Fifteen years ago, my mom gave me a book that would change my life: The Intelligent Investor, by Benjamin Graham. Prior to that time, I was primarily investing in mutual funds, and did not have a coherent investment philosophy. The Intelligent Investor provided me with that philosophy.
What are the main lessons of this book?
- Don’t overinvest in equities. Markets wash out occasionally, and it’s good to have some bonds around.
- Don’t underinvest in equities. Bonds can only do so much for you, and it is good to deploy capital into equities when they are out of favor.
- Stocks provide modest compensation against inflation risks.
- Avoid callable bonds. Avoid preferred stocks.
- Be conservative in bond investing. Read the prospectus carefully. Often a bond is less safe than one would expect, and occasionally, it offers more value than one would expect.
- Purchase bargain issues on a net asset value basis when you can find them, but be careful of quality issues.
- Volatility of stock prices can be your friend if you understand the underlying value of a well-financed corporation.
- Having a longer-term investment horizon is valuable, because one can take advantage of short-term fluctuations in price.
- Growth is worth paying up for, but be disciplined. Don’t overpay.
- Be wary of mutual funds.
- Be wary of experts.
- Pay attention to the balance sheet; don’t invest in companies that are inadequately financed.
- Review average earnings of cyclical companies.
- Buy them safe and cheap. Don’t overpay for growth and trendiness.
- Avoid highly acquisitive companies.
- Watch cash flow, and question unusual accounting treatments.
- Be careful with unseasoned (new) companies.
- Strong dividend policies, in companies that can support the dividends, are an indicator of value.
- Aim for a margin of safety in all investing.
That’s my quick synopsis of the book. Though I am not a strict Graham-and-Dodd investor (who is?), I apply the basic principles to most of what I do. This is still a relevant book today because the principles are timeless. If you want the updated version with writing from Jason Zweig, that’s fine. You gain in current relevance, and lose a little in nuance. Graham was a very bright guy. I give Zweig credit for trying, but aside from Buffett or Munger, who would really be adequate to revise The Intelligent Investor? I don’t think I would be adequate to the task….
As Revised by Jason Zweig: