Author | Benjamin Graham |
---|---|
Cover artist | Donavan Hayes |
Language | English |
Subject | Securities, Investment |
Publisher | Harper & Brothers |
Publication date | 1949 |
Publication place | United States |
Pages | 640 |
ISBN | 0-06-055566-1 (2008 edition) |
OCLC | 1723191 |
LC Class | HG4521 .G665 |
The Intelligent Investor by Benjamin Graham, first published in 1949, is a widely acclaimed book on value investing. The book provides strategies on how to successfully use value investing in the stock market. Historically, the book has been one of the most popular books on investing and Graham's legacy remains.
The Intelligent Investor is based on value investing, an investment approach Graham began teaching at Columbia Business School in 1928 and subsequently refined with David Dodd. [1] This sentiment was echoed by other Graham disciples such as Irving Kahn and Walter Schloss. Warren Buffett read the book at age 20 and began using the value investing taught by Graham to build his own investment portfolio. [2]
The Intelligent Investor also marks a significant deviation in stock selection from Graham's earlier works, such as Security Analysis . Which is, instead of extensive analysis on an individual company, just apply simple earning criteria and buy 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]
Graham’s main investment approach outlined in The Intelligent Investor is that of value investing. [4] 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. [5] 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 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. [6]
One of Graham's important allegories is that of Mr. Market, meant to personify the irrationality and group-think of the stock market. Mr. Market is an obliging fellow who turns up every day at the shareholder's door offering to buy or sell his shares at a different price. Often, the price quoted by Mr. Market seems plausible, but sometimes it is ridiculous. The investor is free to either agree with his quoted price and trade with him, or ignore him completely. Mr. Market doesn't mind this, and will be back the following day to quote another price.
The point of this anecdote is that the investor should not regard the whims of Mr. Market as a determining factor in the value of the shares the investor owns. He should profit from market folly rather than participate in it. A common fallacy in the market is that investors are reasonable and homogenous, but Mr. Market serves to show that this is not the case. The investor is advised to concentrate on the real life performance of his companies and receiving dividends, rather than be too concerned with Mr. Market's often irrational behavior.
In The Intelligent Investor, Graham 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. [7] 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. [8]
Benjamin Graham is regarded as the father of value investing and The Intelligent Investor was highly regarded by the public and remains so. Ronald Moy, professor of economics and finance at St. John’s University, explains that “The influence of Graham's methodology is indisputable. His disciples represent a virtual who's who of value investors, including Warren Buffett, Bill Ruane, and Walter Schloss”. [4] 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.” Ken Faulkberry, founder of Arbor Investment Planner, claims, “If you could only buy one investment book in your lifetime, this would probably be the one”. [9] Many of Graham’s investment strategies explained in the book remain useful today despite massive growth and change in the economy. [5] 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”. [5] The Intelligent Investor was received with praise from economic scholars and everyday investors and continues to be a premier investing book today.
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" ISBN 0-06-015547-7, 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]
An unabridged audio version of the Revised Edition of The Intelligent Investor was also released on July 7, 2015. [11]
2003 edition
Fundamental analysis, in accounting and finance, is the analysis of a business's financial statements ; health; competitors and markets. It also considers the overall state of the economy and factors including interest rates, production, earnings, employment, GDP, housing, manufacturing and management. There are two basic approaches that can be used: bottom up analysis and top down analysis. These terms are used to distinguish such analysis from other types of investment analysis, such as quantitative and technical.
Investment is traditionally defined as the "commitment of resources to achieve later benefits". If an investment involves money, then it can be defined as a "commitment of money to receive more money later". From a broader viewpoint, an investment can be defined as "to tailor the pattern of expenditure and receipt of resources to optimise the desirable patterns of these flows". When expenditures and receipts are defined in terms of money, then the net monetary receipt in a time period is termed cash flow, while money received in a series of several time periods is termed cash flow stream.
Benjamin Graham was a British-born American financial analyst, economist, accountant, investor and professor. He is widely known as the "father of value investing", and wrote two of the discipline's founding texts: Security Analysis (1934) with David Dodd, and The Intelligent Investor (1949). His investment philosophy stressed independent thinking, emotional detachment, and careful security analysis, emphasizing the importance of distinguishing the price of a stock from the value of its underlying business.
In finance, a growth stock is a stock of a company that generates substantial and sustainable positive cash flow and whose revenues and earnings are expected to increase at a faster rate than the average company within the same industry. A growth company typically has some sort of competitive advantage that allows it to fend off competitors. Growth stocks usually pay smaller dividends, as the companies typically reinvest most retained earnings in capital-intensive projects.
