The Intelligent Investor Rev Ed.: The Definitive Book on Value Investing

GRAHAM REVIEWGraham's original work itself is fantastic, if you take the time to absorb it and understand it. It took me two reads before I really felt like I grasped it well. I don't need to write an elaborate review discussing this book for people to know it is obviously an investment classic; it has Warren Buffett's full endorsement which is the reason a lot of people opt to read it in the first place. The practical advice offered is timeless. In particular I found Chapter 1 (the difference between speculation and investing), Chapter 8 (managing your emotions), Chapter 10 (discerning the advice from others) and Chapter 20 (having a margin of safety) to be enlightening, as those four chapters were probably the most useful to me personally. The advice in the very first chapter regarding the difference between investing and speculating gets lost on a lot of people today, as anything and everything that involves stocks, bonds, options, or futures seems to be categorized as investing. The portion of Chapter 8 that discusses managing your emotions is arguably the most difficult for people to actually implement in the real world, despite being a very important concept. Graham truly makes a compelling case in favor of a value approach, which as I will discuss later in this review, is inherently reliant on the belief that investments can and do become undervalued. Buffett notes that the most significant chapters for him were 8 and 20. I agree, but also add chapters 1 and 10 to that shortened list. For others that might be different.A unique thing that I appreciated about Graham is that he discusses two different ways of investing, depending on how much time you have to put into the matter. For those who have too many other things going on to put the time into it, he advocates "defensive investing," which basically focuses on safer, larger companies and is a little more bond-heavy. And for those who want to put a lot more work into it, he advocates "enterprise investing," where he lays out a more rigorous approach to value investing. While the enterprising method does indeed yield greater returns over the long run, there is nothing wrong with taking the defensive approach, particularly for those who aren't able to commit enough time in order to make the enterprising method effective.There are a few minor areas that are no longer relevant as they were in Graham's day, such as his suggestion that one should use a local bank to handle transfers of stock certificates... when it is basically all online these days. But if one reads it and remains aware that it was written in the early 1970s, then these little quirks will not bother them. I will also add that Graham places an emphasis on dividend maintenance that is probably less relevant today. In his day, strong companies actually paid out about 1/3 to 2/3 of their surpluses, whereas these days that is far less common. Graham's followers, including Buffett and Klarman, do not emphasize this so heavily (Klarman has gone as far as saying that looking at dividend policy is almost useless in today's era), although it is still probably relevant to look at the continuity of dividends especially for "defensive" investors. It should be added that while Graham has an almost aloof/academic air about him, he is equally humble and sincere, never underestimating the intelligence of his readers. And for those occasional uppity words that he uses, there is always a dictionary nearby. It may take more than a cursory read, but if you are patient, then this book is a gold mine. As a result, I give Graham 5 stars.ZWEIG REVIEWJason Zweig's commentary really deserves its own separate review, as this is basically two different books. Throughout MUCH (not all) of the book, I would have given Zweig 4 or 5 stars, as his commentary adds to the discussion and thought process of Graham. However, Zweig departs from Graham in a very fundamental way in three portions of the book, causing me to believe that Zweig either truly disagrees with or otherwise does not fully understand what Graham's argument is. Zweig essentially subscribes to the "Random Walker" camp of those supporting a Semi-Strong version of Efficient Market Hypothesis (EMH) and believes that one is simply speculating when choosing individual stocks instead of index funds. Zweig lets his own views seep into the book slowly, chapter by chapter, until it becomes more obvious that he is not a value investor. Graham did not subscribe to this relatively recent view (only existing since the 1960s) in his approach to VALUE investing. The entire premise of value investing is that securities sometimes do become undervalued, which is rare/impossible according to proponents such as Zweig. Though to my knowledge Graham never wrote a piece articulating his stance, his actions were to the contrary of what Zweig seems to believe his position was. It's also notable that his contemporaries/students blatantly countered the EMH viewpoint (see Buffett and "Superinvestors" below; see also Phil Fisher in "Developing an Investment Philosophy" chapter 4, entitled "Is the Market Efficient?").