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The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition)

Benjamin Graham, Jason Zweig, Warren E. Buffett · 14 HN comments
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Amazon Summary
This classic text is annotated to update Graham's timeless wisdom for today's market conditions... The greatest investment advisor of the twentieth century, Benjamin Graham, taught and inspired people worldwide. Graham's philosophy of "value investing" -- which shields investors from substantial error and teaches them to develop long-term strategies -- has made The Intelligent Investor the stock market bible ever since its original publication in 1949. Over the years, market developments have proven the wisdom of Graham's strategies. While preserving the integrity of Graham's original text, this revised edition includes updated commentary by noted financial journalist Jason Zweig, whose perspective incorporates the realities of today's market, draws parallels between Graham's examples and today's financial headlines, and gives readers a more thorough understanding of how to apply Graham's principles. Vital and indispensable, this HarperBusiness Essentials edition of The Intelligent Investor is the most important book you will ever read on how to reach your financial goals.
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The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel by Benjamin Graham

Its not an online course, but it's a great book! It has a lot of information in it, can be dry, but I'm really enjoying going through it so far. Warren Buffet has quoted it in his shareholder letters and other talks.


Also check out Warren Buffets shareholder letters, they are packed with great insights into investing.

(Economics major and longtime econ book/paper reader here) I very much enjoyed The Cartoon Introduction to Economics as an introduction to microeconomic concepts:

It's extremely readable and funny and covers most of the situations in real life where you can apply economic concepts to understand why something is the way it is.

Understanding why countries and economies grow (and why some grow faster than others!) doesn't always fall under the "economics" umbrella but is really useful for informing policy (and a useful reminder these days, when both US presidential candidates rail against trade agreements). "From Poverty to Prosperity" lays out a very readable and convincing argument for how countries have grown and become rich.

For finance I very much enjoyed The Intelligent Investor, which also (apparently) inspired Warren Buffett's investing philosophy.

Indeed, Buffet worked at Graham's (the author of The Intelligent Investor) partnership.
This is a common misunderstanding. Buffett Partnership Ltd., Buffett's initial hedge fund, was very much was guided by the cigar butt style investment principles of Graham.

When Buffett bought Berkshire Hathaway a few years after closing the partnership, his investment philosophy had changed. Your best bet to understand his investing is to simply read his letters.

He may come across as a bit folksy or country bumpkin, but he's fairly clear in his methodology.

Here are some links you may find helpful:


What's your take on it?
I mean, much of Graham's "investment philosophy" has been thoroughly invalidated by the Modigliani-Miller theorem published in the 1960s. But like Deepak Chopra, he's still around!
How well do the assumptions behindd modigliani-miller match what happens in the real world?

I think 'invalidated' is a little strong. Do be aware that within economic models, the map is not the territory.

Well, it assumes no taxes (so it would only apply to Apple et al.), and also symmetric information and an efficient market (which are both debatable).
The assumptions are extremely strong, and the theory is not robust to changes in those assumptions. Agree?
I'm not sure how a theorem is even supposed to invalidate a philosophy. Invalidation is normally done by experimental evidence not making up a theorem.
Aside from that modigliani-miller's theorem "that in the absence of taxes, bankruptcy costs, agency costs, and asymmetric information, and in an efficient market, the value of a firm is unaffected by how that firm is financed." has basically nothing to do with Graham's idea that in the real world with bankruptcy costs, agency costs, asymmetric information, and an inefficient market you should seek a margin of safety in investment. Graham's ideas have much empirical evidence and are completely unlike Chopras nonsense. See The Superinvestors of Graham-and-Doddsville for details, written by Warren Buffett who has quite a good record in this stuff

There is a reasonable case that 'value' (low beta) stocks exhibit excess returns in equity markets. See Fama & French

M&M says there shouldn't be 1st order implications for a firm's dividend payout ratio on its stock price (there are potential effects caused by taxes, agency and signalling that they assume away for simplicity).

However, other popular value metrics such as low price to earnings, market cap to book value, historic beta or past/future earnings growth are not affected by M&M. The efficient market hypothesis is an assumption rather than an implication of the theorem and there is a good empirical case for the combination of value investing and leverage.

Thank you, now this thread is going somewhere. Popcorn time
I agree with others on the "Meditations" by Marcus Aurelius.

Off the top of my head, I would add:

* "The Way to Wealth," by Benjamin Franklin: (also available online for free; it's in the public domain) -- no-nonsense practical advice from a super-successful individual

* Warren Buffett's Letters to Berkshire Hathaway shareholders: (also available organized by topic, in a bound book: which some will find much easier to read)

* "The Intelligent Investor," by Benjamin Graham (specifically the chapters titled "The Investor and Market Fluctuations" and "Margin of Safety"):

* "Influence: the Psychology of Persuasion," by Robert Cialdini:


* "Devil Take the Hindmost," by Edward Chancellor:

* "A Short History of Financial Euphoria," by John Kenneth Galbraith:

* "Extraordinary Popular Delusions and the Madness of Crowds," by Charles Mackay:

> broad economical trends and projections

Any good Economics Text book will do: like Principles of Economics/ Principles of Microeconomics, Gregory Mankiw

You can also try, although, personally I have not taken these:

> FT and all the stats that CNBC shows me

For Investment valuation and Corporate Finance Damodaran is one of the best sources:

Visit his blog, read his books. He has online classes as well

Also you can try, (I've not taken this course):

For Value Investing, Benjamin Graham is a classic:

> For Technical Analysis and Futures Trading though, there are tonnes of books. May be you can start with these:

And lastly,

> combine my CS background with Finance and do something interesting in it

Fantastic. Thanks for this!
Damodaran and Graham are fantastic, as is Shiller's Financial Markets. His 2008 course on Open Yale was an early spark in my career.

