been dominant for many years in the use of the words investment and speculation. Think of our suggested definition of investment given above, and compare it with the sale of a few shares of stock by an inexperienced member of the public, who does not even own what he is selling, and has some largely emotional conviction that he will be able to buy them back at a much lower price. (It is not irrelevant to point out that when the 1962 article appeared the market had already experienced a decline of major size, and was now getting ready for an even greater upswing. It was about as poor a time as possible for selling short.) In a more general sense, the later-used phrase "reckless investors" could be regarded as a laughable contradiction in terms-something like "spendthrift misers" -- were this misuse of language not so mischievous.

The newspaper employed the word "investor" in these instances because, in the easy language of Wall Street, everyone who buys or sells a security has become an investor, regardless of what he buys, or for what purpose, or at what price, or whether for cash or on margin. Compare this with the attitude of the public toward common stocks in 1948, when over 90% of those queried expressed themselves as opposed to the purchase of common stocks.3 About half gave as their reason "not safe, a gamble," and about half, the reason "not familiar with." It is indeed ironical (though not surprising) that common-stock purchases of all kinds were quite generally regarded as highly speculative or risky at a time when they were selling on a most attractive basis, and due soon to begin their greatest advance in history; conversely the very fact they had advanced to what were undoubtedly dangerous levels as judged by past experience later transformed them into "investments," and the entire stock-buying public into "investors."

The distinction between investment and speculation in common stocks has always been a useful one and its disappearance is a cause for concern. We have often said that Wall Street as an institution would be well advised to reinstate this distinction and to emphasize it in all its dealings with the public. Otherwise the stock exchanges may some day be blamed for heavy speculative losses, which those who suffered them had not been properly warned against. Ironically, once more, much of the recent financial embarrassment of some stock-exchange firms seems to have come from the inclusion of speculative common stocks in their own capital funds. We trust that the reader of this book will gain a reasonably clear idea of the risks that are inherent in common-stock commitments-risks which are inseparable from the opportunities of profit that they offer, and both of which must be allowed for in the investor's calculations.

What we have just said indicates that there may no longer be such a thing as a simon-pure investment policy comprising representative common stocks-in the sense that one can always wait to buy them at a price that involves no risk of a market or "quotational" loss large enough to be disquieting. In most periods the investor must recognize the existence of a speculative factor in his commonstock holdings. It is his task to keep this component within minor limits, and to be prepared financially and psychologically for adverse results that may be of short or long duration.

Two paragraphs should be added about stock speculation per se, as distinguished from the speculative component now inherent in most representative common stocks. Outright speculation is neither illegal, immoral, nor (for most people) fattening to the pocketbook. More than that, some speculation is necessary and unavoidable, for in many common-stock situations there are substantial possibilities of both profit and loss, and the risks therein must be assumed by someone. There is intelligent speculation as there is intelligent investing.But there are many ways in which speculation may be unintelligent...

1. Benjamin Graham, David L. Dodd, Sidney Cottle, and Charles Tatham, McGraw-Hill, 4th. ed., 1962.

2. This is quoted from Investment and Speculation, by Lawrence Chamberlain, published in 1931.

3. In a survey made by the Federal Reserve Board.

intelligent investor
The Classic Text on Value Investing
. Copyright © by Benjamin Graham. Reprinted by permission of HarperCollins Publishers, Inc. All rights reserved. Available now wherever books are sold.

Table of Contents

Introduction: What This Book Expects to Accomplishxxiii
Part IGeneral Approaches to Investment1
IWhat the Intelligent Investor Can Accomplish3
IIThe Investor and Stock-Market Fluctuations21
IIIThe Investor and His Advisers45
IVGeneral Portfolio Policy: The Defensive Investor55
VPortfolio Policy for the Aggressive Investor: Negative Approach75
VIPortfolio Policy for the Enterprising Investor: The Positive Side89
Part IIPrinciples of Security Selection109
VIIUnited States Savings Bonds: A Boon to Investors111
VIIISecurity Analysis for the Lay Investor: General Approach123
IXStock Selection for the Defensive Investor137
XStock Selection for the Enterprising Investor: The Appraisal Method147
XIDetection of Undervalued Issues by Security Analysis: Three Examples163
XIIThe Pattern of Change in Stock Earnings and Stock Prices175
XIIIGroup Studies of Earnings and Price Developments195
Part IIIThe Investor as Business Owner205
XIVStockholders and Managements207
XVA Study of Stockholder-Management Relations in Two Industries227
Part IVConclusion239
XVI"Margin of Safety" as the Central Concept of Investment241
AppendixBuying and Selling by "Central Value" Method251
About Benjamin Graham265
About John C. Bogle267

