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BOOK REVIEW -- The Intelligent Investor by Benjamin Graham

This book is the ultimate case for investing being a liberal art. And if one lives by the principles Graham articulates, then achieving a reasonable return from stocks is likely. That has been my experience and is why I read this book every 5 years, or so.

Insights include: obvious prospects for growth in a company do not translate into obvious profits for investors because a.) you may be wrong about the prospects, or b.) the market has already fully anticipated the growth.

The rate of return sought is not related to the risk taken, it’s dependent “on the amount of intelligent effort the investor is willing and able to bring to bear on his task.”

And the rate of return earned will be dependent upon the price you pay.

“Really good preferred stocks can and do exist, but they are good in spite of their investment form, which is inherently a bad one…In other words, they should be bought on a bargain basis or not at all.”

“…new issues have special salesmanship behind them, which calls for a special degree of sales resistance…”

The book is loaded with rule-of-thumb recommendations about buying individual stocks and gives a practical reason as to why book value is important in most cases:

“The investor with a stock portfolio having such book values behind it can take a much more independent and detached view of stock market fluctuations than those who have paid high multipliers of both earnings and tangible assets.”

Graham is a big believer that one must have the right temperament to deal with market fluctuations and that you should know yourself. If you are temperamentally not suited to investing, then delegate it. If you are well-suited, then decide if you are a defensive investor or an enterprising investor.

The following quote is very “au courant:”

“I have never seen dependable calculations made about common stock values, or related investment policies, that went beyond simple arithmetic or the most elementary algebra. Whenever calculus is brought in, or higher algebra, you could take it as a warning signal that the operator was trying to substitute theory for experience, and usually also to give to speculation the deceptive guise of investment.”

A nice summary of viewing the unknowable: “The future itself can be approached in two different ways, which may be called the way of prediction (or projection) and the way of protection.” He, of course, opts for protection and a margin of safety.

A quote that has always stayed with me: “…the chief loss to investors come from the purchase of low-quality securities at times of favorable business conditions.”

Finally: “To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.”

This book has rightly been called the investment bible. Combine this with Shiller’s “Irrational Exuberance” and Taleb’s “The Black Swan” and you’ll have a knowledge base powerful enough to enable you to keep your own counsel; and not make the common mistakes of others.

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