After a quick look at the "Technical Analysis" book preview on Amazon, I would caution that technical analysis is generally a rorschach test of humans finding patterns in data when there really aren't any. Skip that one.

Go and read the intelligent investor by Graham (who taught Warren Buffet)

Stock market is not that risky in the very long term, say, 10 years or more, if done well.

And by "done well" I do not mean predicting ups and downs, but having a diversified portfolio (investing everything in one company is not a good idea, does not matter how promising or established it looks), which is doable with all the investment funds out there that ask for a very low minimum investment.

Check these books:

The short answer is that Warren Buffett combined quantitative aspects of investing (ie., Ben Graham) with qualitative aspects of investing (ie., Philip Fisher).

To get a better idea of these two approaches: Read Ben Graham's book:

and Read Philip Fisher's book:

Both are good reads.

Two definitions of investing by notable people:

1. From The Intelligent Investor by Benjamin Graham: "An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative."

2. From Mr. Buffett on the Stock Market: "The definition is simple but often forgotten: investing is laying out money now to get more money back in the future -- more money in real terms, after taking inflation into account."

I'm enjoying this discussion heavily, particularly your contributions to it which are great. Just a minor (but important) nitpick -

> A stock analyst is going off of timing and trends more than data.

Not necessarily. You can broadly divide analysis into two camps - "technical analysis" [1] which is what you're describing, and "fundamental analysis" [2] which is looking more at intrinsic value, numbers, assets, things like that.

Warren Buffett, for instance, does plenty of stock analysis and he's not a technical trader at all. He repeatedly says he doesn't try to time the market. [3]

The first book I read on trading - Technical Analysis of the Financial Markets [4] - was from a technical analysis perspective, and I lost money trying to implement it.

Then I read about value investing and started trying to apply those principles - only buying fundamentally sound stocks trading at a favorable price earnings ratio, either in fundamentally defensible businesses or with lots of solid assets on their books, and buying with a big margin of safety.

I haven't had a losing trade since then, though in fairness my sample size is small and I don't sell unless the price of a stock I bought gets over what I consider reasonable. I'm currently holding Microsoft and HP which are down, but both I think are way undervalued (Microsoft is extremely stable, has some upside in the way of a strong research division, and could potentially translate a hit like the Kinect into alternate input devices. HP is being treated as toxic despite owning some nice high margin businesses that most people don't think about when they think of HP, as well as a huge patent portfolio and some good assets... yeah, their management sucks lately, but who cares if a company is trading below its liquidation value? anyways, do your own research, check the financials, etc, etc)

Anyways. Not all traders are technical traders. Fundamental analysis is also analysis, and probably easier to implement to be consistently successful. The top book on that is "The Intelligent Investor" [5] by Ben Graham, which Warren Buffets calls the best book on finance ever written (I agree).



[3] “If you’re an investor, you’re looking on what the asset is going to do, if you’re a speculator, you’re commonly focusing on what the price of the object is going to do, and that’s not our game.” (1997 Berkshire Hathaway Annual Meeting)

[4] Generally considered one of the best intro books to technical analysis.


I love your response. This is the kind of thoughtful reply I greatly respect, and yes, when I said 'economists' vs. 'analysts', I really wanted to just make a point between how detailed an economist can be and the difference between such and a stock trader.

Your response is one of the reasons I have to force myself to stay away from Hacker News; I have too much to do but there are some great conversations on here.

> Your response is one of the reasons I have to force myself to stay away from Hacker News; I have too much to do but there are some great conversations on here.

This might shock you, but 2-3 years this was the only kind of conversation we ever had on HN with any regularity. It was pretty cool back then.

Anyways, I appreciate the kind words and the discussion as well - drop a line if I can ever lend a hand with anything.

> The top book on that is "The Intelligent Investor" [5] by Ben Graham [...]

Isn't the top book on value investing "Security Analysis", and "The Intelligent Investor" is just the popular science alternative?

I've come to almost the exact opposite conclusion. I went from fundamental trading to almost completely technical/algorithmic trading.

After the 87 crash, the 2001 crash and the 2008 crash, I'm a firm believer that we will experience crashes every 7-10 years, because the financial markets are fundamentally unstable, and keeping your money in the stock market for long term will only lose you money.

