4. The Intelligent Investor.
When you have Warren Buffett’s endorsement as “by far the best book about investing ever written”, you can expect to be a candidate for any top ten list. And this book does frequently appear at or near the top of most of the best-book lists that are produced from time to time for individual investors. But does it tell institutional investors anything they don’t know? Is there really anything new to be learned from plowing through a text first published more than 60 years ago? Is this really a must-read for those in institutional investment?
I think it is — Partly because it’s so influential. Partly because — despite being held in high esteem— this book’s lessons have not been assimilated into market behavior to the extent one might expect. Throughout this book runs a distinction between speculation (based on the ups and downs of an asset’s market valuation) and investment (looking through to the underlying business). The distinction sounds simple, but is not. As Graham notes: “The development of the stock market in recent decades has made the typical investor more dependent on the course of price quotations and less free than formerly to consider himself merely a business owner.” If that was true in 1973, it’s certainly true in 2013 for institutional investors and their money managers whose performance is tracked continuously and success evaluated from quarter-to-quarter. Attention spans are short and the clamor of a speculative mindset is hard to avoid.
This emphasis on investment, as opposed to speculation, leads to Graham’s own summary of his approach in just three words: MARGIN OF SAFETY (the capitals are his). With a sufficient margin of safety, an investment can be sound even if your assumptions or analysis prove too optimistic. A bond or a stock that is priced for perfection can surprise only on the downside.
There is more to the skill of investing than following any simple formula or rule (“any approach to moneymaking in the stock market which can be easily followed by a lot of people is by its terms too simple and too easy to last”) but we can all be usefully reminded from time to time of the need for common sense, and, sixty years on from its first publication, Graham’s classic remains worth studying.
Benjamin Graham (1949, fourth revised edition 1973). The Intelligent Investor. HarperCollins.