The Intelligent Investor by Benjamin Graham was first published in 1949 and is a widely acclaimed book on value investing. The book provides strategies on how to successfully use value investing in the stock market and provides strategies for the analysis of bonds. The book also makes a very important distinction that is repeated multiple times throughout the book, this being the distinction between investment and speculation. Graham argues that investment must be based in sound principles of financial analysis, otherwise it is speculation, which he compares to gambling. Historically, the book has been one of the most popular books on investment and Graham's legacy remains.
The Intelligent Investor also marks a significant deviation in stock selection as described in Graham's earlier works, including Security Analysis. Instead of extensive analysis on an individual company, The Intelligent Investor recommends applying simple earning criteria and buy stocks in a group of companies. He explained the change as:
The thing that I have been emphasizing in my own work for the last few years has been the group approach. To try to buy groups of stocks that meet some simple criterion for being undervalued -- regardless of the industry and with very little attention to the individual company... I found the results were very good for 50 years. They certainly did twice as well as the Dow Jones. And so my enthusiasm has been transferred from the selective to the group approach. What I want is an earnings ratio twice as good as the bond interest ratio typically for most years. One can also apply a dividend criterion or an asset value criterion and get good results. My research indicates the best results come from simple earnings criterions.[3]
Analysis
Value investing
Value investing is an investment strategy that targets undervalued stocks of companies that have the capabilities as businesses to perform well in the long run.[2] Value investing is not concerned with short term trends in the market or daily movements of stocks.[4] This is because value investing strategies believe the market overreacts to price changes in the short term, without taking into account a company’s fundamentals for long-term economic growth.[2]
In its most basic terms, value investing is based on the premise that if you know the true value of a stock, then you can save lots of money if you can buy that stock on sale.[5]
Determining value
The Intelligent Investor explains the importance of determining value when investing. In order to invest for value successfully and avoid participating in short-term market booms and busts, determining the value of companies is essential.[6] To determine value, investors use fundamental analysis. Mathematically, by multiplying forecasted earnings over a certain number of years times a capitalization factor of a company, value can be determined and then compared to the actual price of a stock. There are five factors that are included in determining the capitalization factor, which are long-term growth prospects, quality of management, financial strength and capital structure, dividend record, and current dividend rate. To understand these factors, value investors look at a company's financials, such as annual reports, cash flow statements and EBITDA, and company executives’s forecasts and performance.[1] This information is all available online as it is required for each public company by the SEC.[7]
Reception
Benjamin Graham is regarded as the father of value investing and The Intelligent Investor was highly regarded by the public and remains so. The influence of Graham's methodology has not been disputed, as his disciples include Warren Buffett, Bill Ruane, and Walter Schloss.[8] Warren Buffett is regarded as a brilliant investor and Graham’s best-known disciple.[9] According to Buffett The Intelligent Investor is “By far the best book on investing ever written.”
Many of Graham’s investment strategies explained in the book remain useful today despite massive growth and change in the economy.[4] Scholar Kenneth D. Roose of Oberlin College writes, “Graham’s book continues to provide one of the clearest, most readable, and wisest discussions of the problems of the average investor”.[4]
Editions
Since the work was published in 1949 Graham revised it several times, most recently in 1971–72. This was published in 1973 as the "Fourth Revised Edition" ISBN0060155477, and it included a preface and appendices by Warren Buffett. Graham died in 1976. Commentaries and new footnotes were added to the fourth edition by Jason Zweig, and this new revision was published in 2003.[10]
The Intelligent Investor (Re-issue of the 1949 edition) by Benjamin Graham. Collins, 2005, 269 pages. ISBN0060752610.
The Intelligent Investor by Benjamin Graham, 1949, 1954, 1959, 1965(Library of Congress Catalog Card Number 64-7552) by Harper & Row Publishers Inc, New York.
The Intelligent Investor (Revised 1973 edition) by Benjamin Graham and Jason Zweig. HarperBusiness Essentials, 2003, 640 pages. ISBN0060555661.
An unabridged audio version of the Revised Edition of The Intelligent Investor was also released on July 7, 2015.[11]
