Book Extract | Benjamin Graham & Jason Zweig, The Intelligent Investor: The Definitive Book on Value Investing (Third Edition)

Market developments over the past seven decades have borne out the wisdom of Graham’s basic policies, and in today’s volatile market, The Intelligent Investor remains essential. It is the most important book you will ever read on making the right decisions to protect your investments and make them grow.

Featuring updated commentaries which accompany every chapter of Graham’s book—leaving his original text untouched—from noted financial journalist Jason Zweig, this newly revised edition offers readers an even clearer understanding of Graham’s wisdom and how it should be applied by investors today.

The extract that is published below with permission is that which Jason Zweig wrote for this special 75th anniversary edition of this seminal book. It is prefaced by a wonderful tribute by Warren Buffett as well as his obituary for Benjamin Graham published in the Financial Analysts Journal, November/December 1976. It is a kind and perceptive assessment of a life well lived. But there is one paragraph which stands out. It is:

A remarkable aspect of Ben’s dominance of his professional field was that he achieved it without that narrowness of mental activity that concentrates all effort on a single end. It was, rather, the incidental by-product of an intellect whose breadth almost exceeded definition. Certainly, I have never met anyone with a mind of similar scope. Virtually total recall, unending fascination with new knowledge, and an ability to recast it in a form applicable to seemingly unrelated problems made exposure to his thinking in any field a delight.

Benjamin Graham (May 8, 1894 – September 21, 1976) was a British-born American economist and professional investor. Graham is considered the father of value investing, an investment approach he began teaching at Columbia Business School in 1928 and subsequently refined with David Dodd through various editions of their famous book Security Analysis. Graham had many disciples in his lifetime, a number of whom went on to become successful investors themselves. Graham's most well-known disciples include Warren Buffett, William J. Ruane, Irving Kahn and Walter J. Schloss, among others. Buffett, who credits Graham as grounding him with a sound intellectual investment framework, described him as the second most influential person in his life after his own father. In fact, Graham had such an overwhelming influence on his students that two of them, Buffett and Kahn, named their sons Howard Graham Buffett and Thomas Graham Kahn after him. Graham also taught at the UCLA Anderson School of Management.

Jason Zweig is an investing and personal finance columnist for The Wall Street Journal. Previously, he was a senior writer at Money magazine, mutual-funds editor at Forbes magazine, and a guest columnist for Time and www.cnn.com . He is the editor of the revised edition of Benjamin Graham's The Intelligent Investor, the classic text that Warren Buffett has called "by far the best book about investing ever written". He is also the author of The Devil's Financial Dictionary, a satirical glossary of Wall Street terms, and Your Money and Your Brain, on the neuroscience and psychology of financial decision-making. Zweig serves on the editorial boards of Financial History magazine and The Journal of Behavioral Finance. Visit the author at www.jasonzweig.com and follow him on Twitter at @jasonzweigwsj.

A Note About Benjamin Graham, by Jason Zweig

The test of integrity is its blunt refusal to be compromised.

—Chinua Achebe[1]

Who was Benjamin Graham, and why should you listen to him?

Graham was one of the greatest investors who ever lived. He also was one of the smartest, and he may well have been the wisest.[2]

How great an investor was Graham?

He didn’t merely earn superior returns; he did so during some of the most difficult times investors have ever seen, including the end of the Great Depression. His Graham-Newman Corp. beat the market by an average of roughly five percentage points annually between 1936 and 1956.[3] Few other investors have ever rivaled so great a margin of outperformance over so long a career—foremost among them Warren Buffett, who learned how to invest from Graham himself.

How smart was Graham?

He entered Columbia University at age 17; he should have been admitted a year earlier, but the college bungled his paperwork. He finished in two and a half years, ranked second in his class. Before Graham even graduated, Columbia offered him faculty positions in three different departments: philosophy, mathematics, and English. Needing to support his widowed mother, he took a better-paying job on Wall Street instead. Graham’s book Security Analysis, written with David Dodd and published in 1934, became the foundational text for financial analysts worldwide. But his brilliance knew no bounds. When Graham was 23, the American Mathematical Monthly published his article on how to improve the teaching of calculus. He went on to patent two innovative handheld calculators. He wrote two books on how to stabilize global currencies and numerous articles on law, taxation, and unemployment. In his spare time, Graham wrote a Broadway play, taught himself Spanish and translated a Uruguayan novel, and read voraciously in French, ancient Greek, and Latin.

Above all, Graham was wise. In his decades on Wall Street, he encountered every kind of scam and fraud: insider trading, promoters touting worthless stocks, dirty accounting tricks, companies shafting their own shareholders. He witnessed markets in which millions of people lost their minds, fooling themselves into thinking they were investing geniuses just because they had bought a few stocks that had gone up—temporarily. He had also seen investors stripped of their wealth by listening to “experts” who told them they could get rich quick.

