The Intelligent Investor
by Benjamin Graham
Central Theme: An "Investment" promises safety of principal and an adequate return.
Show examples of 7 of these concepts used in business.
Stock for the Defensive Investor
- Value is found in companies of adequate size. Small companies are too volatile.
- A company should have a sufficiently strong financial condition (Long term debt should not exceed the net current assets.
- The company should have stable earnings over the past ten years.
- If the company pays dividends they should be uninterupted over the past 20 years.
- Earnings should have a minimum increase of at least one-third in per-share earnings in the past ten years using three-year averages at the beginning and end.
- The current price per share of stock should not be more than 15 times average earnings of the past three years.
- the current price per share should not be more than 1 1/2 times the book value last reported.
In 1934, following the worst bear market in this century, Security Analysis was published. Benjamin Graham and his co-author, David Dodd, emphasized conservative, quantitative measures of performance — and offered a rigorous approach to stock and bond analysis which, for the first time, made investing more science than art. It is the acknowledged classic of this industry, but it a long and very difficult read.
Graham perhaps recognized this himself since, in 1947, he published the first edition of The Intelligent Investor, an insightful approach to investing designed for any interested reader. The central arguments of the book — defined in Chapters 8 and 20 (and highlighted in the preface by his former student, Warren Buffett) — are familiar to you by now: (1) view a stock as a piece of a business, not a piece of paper; (2) be willing to buy stock in quality companies when others are blindly desperate to sell; and (3) leave yourself a margin of safety since even the best analysis might be off the mark to some degree.
The overall approach is disciplined, contrarian, and conservative — hardly surprising for a brilliant investor who lived through the 1929-1932 stock market massacre and the subsequent roller-coaster. Graham directs his discussion both to defensive and to active investors, and includes several rules for each. He also includes his one sure-fire investment approach: Buy companies at two-thirds of their current assets minus all liabilities. These days, however, you're as likely to find a unicorn as a stock selling at a one-third discount to "net-net."
The Intelligent Investor also contains interesting material on the history of the stock market, and even a mention of Graham's unsuccessful attempt to get his employer to buy shares of National Tabulating and Recording in 1914 — the company subsequently changed its name to International Business Machines. In addition, there are discussions of accounting red flags, private market value and Wall Street's penchant for recommending companies regardless of price. Two pages under the title "To Sum Up" can be read in a few minutes and will probably persuade you to read the rest.