The Intelligent Investor: The Definitive Book on Value Investing
“Among the library of investment books promising no-fail strategies for riches, Benjamin Graham’s classic, The Intelligent Investor, offers no guarantees or gimmicks but overflows with the wisdom at the core of all good portfolio management. The hallmark of Graham’s philosophy is not profit maximization but loss minimization. In this respect, The Intelligent Investor is a book for true investors, not speculators or day traders. He provides, “in a form suitable for the laymen, guidance in adoption and execution of an investment policy”. This policy is inherently for the longer term and requires a commitment of effort. Where the speculator follows market trends, the investor uses discipline, research, and his analytical ability to make unpopular but sound investments in bargains relative to current asset value. Graham coaches the investor to develop a rational plan for buying stocks and bonds, and he argues that this plan must be a bulwark against emotional behavior that will always be tempting during abrupt bull and bear markets. Since it was first published in 1949, Graham’s investment guide has sold over a million copies and has been praised by such luminaries as Warren E. Buffet as “the best book on investing ever written [Buffett attributes 85% of his current strategy comes from this book].” These accolades are well deserved. In its new form–with commentary on each chapter and extensive footnotes prepared by senior Money editor, Jason Zweig–the classic is now updated in light of changes in investment vehicles and market activities since 1972″.
Recently National Geographic ran a special, “Warren Buffett: The Modern Midas”. Here are notes from the show:
Buffett is worth about $40 billion; $10,000 starting with him in the early days is today worth $50 million. He runs his business, Berkshire Hathaway, valued at $150 billion, from the 14th floor of the nondescript Kiewit Plaza office building in Omaha, Nebraska, with headquarters staff of 20 people, a couple of secretaries & accountants & 1 bond trader; no computer, no stock ticker; he buys whole companies. He lives in a modest home off Farnam Street in a residential district in Omaha; he bought the home years ago for $31,000. He similarly saves on autos, typically buys hail-damaged cars at bargain prices and drives them until they need replacement; he has simple tastes &, like his good friend Microsoft’s Bill Gates, likes junk food. Buffett’s favorite regular eatery is an Omaha steakhouse called Gorats off 49th Ave. During the documentary the show offered the following simple PowerPoint-like summary of his investment principles:
Buffett Primer Lessons
1st: Invest…Don’t Speculate
Value investing looks to the asset itself for the return, whereas speculation is buying stock and hoping it goes up next week. Buffett, with partner Vice Chairman Charlie Munger, developed a 4 point checklist to help choose if a business is the right investment:
1. Only deal with things we’re capable of understanding
Example Coca-Cola: Look at the earning power of the asset, then look to that to justify the price paid. Over time they sunk ⅓ their assets into Coca-Cola – they now have shares worth $10 billion. They’ve also invested in other big brands like American Express, Walt Disney and Geico.
2nd: You Don’t Have to Diversify
Buffett’s investment fund has been rising by 20% a year for decades; $1000 in 1965 has grown to $5 million now. Interviewed in the documentary were an example of an early investor made rich by investing with Buffett, Omaha’s Dick Holland; also interviewed was biographer Alice Schroeder.
So how did Buffett do it? Born in Omaha, his dad was a stockbroker during the depression era; they later moved to New York, where young Buffett discovered business, as a kid launching several successful small business ventures, starting with a paper route & including a pinball machine chain operation, which saw him filling out his own tax forms at age 13 & making more money than his teachers. After college he went to New York City to graduate school. His teacher there was Benjamin Graham, author of the book “The Intelligent Investor”. Graham became Buffett’s guru. Graham, in his book chapter 8, introduced Buffett to “Mr. Market”, which Buffett said in the documentary was “the most important thing I had ever read in my life…it’s a very simple concept…the market is there to serve you and not to instruct you…imagine Mr. Market as your business partner, you can buy or sell from him any day of the year…but he has unpredictable moods…sometimes his prices are too high or too low…that gives you a chance to make money…so in the stock market you get this wonderful opportunity to deal with this crazy psychotic partner called Mr. Market – and he does it with thousands of companies, and every day he gives you that offer, and when he’s wrong you take advantage of it, but you don’t start paying attention to what he’s saying to tell you whether you’re right or wrong, you pay attention because he’s there to serve you and not to instruct you”. Buffett, aware of what a dollar can earn, feels it’s better to invest than spend. As he gained experience, his focus evolved from investing in other people’s companies to, not just buying shares, but buying companies by buying them out.
3rd: Be a Business Owner
Example Business: Clayton Homes (“the nation’s leading source for manufactured and modular homes…[like] the environmentally friendly i-house [video HD 720]”. Chief executive Kevin Clayton says Buffett simply called them up, talked a little bit, then bought the company over the phone; Buffett practices hands-off management, asks simply that they pass on the financials, & never makes a company visit.
4th: Allocate Capital Efficiently
Buffett’s key to success is to take profits from one business and invest in another, using the power of persuasion – to learn it, he had to overcome his original fear of public speaking & dealing with people, so he got help from self-help expert, industrialist Dale Carnegie’s book “How to Win Friends and Influence People [Wikipedia; Google Books Preview]”, which enabled him to conquered his fear.
Example Geico: Insurance is at the heart of Hathaway. When people pay premiums upfront, that generates massive cash flow, which can then be turned into investment; it provides flow to invest in another business without borrowing – unlike Wall Street which does depend heavily on borrowing, called “leverage”.
5th: Don’t Get into Debt
Buffett says, “more smart people have gone broke through leverage; if you’re smart you don’t need it”.
6th: Think Independently
Buffett says this is the most important rule of his life; for investing, ignore investor hype, even their market appraisal when it doesn’t seem right; unfashionable stocks are the best deals; Buffett accumulates steady returns, whereas on Wall Street quick profits are often followed by quick losses. Buffett believes the main reasons investors are successful is due to society providing them opportunities, so the richest people should give back to help those who got a shorter straw in life. Buffett has so much money currently, cozy family businesses are too small, so he is now advancing into more investing in insurance and especially derivatives, which he once derided, & which leads to his next rule.
7th: Break Your Own Rules
8th: Give It Away
Buffett’s recent donation of $31 billion to the Bill and Melinda Gates Foundation, was history’s largest. Buffett’s basic philosophy of life is to embrace people and have fun; he says, “I’m lucky and think a fair amount of that luck should be shared with others”. — National Geographic “Warren Buffett: The Modern Midas”.
The Elements of Investing,
“A timeless, easy-to-read guide on life-long investment principles that can help any investor succeed. The Elements of Investing has a single-minded goal: to teach the principles of investing in the same pared-to-bone manner that Professor William Strunk Jr. once taught composition to students at Harvard, using his classic little book, The Elements of Style. With great daring, Ellis and Malkiel imagined their own Little Red Schoolhouse course in investing for every investor around the world-and then penned this book. The Elements of Investing hacks away at all the overtrading and over thinking so predominant in the hyperactive thought patterns of the average investor. Malkiel and Ellis offer investors a set of simple but powerful thoughts on how to challenge Mr. Market at his own game, and win by not losing. All the need-to-know rules and investment principles can be found here.
A disciplined approach to investing, complemented by conviction, is all you need to succeed. This timely guide will help you develop these skills and make the most of your time in today’s market”. — Amazon Editorial Reviews