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A Fresh Look at an Investment Classic
on June 12, 2006
When it comes to the subject of investment, one cannot speak about it without mentioning the household name, Warren Buffett. After all, this is a man who had made himself the second richest man in the world solely by investing money in companies. It is through learning more about Buffett that lead me to Benjamin Graham and his investment classic, The Intelligent Investor. In this 2003 updated edition, supplementary commentaries and footnotes were added throughout the book by Jason Zweig, a senior writer at Money magazine. This updated edition offers a fresh look at an investment classic, and convinces the reader that the book is still relevant 33 years after Graham’s last revision.
Let me begin then with an observation. Nowadays, just about everybody who has worked a day job knows about putting their money in the stock market. There are some who does it out of greed, some out of fear, but the vast majority does it just because everybody else is doing the same thing! It appears to me that only a tiny group of minorities are really making intelligent investment decision. What about the rest? They buy/sell when they feel like it. Emotion is their chief investment advisor, and they listen to it religiously. Is it any wonder that the financial market behaves the way it does? Good news, because one will learn from Graham that the sillier the market’s behavior, the greater the opportunity for the business-life investor.
Graham begins by laying out the foundational definition of investment versus speculation. “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative." In the following chapters, Graham gives his reader unprecedented access to the stock market history and grants readers the wisdom that are used in developing portfolio policies in the body of the book. This book attempts to inject some transparency into the secret world of finance and he has succeeded abundantly.
The final and most important chapter of this book sums up the secret of sound investment into three words, MARGIN OF SAFETY. To quote, “The margin of safety is always dependent on the price paid. It will be large at one price, small at some higher price, nonexistent at some still higher price.”
The Intelligent Investor isn’t a book about analyzing companies, but one which really nails into the readers’ heads the proper investment principles and attitudes. Professor Graham’s academic writing style delivers his powerful idea in a simple and gentle way.
To summarize, in the added appendix of the book is an article called Superinvestors of Graham of Doddsville written by Buffett, “There seems to be some perverse human characteristic that likes to make easy things difficult… Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace, and those who read their Graham & Dodd will continue to prosper.”