The Intelligent Investor

THE INTELLIGENT INVESTOR A BOOK OF PRACTICAL COUNSEL REVISED EDITION B E NJAM I N G RAHAM Updated with - pdf free download

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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

To E.M.G.

Through chances various, through all vicissitudes, we make our way. . . . Aeneid

Contents

Epigraph Preface to the Fourth Edition, by Warren E. Buffett A Note About Benjamin Graham, by Jason Zweig

x

Introduction: What This Book Expects to Accomplish COMMENTARY ON THE INTRODUCTION

1.

2. 3.

4.

6.

7.

8. iv

1 12

Investment versus Speculation: Results to Be Expected by the Intelligent Investor

18

COMMENTARY ON CHAPTER 1

35

The Investor and Inflation

47

COMMENTARY ON CHAPTER 2

58

A Century of Stock-Market History: The Level of Stock Prices in Early 1972

65

COMMENTARY ON CHAPTER 3

80

General Portfolio Policy: The Defensive Investor

88

COMMENTARY ON CHAPTER 4

5.

iii viii

101

The Defensive Investor and Common Stocks

112

COMMENTARY ON CHAPTER 5

124

Portfolio Policy for the Enterprising Investor: Negative Approach

133

COMMENTARY ON CHAPTER 6

145

Portfolio Policy for the Enterprising Investor: The Positive Side

155

COMMENTARY ON CHAPTER 7

179

The Investor and Market Fluctuations

188

v

Contents COMMENTARY ON CHAPTER 8

9. Investing in Investment Funds COMMENTARY ON CHAPTER 9

213 226 242

10. The Investor and His Advisers

257

COMMENTARY ON CHAPTER 10

272

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

280 302 310 322 330 339 347 367 376 396 403 418 422 438 446 473 487 497 512

COMMENTARY ON CHAPTER 20

525

Postscript

532

COMMENTARY ON POSTSCRIPT

535

Appendixes 1. The Superinvestors of Graham-and-Doddsville

537

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)

562

4. The New Speculation in Common Stocks

563

5. A Case History: Aetna Maintenance Co.

575

6. Tax Accounting for NVF’s Acquisition of Sharon Steel Shares

576

7. Technological Companies as Investments

578

Endnotes

579

Acknowledgments from Jason Zweig

589

Index

591

About the Authors Credits Front Cover Copyright About the Publisher

The text reproduced here is the Fourth Revised Edition, updated by Graham in 1971–1972 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).

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

ix

Preface to the Fourth Edition

BENJAMIN GRAHAM 1894–1976 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.

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 gov1

Coauthored 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

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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, Gra...

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