The Intelligent Investor


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Benjamin Graham

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the intelligent investor a book of practical counsel revised edition b e njam i n g raham updated with new commentary by jason zweig


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to e.m.g.


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through chances various through all vicissitudes we make our way aeneid


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contents epigraph preface to the fourth edition by warren e buffett a note about benjamin graham by jason zweig introduction what this book expects to accomplish commentary on the introduction iii viii x 1 12 18 35 47 58 65 80 88 101 112 124 133 145 155 179 188 1 investment versus speculation results to be expected by the intelligent investor commentary on chapter 1 2 3 the investor and inflation commentary on chapter 2 a century of stock-market history the level of stock prices in early 1972 commentary on chapter 3 4 5 6 general portfolio policy the defensive investor commentary on chapter 4 the defensive investor and common stocks commentary on chapter 5 portfolio policy for the enterprising investor negative approach commentary on chapter 6 7 portfolio policy for the enterprising investor the positive side commentary on chapter 7 8 iv the investor and market fluctuations


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v contents commentary on chapter 8 213 226 242 257 272 280 302 310 322 330 339 347 367 376 396 403 418 422 438 446 473 487 497 512 525 532 535 9 investing in investment funds commentary on chapter 9 10 the investor and his advisers commentary on chapter 10 11 security analysis for the lay investor general approach commentary on chapter 11 12 things to consider about per-share earnings commentary on chapter 12 13 a comparison of four listed companies commentary on chapter 13 14 stock selection for the defensive investor commentary on chapter 14 15 stock selection for the enterprising investor commentary on chapter 15 16 convertible issues and warrants commentary on chapter 16 17 four extremely instructive case histories commentary on chapter 17 18 a comparison of eight pairs of companies commentary on chapter 18 19 shareholders and managements dividend policy commentary on chapter 19 20 margin of safety as the central concept of investment commentary on chapter 20 postscript commentary on postscript appendixes 1 the superinvestors of graham-and-doddsville 537


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contents vi 2 important rules concerning taxability of investment income and security transactions in 1972 561 3 the basics of investment taxation updated as of 2003 4 the new speculation in common stocks 5 a case history aetna maintenance co 6 tax accounting for nvf s acquisition of sharon steel shares 7 technological companies as investments endnotes acknowledgments from jason zweig index about the authors credits front cover copyright about the publisher 562 563 575 576 578 579 589 591 the text reproduced here is the fourth revised edition updated by graham in 1971­1972 and initially published in 1973 please be advised that the text of graham s original footnotes designated in his chapters with superscript numerals can be found in the endnotes section beginning on p 579 the new footnotes that jason zweig has introduced appear at the bottom of graham s pages and in the typeface used here as occasional additions to graham s endnotes


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preface to the fourth edition by warren e buffett i read the first edition of this book early in 1950 when i was nine teen i thought then that it was by far the best book about investing ever written i still think it is to invest successfully over a lifetime does not require a stratospheric iq unusual business insights or inside information what s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework this book precisely and clearly prescribes the proper framework you must supply the emotional discipline if you follow the behavioral and business principles that graham advocates and if you pay special attention to the invaluable advice in chapters 8 and 20 you will not get a poor result from your investments that represents more of an accomplishment than you might think whether you achieve outstanding results will depend on the effort and intellect you apply to your investments as well as on the amplitudes of stock-market folly that prevail during your investing career the sillier the market s behavior the greater the opportunity for the business-like investor follow graham and you will profit from folly rather than participate in it to me ben graham was far more than an author or a teacher more than any other man except my father he influenced my life shortly after ben s death in 1976 i wrote the following short remembrance about him in the financial analysts journal as you read the book i believe you ll perceive some of the qualities i mentioned in this tribute viii


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ix preface to the fourth edition benjamin graham 1894­1976 several years ago ben graham then almost eighty expressed to a friend the thought that he hoped every day to do something foolish something creative and something generous the inclusion of that first whimsical goal reflected his knack for packaging ideas in a form that avoided any overtones of sermonizing or self-importance although his ideas were powerful their delivery was unfailingly gentle readers of this magazine need no elaboration of his achievements as measured by the standard of creativity it is rare that the founder of a discipline does not find his work eclipsed in rather short order by successors but over forty years after publication of the book that brought structure and logic to a disorderly and confused activity it is difficult to think of possible candidates for even the runner-up position in the field of security analysis in an area where much looks foolish within weeks or months after publication ben s principles have remained sound their value often enhanced and better understood in the wake of financial storms that demolished flimsier intellectual structures his counsel of soundness brought unfailing rewards to his followers even to those with natural abilities inferior to more gifted practitioners who stumbled while following counsels of brilliance or fashion 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 but his third imperative generosity was where he succeeded beyond all others i knew ben as my teacher my employer and my friend in each relationship just as with all his students employees and friends there was an absolutely open-ended no-scores-kept generosity of ideas time and spirit if clarity of thinking was required there was no better place to go and if encouragement or counsel was needed ben was there walter lippmann spoke of men who plant trees that other men will sit under ben graham was such a man reprinted from the financial analysts journal november/december 1976.