(1) In the first and most notable departure for Zweig, there is a portion of the book where Graham says "[i]t would be rather strange if - with all the brains at work professionally in the stock market - there could be approaches which are both sound and relatively unpopular. Yet our own career and reputation have been based on this unlikely fact." (Graham, p. 380). If one reads the version in its proper context, then they will realize rather quickly that Graham is arguing that this unlikely fact of the markets actually being inefficient much of the time is actually TRUE, and is thus a compelling reason to study value investing. However... Zweig goes on in the commentary to say that Graham is pointing out that the market is efficient, and discusses the definition of the Efficient Market Hypothesis (EMH). This is clearly NOT what Graham was saying... rather the opposite.(2) In the second notable departure, there is a commentary chapter of Zweig's where he discusses how to effectively manage your portfolio. In the chapter itself, Graham discussed stock selection. Zweig, however, goes on to say that people should not actually pick stocks with more than 10% of their money, as doing so is akin to speculating, and should instead place all or nearly all of their funds into index funds that can come close to tying the market because of the EMH. Even though this advice MIGHT (arguably) be relevant for the "defensive" investor that Graham discusses (those who do not have the time or want to put the time into managing their own portfolio), this advice is a blatant misrepresentation of what Graham advises for "enterprising" investors (those who want to actively practice value investing) in such a fundamental way as to make me want to give Zweig 1 star instead of 5. But due to my holistic review, Zweig gets more than 1.(3) Zweig places an emphasis on diversification that I don't think Graham fully intended. Graham discusses the value of diversification throughout the book by taking multiple positions. Note though that Graham does NOT advocate buying everything...simply holding a few varied positions. But Zweig interprets this concept in such a way as to, in my humble opinion, advocate over-diversification... which is effectively nothing more than buying so many things that you should have just purchased an index fund to begin with.Collectively, Zweig's most significant contribution to the book was simply putting some of Graham's now-dated statements into context. I'm not saying there's anything wrong with believing in EMH in the markets the way that Zweig does, per se. But I am harsh on Zweig because advocating EMH and claiming that any stock is "speculative" is a blatant misrepresentation of Graham's views and stance. Despite departing from Graham quite fundamentally in two or three areas, Zweig mostly added a beneficial/informative conversation. Thus I hesitantly give him 3 stars.BUFFETT REVIEWWarren Buffett has a brief introduction towards the beginning of the book that tells what readers can expect from reading his mentor, Graham. As already mentioned, he places additional emphasis on chapters 8 and 20. But more importantly, there is a compelling essay/speech by Buffett in the back of the book that is called "The Superinvestors of Graham and Doddsville" that was given at Columbia University in 1984. You don't have to buy the book to read this essay, as it is free on the internet in a few different places. But it is arguably the best rebuttal to the Efficient Market Hypothesis that anyone has ever put out, and I don't know of any EMH proponents that have ever addressed Buffett's argument. In essence, Buffett points out that many different versions of investing that have little in common with each other beyond a decidedly long-term value-driven approach have all yielded positive results over time that have had decidedly superior returns to the market. There is unfortunately little written on this topic by actual practitioners, but Buffett's argument is worth a read. It's a definite 5 stars.CONCLUSIONAs a result, I give this whole book collectively 5 stars. You can just ignore the areas where Zweig errs, sometimes rather substantially. You could safely ignore his additional chapters/commentary altogether, although I think it is useful to read for putting certain portions of Graham's writing into perspective. Entire book is recommended; but if you don't read the whole thing, at least read Chapters 1, 8, 10, and 20, as well as Buffett's essay. It's a great addition to any investment library. I know that adding those up rounds to 4, but it is Graham's book after all (much as Zweig might wish it was his)... so it's 5 stars.