The Graham number or Benjamin Graham number is a figure used in securities investing that measures a stock's so-called fair value. Named after Benjamin Graham, the founder of value investing, the Graham number can be calculated as follows:
Value investing is an investment paradigm that involves buying securities that appear underpriced by some form of fundamental analysis. Modern value investing derives from the investment philosophy taught by Benjamin Graham and David Dodd at Columbia Business School starting in 1928 and subsequently developed in their 1934 text Security Analysis.
Contrarian investing is an investment strategy that is characterized by purchasing and selling in contrast to the prevailing sentiment of the time.
In finance, an investment strategy is a set of rules, behaviors or procedures, designed to guide an investor's selection of an investment portfolio. Individuals have different profit objectives, and their individual skills make different tactics and strategies appropriate. Some choices involve a tradeoff between risk and return. Most investors fall somewhere in between, accepting some risk for the expectation of higher returns.
Security Analysis is a book written by Benjamin Graham and David Dodd. Both authors were professors at the Columbia Business School. The book laid the intellectual foundation for value investing. The first edition was published in 1934 at the start of the Great Depression. Graham and Dodd coined the term margin of safety in the book.
Growth investing is a type of investment strategy focused on capital appreciation. Those who follow this style, known as growth investors, invest in companies that exhibit signs of above-average growth, even if the share price appears expensive in terms of metrics such as price-to-earnings or price-to-book ratios. In typical usage, the term "growth investing" contrasts with the strategy known as value investing.
An undervalued stock is defined as a stock that is selling at a price significantly below what is assumed to be its intrinsic value. For example, if a stock is selling for $50, but it is worth $100 based on predictable future cash flows, then it is an undervalued stock. The undervalued stock has the intrinsic value below the investment's true intrinsic value.
Financial statement analysis is the process of reviewing and analyzing a company's financial statements to make better economic decisions to earn income in future. These statements include the income statement, balance sheet, statement of cash flows, notes to accounts and a statement of changes in equity. Financial statement analysis is a method or process involving specific techniques for evaluating risks, performance, valuation, financial health, and future prospects of an organization.
"The Superinvestors of Graham-and-Doddsville" is an article by Warren Buffett promoting value investing, published in the Fall, 1984 issue of Hermes, Columbia Business School magazine. It was based on a speech given on May 17, 1984, at the Columbia University School of Business in honor of the 50th anniversary of the publication of Benjamin Graham and David Dodd's book Security Analysis. The speech and article challenged the idea that equity markets are efficient through a study of nine successful investment funds generating long-term returns above the market index. All these funds were managed by Benjamin Graham's alumni, following the same "Graham-and-Doddsville" value investing strategy but each investing in different assets and stocks.
Quality investing is an investment strategy based on a set of clearly defined fundamental criteria that seeks to identify companies with outstanding quality characteristics. The quality assessment is made based on soft and hard criteria. Quality investing supports best overall rather than best-in-class approach.
Stocks consist of all the shares by which ownership of a corporation or company is divided. A single share of the stock means fractional ownership of the corporation in proportion to the total number of shares. This typically entitles the shareholder (stockholder) to that fraction of the company's earnings, proceeds from liquidation of assets, or voting power, often dividing these up in proportion to the number of like shares each stockholder owns. Not all stock is necessarily equal, as certain classes of stock may be issued, for example, without voting rights, with enhanced voting rights, or with a certain priority to receive profits or liquidation proceeds before or after other classes of shareholders.
Tweedy, Browne Company LLC is an American investment advisory and fund management firm founded in 1920 and headquartered in Stamford, CT. As of December 2012, it managed approximately 13 billion dollars in separate accounts and four mutual funds. The firm specialized in value investing influenced by Benjamin Graham, and is also known for their association with Warren Buffett during the early phase of his career. Tweedy, Browne has been described as "the oldest value investing firm on Wall Street".
A period of financial distress occurs when the price of a company or an asset or an index of a set of assets in a market is declining with the danger of a sudden crash of value occurring, either because the company is experiencing increasing problems of cash flow or a deteriorating credit balance or because the price had become too high as a result of a speculative bubble that has now peaked.
Mr. Market is an allegory created by investor Benjamin Graham to describe what he believed were the irrational or contradictory traits of the stock market and the risks of following groupthink. Mr. Market was first introduced in his 1949 book, The Intelligent Investor.
Factor investing is an investment approach that involves targeting quantifiable firm characteristics or “factors” that can explain differences in stock returns. Security characteristics that may be included in a factor-based approach include size, low-volatility, value, momentum, asset growth, profitability, leverage, term and carry.
Geraldine Weiss was an American editor, investment advisor, investor, and writer. She was the co-founder of the newsletter, Investment Quality Trends and was nicknamed "the Grande Dame of Dividends" and "The Dividend Detective" for her unconventional value approach investment style by focusing on a company's dividends rather than earnings.