I believe the only way to be in the stock market is to realize that it is a game, that the dominant players all believe it is a game, and you have to know how to play by their rules. In this case, it means that you have to follow the technicals in order to understand the ebbs and flows of the market, and know how to trade, not invest. I believe that given the nature of the markets these days, it's more of a market of probabilities, and short-term momentum rather than fundamentals.

I still think there is room for "investing", but it is high risk to hold things in the market these days.

Elliott Wave much?
Buy stock of fundamentally solid companies that pay dividends when their stock price is low.

Sell if their stock price gets overinflated, otherwise just hold and collect dividends.

Don't buy stocks that are trading at stupid prices. Don't even buy stocks that are trading at reasonable prices. Only buy stocks that are trading at a steep discount to their reasonably projected future cashflow + asset value + large margin of safety.

I mean, you kind of can't lose if you do that. Sure, sell if your stocks get overheated. Or just collect dividends forever if it's a great company that's consistently underpriced. Avoid stocks that are priced high relative to earnings/assets, and even avoid reasonably priced stocks. Kind of a no lose proposition that way, no?

The problem with a strategy of only buying stocks when they're clearly undervalued is that it's generally extremely rare for companies to actually trade at an obviously undervalued level. Generally, when their price is depressed below the level you'd expect based on their dividends and/or earnings, it's because there's some other black cloud hanging over their future earnings potential.

It's great in theory, but in practice it's not realistic to believe you can reliability know what a company's "reasonably projected future cashflow" really is. Even if they're in the most reliable business in the world, if someone comes up with a lower-cost alternative next year, all those future cash flows go poof.

Conversely, it's damn hard to tell when some stocks are overpriced. I remember folks saying in 2007/2009 that Apple was wildly overpriced at about $90. I heard the same things about Amazon over the past few years.

There are plenty of problems with this strategy.

1) Dividend might get cut. All the banks had their dividends drastically cut, and their stock prices kept dropping. I'm talking pre-crisis, EVERYONE was saying that the financials were screaming buys. When a stock's dividend yield is too rich relative to its stock price, and it can't get its stock price to appreciate, many companies will tend to just cut the dividend outright.

2) Just because a stock is low doesn't mean it won't go lower, especially if the prospects for growth keep dropping. Look at CSCO. People bought in at 21 thinking it was a good value investment. Now they are trapped longs, waiting to get out at break even. The same goes for MSFT and HP at this point. These are called value traps, because your money gets trapped while you wait for a pop.

The worst case scenario, which happened in 2008 to many, many stocks and which I believe will continue happening, is that you buy a "value" stock, the we get a recession or another crash, the stock price halves, and then the dividend gets cut or eliminated altogether. Then you're left holding a crappy stock for months or years.

The point is that your strategy is not fool-proof. I believe there are probably plenty of companies where it might work, but there are also plenty of companies in-this-day-and-age where you could get massively whacked following this strategy. And history in the last 3-5 years shows that it doesn't work that well.

I did it with WaMu and lost a boatload. Watching cashflows, etc, etc is fine during a healthy environment, but right now, we have no clues as to the underpinnings of many, many companies, because you really need to understand how to interpret financial statements better than a casual observer. Look at Groupon... would you have been able to tell that their cashflows were positive only because they collected their moneys quickly, but paid their merchants slowly? That takes significant amount of experience to understand this. Probably for most of us here that isn't in the industry, it would have looked great.

Good insights here, but -

> EVERYONE was saying that the financials were screaming buys.

Investing on fundamentals means giving not a damn what everyone is saying or thinking. It's just about the numbers. Actually, if EVERYONE is really thinking something is a great buy, it's probably not.

> Look at CSCO. People bought in at 21 thinking it was a good value investment.

Nothing at 21 is ever a value investment. That's still looking for growth. Just because a whole industry is insane doesn't mean a less insane number is good. As a very rough and flexible guideline, I won't spend too much time looking at something with price/earnings above 12. There's just too many solid companies priced below that with solid businesses and assets.

> The worst case scenario, which happened in 2008 to many, many stocks and which I believe will continue happening, is that you buy a "value" stock, the we get a recession or another crash, the stock price halves, and then the dividend gets cut or eliminated altogether. Then you're left holding a crappy stock for months or years.

That's a good point, yeah. I'm comfortable holding forever with my buys, and when "forever" comes around these things correct, but you've got potential opportunity cost in there.

Good comment here, good discussion, cheers.

> One would think that they, like all things, are in the process of being priced "correctly"-- that is to say, what the market will bear.

I think that "in the process of" is critical. It hasn't yet stabilized. There are some genuinely weird things... for instance: the paperback is half the price of the Kindle version!

I'm still not quite sure what I think about ebooks. Definitely convenient in some ways, but I like being able to hand a book I've read to my wife, or sell it used or whatever. Those things haven't quite been worked out, just yet.

Also, there's something a bit monotonous about reading everything in the same "form factor" with the same fonts.

> The Intelligent Investor is good, however, it's a bit dated.

I found this edition helpful in that regard:

Each of Graham's chapters is followed by another chapter of interpretation/reflection on his advice in a modern context.

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