[1] The Trouble with Nigeria (Heinemann, 1984), p. 42.
[2] For more on this remarkable man, see Jason Zweig, “A Note on Benjamin Graham,” bit.ly/40XkE7h ; the Beyond Ben Graham blog, bit.ly/442IEX8 ; and Benjamin Graham, Benjamin Graham: The Memoirs of the Dean of Wall Street (McGraw-Hill, 1996).
[3] According to Warren Buffett, Graham’s full returns aren’t precisely knowable over his entire career from 1923 through 1956, but were “far more terrific” than usual estimates indicate (personal communication, April 14, 2023). In addition to their gains on Graham’s fund, his investors earned high returns on shares in Government Employees Insurance Co. or GEICO, which Graham- Newman Corp. paid out in July 1948 as a special dividend.

Graham learned not only from the mistakes of others but from his own:

·         He had chased hot stocks—and gotten burned.

·         He had traded too much—and learned to be patient.

·         He had taken too much risk—and learned to be cautious.

·         He had invested with borrowed money—and never used leverage again.

·         He had tried and tested countless investing methods—and understood the pitfalls of attempting to predict the future with inadequate data from the past.

Graham understood that investing is a lonely activity in which isolated individuals, yearning for connection and the approval of their peers, easily fall prey to manipulators and crooks. In recent years, the profoundly human desire to join the crowd has been hijacked by social media and smartphone brokerage apps until millions of people ended up trading the same stocks all at once, motivated by FOMO: the fear of missing out. Once you join such a financial flash mob, making a sensible plan and sticking to it become all but impossible. This book will help you think for yourself instead of letting millions of strangers tell you what to think.

Graham also knew that even the most honest people aren’t always honest with themselves. We all hate admitting our own shortcomings. Graham’s advice focuses not only on what investors ought to do, but on what they can do. He never misleads his readers with bogus promises about the markets or themselves. This book will help you understand your own strengths and weaknesses, giving you the intellectual and emotional framework for making good investing decisions—and, more importantly, for sticking with them.

To stand out from the crowd, you must stand apart from the crowd. To be an intelligent investor, you must be disciplined and you must think differently.

Four Cornerstones

Graham teaches four great principles:

·         You can’t be an investor without trading, but you can trade without ever investing. If you know nothing about a stock except that its price has gone up or “everybody” is buying it, you’re not investing; you’re speculating. The intelligent investor does thorough research and makes deliberate, consistent, measurable decisions.

·         A stock isn’t a ticker symbol or a pulsating series of prices on your smartphone; it’s an ownership interest in a business with a fundamental value independent of its share price. The intelligent investor studies the business, not the stock. (See Table 0.1.)

·         Most of the time, market prices are approximately right, but when they are wrong they can be abysmally wrong. Graham invented a character called Mr. Market, a mythical figure who goes wild with greed and euphoria when stocks go up but wallows in fear and misery when stocks go down.[1] The intelligent investor is a realist who sells to optimists and buys from pessimists. You must never let your emotions be taken hostage by Mr. Market’s mood swings.

·         Most investors commit their biggest mistakes when they focus on how much money they could make if they turn out to be right—and forget to consider how much they could lose if they turn out to be wrong. The intelligent investor always maintains what Graham called a “margin of safety,” a cushion of humility that will allow you to survive your losses if your analysis is incorrect.

[1] See Chapter 8.

·         Market’s mood swings.

·         Most investors commit their biggest mistakes when they focus on how much money they could make if they turn out to be right—and forget to consider how much they could lose if they turn out to be wrong. The intelligent investor always maintains what Graham called a “margin of safety,” a cushion of humility that will allow you to survive your losses if your analysis is incorrect.

The Intelligent Investor was first published in 1949. The goal of this commemorative 75th anniversary edition is to integrate Graham’s classic insights with today’s market realities.

This edition, like the previous version published in 2003, follows Graham’s own plan. The Intelligent Investor isn’t—and Graham never intended it to be—a step-by-step guide to stock picking or an instructional handbook on how to analyze and evaluate businesses. Instead, it lays down the guidelines and principles that are the indispensable foundation for investing success. As Graham put it:

Comparatively little will be said here about the technique of analyzing securities; attention will be paid chiefly to investment principles and investors’ attitudes.

All of Graham’s original chapters remain intact.[1] I’ve also highlighted many of Graham’s passages in boldface type to signal their importance. In the commentaries that accompany each of Graham’s chapters, I’ve included recent examples that show how powerful his principles still are. The commentaries are printed in sans serif type, like this.

Graham’s original chapters are printed in serif type, like this.

This book will help you build the habits and cultivate the discipline that are essential for succeeding as an investor. Warren Buffett calls The Intelligent Investor “by far the best book about investing ever written” because no one else has ever understood and conveyed these principles better than Graham.

With this book in your hands, you are well on your way to becoming an intelligent investor. In the next chapter, we’ll talk about what that means and what it takes.

[1] However, three of Graham’s appendixes, discussing long-ago companies and obsolete tax rules, aren’t included in this edition. To see those, please reference the 2003 revised edition of The Intelligent Investor.