This book is light reading compared to Ben Graham's seminal tome, Security Analysis. It's easier to read, and shorter. It's also more up to date. Highly recommended for investors of any stripe, value or growth. The appendix, from Warren Buffett's speech at Columbia University is particularly entertaining, as he debunks academia's love affair with efficient market theory. Jason Zweig, an obvious Graham disciple, does a fantastic job bringing the book's principles to life through modern examples. The only grating thing is his constant derision of brokers or anyone that actually gets paid to manage money. (full disclosure: I'm an analyst now and was a broker for 10 years).Ben Graham clearly invested in the stock market during a period of hustlers, crooks, crashes, and frauds. Brokers, investment bankers and analysts back then were not much more than fast-talking salesmen. Wait a minute, that sounds just like the way things are today on Wall Street! Things may not have changed as much as we would like to think. Due to his travails as an investor in difficult markets, Ben Graham's investment style evolved into a systematic, logical approach which became the basis for value investing. In "The Intelligent Investor", Graham lays out the foundation of value investing by three introducing key principles: the idea of "Mr. Market", a value-oriented disciplined approach to investing, and the "margin of safety" concept."Mr. Market."The stock market on a daily basis resembles a casino, only without the comfort of free cocktails. Watching the stock ticker is like having a business partner that is totally schizophrenic; Graham calls him "Mr. Market." One day he loves the business and wants to pay a ridiculous price to buy out your half. The next day, all hope is lost, and he wants to sell you his portion for pennies on the dollar. Graham argues that this daily liquidity is an advantage that most investors turn against themselves: (p. 203) "But note this important fact: The true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all; for he would then be spared the mental anguish caused him by other persons' mistakes of judgment." This is profound. It's not a question of whether our stocks will drop; they will: the trick is how we respond to that eventuality.Ben Graham's Stock selection for the defensive investor.Graham lays out some important characteristics of "value" stocks. (p. 348). Some of the metrics are dated, but the principles are still valid. Even deep value investing today would seem like GARP investing to Ben Graham. Investors are now more focused on future earnings than they were in his day, and valuations reflect that. Graham recommends:a. Adequate size of the enterprise (>$100M revenue, old figure)b. Sufficiently strong financial condition (2:1 current ratio)c. Earnings stability (some earnings every year last 10 years)d. Dividend record (uninterrupted payments for at least 20 years)e. Earnings growth (1/3 increase in per share EPS past 10 years)f. Moderate price/earnings ratio (P/E < 15x average last 3 years EPS)g. Moderate ratio of price to assets (price/book < 1 1/2 times)h. Overall stock portfolio, when acquired, should have an overall earnings /price ratio- the reverse of the P/E ratio - at least as high as the current high-grade bond rate. A P/E no higher than 13.3 against an AA bond yield of 7.5%Margin of Safety as the central concept of value investing.This is an investment rule that was written by a man who had been deeply bruised by bear markets. I believe he came up with this by learning from his losses. When the market turns into a storm of feces, like it inevitably will, if the stock has no earnings to rely on, you have nothing to grab onto. You can't make yourself stay in the stock when the price is down. Graham says: (p. 515) "The margin of safety is the difference between the percentage rate of the earnings on the stock at the price you pay for it and the rate of interest on bonds, and that is to absorb unsatisfactory developments". Furthermore he writes: (p. 518) "The buyer of bargain issues places particular emphasis on the ability of the investment to withstand adverse developments. " You can and will still lose money in the market with value-oriented investing, but according to Graham: (p. 518) "The margin guarantees only that he has a better chance of profit than for loss-not that loss is impossible."ConclusionSo that's it, those are the three basic points of the book, but you should still buy it and read it, it's a very enjoyable experience, Shakespeare for the investing crowd. Despite being a realist, Ben Graham wasn't a total pessimist. Late in the book Graham makes a point that is one of my favorites: (p. 524) "A fourth business rule is more positive: "Have the courage of your knowledge and experience. If you have formed a conclusion from the facts and if you know your judgment is sound, act on it- even though others may hesitate or differ. You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right. Similarly, in the world of securities, courage becomes the supreme virtue after adequate knowledge and a tested judgment are at hand. "

Loved this book it is really amazing. Definelty a must read for all investors

I read half of this book and put it down cuz it's so thick and haven't picked it back up yet but it's a real good book a nice read