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a note about benjamin graham by jason zweig who was benjamin graham and why should you listen to him graham was not only one of the best investors who ever lived he was also the greatest practical investment thinker of all time before graham money managers behaved much like a medieval guild guided largely by superstition guesswork and arcane rituals graham s security analysis was the textbook that transformed this musty circle into a modern profession.1 and the intelligent investor is the first book ever to describe for individual investors the emotional framework and analytical tools that are essential to financial success it remains the single best book on investing ever written for the general public the intelligent investor was the first book i read when i joined forbes magazine as a cub reporter in 1987 and i was struck by graham s certainty that sooner or later all bull markets must end badly that october u.s stocks suffered their worst one-day crash in history and i was hooked today after the wild bull market of the late 1990s and the brutal bear market that began in early 2000 the intelligent investor reads more prophetically than ever graham came by his insights the hard way by feeling firsthand the anguish of financial loss and by studying for decades the history and psychology of the markets he was born benjamin grossbaum on may 9 1894 in london his father was a dealer in china dishes and figurines.2 the family moved to new york when ben was a year old at first they lived the good life with a maid a cook and a french govcoauthored with david dodd and first published in 1934 the grossbaums changed their name to graham during world war i when german-sounding names were regarded with suspicion 2 1 x


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xi a note about benjamin graham erness on upper fifth avenue but ben s father died in 1903 the porcelain business faltered and the family slid haltingly into poverty ben s mother turned their home into a boardinghouse then borrowing money to trade stocks on margin she was wiped out in the crash of 1907 for the rest of his life ben would recall the humiliation of cashing a check for his mother and hearing the bank teller ask is dorothy grossbaum good for five dollars fortunately graham won a scholarship at columbia where his brilliance burst into full flower he graduated in 1914 second in his class before the end of graham s final semester three departments english philosophy and mathematics asked him to join the faculty he was all of 20 years old instead of academia graham decided to give wall street a shot he started as a clerk at a bond-trading firm soon became an analyst then a partner and before long was running his own investment partnership the internet boom and bust would not have surprised graham in april 1919 he earned a 250 return on the first day of trading for savold tire a new offering in the booming automotive business by october the company had been exposed as a fraud and the stock was worthless graham became a master at researching stocks in microscopic almost molecular detail in 1925 plowing through the obscure reports filed by oil pipelines with the u.s interstate commerce commission he learned that northern pipe line co then trading at $65 per share held at least $80 per share in high-quality bonds he bought the stock pestered its managers into raising the dividend and came away with $110 per share three years later despite a harrowing loss of nearly 70 during the great crash of 1929­1932 graham survived and thrived in its aftermath harvesting bargains from the wreckage of the bull market there is no exact record of graham s earliest returns but from 1936 until he retired in 1956 his graham-newman corp gained at least 14.7 annually versus 12.2 for the stock market as a whole one of the best longterm track records on wall street history.3 graham-newman corp was an open-end mutual fund see chapter 9 that graham ran in partnership with jerome newman a skilled investor in his own right for much of its history the fund was closed to new investors i am 3


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a note about benjamin graham xii how did graham do it combining his extraordinary intellectual powers with profound common sense and vast experience graham developed his core principles which are at least as valid today as they were during his lifetime · a stock is not just a ticker symbol or an electronic blip it is an ownership interest in an actual business with an underlying value that does not depend on its share price the market is a pendulum that forever swings between unsustainable optimism which makes stocks too expensive and unjustified pessimism which makes them too cheap the intelligent investor is a realist who sells to optimists and buys from pessimists the future value of every investment is a function of its present price the higher the price you pay the lower your return will be no matter how careful you are the one risk no investor can ever eliminate is the risk of being wrong only by insisting on what graham called the margin of safety never overpaying no matter how exciting an investment seems to be can you minimize your odds of error the secret to your financial success is inside yourself if you become a critical thinker who takes no wall street fact on faith and you invest with patient confidence you can take steady advantage of even the worst bear markets by developing your discipline and courage you can refuse to let other people s mood swings govern your financial destiny in the end how your investments behave is much less important than how you behave · · · · the goal of this revised edition of the intelligent investor is to apply graham s ideas to today s financial markets while leaving his text entirely intact with the exception of footnotes for clarification 4 after each of graham s chapters you ll find a new commentary in these reader s guides i ve added recent examples that should show you just how relevant and how liberating graham s principles remain today grateful to walter schloss for providing data essential to estimating graham-newman s returns the 20 annual average return that graham cites in his postscript p 532 appears not to take management fees into account 4 the text reproduced here is the fourth revised edition updated by graham in 1971­1972 and initially published in 1973.


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xiii a note about benjamin graham i envy you the excitement and enlightenment of reading graham s masterpiece for the first time or even the third or fourth time like all classics it alters how we view the world and renews itself by educating us and the more you read it the better it gets with graham as your guide you are guaranteed to become a vastly more intelligent investor.


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introduction what this book expects to accomplish the purpose of this book is to supply in a form suitable for lay men guidance in the adoption and execution of an investment policy comparatively little will be said here about the technique of analyzing securities attention will be paid chiefly to investment principles and investors attitudes we shall however provide a number of condensed comparisons of specific securities chiefly in pairs appearing side by side in the new york stock exchange list in order to bring home in concrete fashion the important elements involved in specific choices of common stocks but much of our space will be devoted to the historical patterns of financial markets in some cases running back over many decades to invest intelligently in securities one should be forearmed with an adequate knowledge of how the various types of bonds and stocks have actually behaved under varying conditions some of which at least one is likely to meet again in one s own experience no statement is more true and better applicable to wall street than the famous warning of santayana those who do not remember the past are condemned to repeat it our text is directed to investors as distinguished from speculators and our first task will be to clarify and emphasize this now all but forgotten distinction we may say at the outset that this is not a how to make a million book there are no sure and easy paths to riches on wall street or anywhere else it may be well to point up what we have just said by a bit of financial history especially since there is more than one moral to be drawn from it in the climactic year 1929 john j raskob a most important figure nationally as well as on wall street extolled the blessings of capitalism in an article in the ladies home journal entitled everybody ought to be 1



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