Understanding The Intelligent Investor by Benjamin Graham

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I am collaborating with Joseph Hogue, Chartered Financial Analyst (CFA) on a chapter-by-chapter review and analysis of The Intelligent Investor: The Definitive Book on Value Investing by Benjamin Graham.

We are reviewing the latest edition of the book that contains a preface by Warren Buffett, billionaire investor and Graham student, and commentary by Jason Zweig, a financial journalist who now writes a column for the Wall Street Journal. This edition covers investment history and Graham's insights on current events through 1972. Zweig's commentary is more recent, written from a 2006 vantage point.

Graham teaches investors to make decisions based on discipline, not emotion

In The Intelligent Investor, Graham sets out investing frameworks. These allow investors to make decisions that rely on an investment plan and policy, not an emotional reaction to activity in the stock and bond markets.

He also describes two types of investors for which he writes his book:

  • Defensive investors or passive investors (aka lazy investors) who seek to 1) avoid mistakes and 2) be free from “effort, annoyance, and the need for frequent decisions”; they can expect average performance compared to the market (or less, depending on their stock-bond allocations)
  • Enterprising investors or active or aggressive investors who are willing to spend the time and effort in selecting securities that are attractive and sound; they may be able to achieve above-average performance

Both of these types of investors are distinct from speculators, most of whom make short-term trading decisions based solely on market activity and not underlying value.

Investing wisdom draws on knowledge of historical patterns

Graham says “To invest intelligently in securities one should be forearmed with an adequate knowledge of how the various types of bonds and stocks have actually behaved under varying conditions — some of which, at least, one is likely to meet again in one's experience.”

I've noticed that investing circumstances tend to ebb and flow, often in conjunction with economic growth and slowdowns as well as investors' excitement and skepticism.

Consistency of historical patterns of market gains and retreats, however, doesn't mean predictability. Pinpointing the exact timing and nature of stock movements is difficult, if not impossible — even for the most intelligent of investors.

Application of investing wisdom should be adapted to current circumstances

The Intelligent Investor is a classic and Graham's wisdom, timeless. The principles of investing presented by Graham hold true in varied economic and investing climates. Still, how this wisdom is applied in making investment decisions can change to address varied circumstances. Graham writes: “The underlying principles of sound investment should not alter from decade to decade, but the application of these principles must be adapted to significant changes in the financial mechanisms and climate.”

The investing climate of the 1970s referenced in the book may seem foreign to today's investor. At the time, interest rates on bank savings accounts were similar to those of high-grade bonds; high-grade bonds offered desirable rates of 6% or more. These rates were much higher than the then-prevailing dividend returns from stocks of similar quality.

Graham noted that this situation was unlikely to endure. But he mentioned it as a way of demonstrating that a stock-bond allocation ranging from 25-75 to 75-25 can make sense in a wide range of investing environments.

Further, in the time between Graham's writings and this latest edition's publication, many investment products have been launched and types of accounts introduced. These financial mechanisms include:

Investment Products

Investment Accounts

Knowing that new products and and accounts have been introduced since Graham wrote The Intelligent Investor may help readers understand the general principles being discussed. In this regard, Zweig's commentary after each chapter is useful in putting Graham's words and ideas in a more contemporary, understandable context.

The chapter-by-chapter reviews may also be helpful.

Let us know what you think about The Intelligent Investor and our chapter-by-chapter reviews.

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