Friday, November 5, 2010

The Intelligent Investor

Warren Buffet describes The Intelligent Investor by Benjamin Graham as, "by far the best book on investing ever written." It is the seminal description of the principles of value investing. The sage of Omaha is not alone in praising this book. On vacation I read the original 1948 edition of this classic. John C. Bogle, founder of the Vanguard Funds wrote the introduction. Other luminaries such as Irving Kahn, Walter Schloss, and Jason Zweig have praised this work.

The Intelligent Investor is the essence what I have been trying to learn over the last nine years. The value investor does not overly concern himself with the day to day fluctuations of the market. Instead, this investor attempts to identify companies with a promising income stream, sound management, and a sustainable dividend, buying them when their price dips, and then holding them, sometimes forever. Graham also recommends developing a defensive mix of fixed income securities and stocks to further protect the value of the investor’s portfolio against the slings and arrows of outrageous fortune.

In the sixty years that have passed since this book was written the particulars of all his examples have changed, but the principles taught are timeless. For example, I found it interesting he was aware of the inherent value found in unprofitable railroads. Thirty years later some of these unprofitable railroads went bankrupt. Those wise enough to understand what Graham was preaching made a killing buying these “worthless” securities. The real estate holdings of these railroads, proved to be worth many times the value of their cost.

This book is not an easy read. There is more to learn from his examples than can be absorbed in a single reading, no matter how slow and careful.

Graham is greatly amused by “Mr. Market,” an obliging fellow who comes to his door every day, offering to buy his stocks or sell him something else. Some days the price offered is ridiculously low and on other days the price is outrageously high, but over time the value of the intelligent investor’s holdings continues to grow and pay regular dividends.

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