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The Intelligent Investor 4 out of 5 based on 0 ratings. 32 reviews.
Guest More than 1 year ago
This classic book on investing belongs on the bookshelf of every investor. The principles that Benjamin Graham outlines are the very precepts that guided such great investors as Warren Buffett, and such mutual fund innovators as John Bogle, the noted Vanguard Group founder, who wrote this edition's foreword. First published in 1949, the text shows a few signs of age, most notably in its discussion of interest rates, investment vehicles such as savings bonds and other time-sensitive subjects. However, those are minor issues. When Benjamin Graham writes about categories of investors, approaches to security analysis, the proper disposition investors should have toward market moves, and other fundamental investment subjects, his advice is timeless. We highly recommend this seminal book.
ColinB More than 1 year ago
One might wonder, why (s)he should read a book on investing written in 1949. How would such a thing be relevant to today's stock market? How much of it would still apply to 2010? Just about all of it. Graham started his Wall Street career in 1914, and was all but wiped out in the infamous 1929-32 mother of all bear markets, a painful experience from which he learned many important lessons. He says that, just as information relating to securities in 1914 would make strange reading in 1949, so would information in the first edition of his book make strange reading today. However, the information relating to bull and bear markets, the nature of the stock market as a whole and the insane behavior of investors will all remain the same, without end, Amen. Also, he warns, you must have a knowledge of stock market history, and what better way to get one than a book written originally in 1949 with periodic updates ending in 1973? Graham does not talk like he is some sort of a Wall Street prophet (which actually he was). He does not sermonize, he does not admonish, he does not accuse. But he does make a crystal clear definition of the "intelligent" investor: that it is more a trait of character than of the brain. He states that many who have brought great intellect (in the non-Graham definition) and enthusiasm to investing have ended up bust in the end, as they acted just like all the other little lemmings jumping suicidally together off of the cliff that is Wall Street. You can have a stratospheric IQ and a Harvard degree and still be mentally retarded by Graham's definition. Do not expect "The Intelligent Investor" to be some sort of a "how to make a million on Wall Street" book. He talks of the "defensive investor" who must expect adequate and gradual returns out of his or her investments; and of the "enterprising investor" who will make a little bit more than their defensive counterpart, not because his or her IQ is higher, or they bought risky growth stocks, but only because of the extra effort and research brought to the table. Even the enterprising investor must not expect to make gargantuan returns, sadly, and Graham is just being a realist. Try swinging for the fences on every pitch and you'll end up like those lemmings I mentioned. The only confusion I have over the 1949 edition of the Intelligent Investor, is the question of FOR WHOM this book was written. As Bogle says in the forward, the trading volume on the Big Board was 2,000,000 shares per day. That is about how many Americans actually owned stock in the 40's and 50's, most of which were of above average means and wealth. So maybe he was only expecting to print 2 million copies?? For whomever this book was originally intended, it applies to ALL OF US who want to invest in stocks and bonds and other investment vehicles, even if the Big Board traded 2 BILLION shares yesterday and 90 million Americans own stock or mutual funds in 2010. Let's just hope those 90 million Americans have read Graham. Or maybe not: he says you can profit off of their insanity. So much for the better.
nzwaneveld on LibraryThing 6 months ago
A book on investing that every investor should have read. The principles that Benjamin Graham outlines are the very precepts that guided many great investors. Although the book was first published in 1949, and is still very relevant for today's markets. When Benjamin Graham writes about categories of investors, approaches to security analysis, the proper disposition investors should have toward market moves, and other fundamental investment subjects, his advice is timeless. This is a "must-read" even if you are an investor who bases their strategy on technical analysis. Every investor must have a fundamental understanding of how markets interact, and although this book is not easy to read, and takes some discipline to complete, it is time well spent. This book is highly recommended for everyone interested in investing in today's markets.
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