When Warren Buffett calls a book on investing "by far the best book about investing ever written," it is common sense to concede the point.
One does this while gently pointing out that The Intelligent Investor by Benjamin Graham, with a third edition out this week on its 75th anniversary (HarperCollins, Oct. 22), contains a lot of musty musings on railroad shares and the markets of 1972; requires (and gets) contemporary commentary by the Wall Street Journal's Jason Zweig after each of its original chapters; and provides investment advice that would have led over the last 30 years to lousy returns.
This is why the book is likely more owned than read. But it should be read for its core, originating importance: an inoculation against bad habits of mind.
Graham, Buffett History
Graham (born Grossbaum) was an active investor at his own firm in the 1920s through the 1950s. An undergrad polymath at Columbia University (English, math, philosophy, music, Latin and Greek), he seemed inclined always to also teach, maybe a legacy of being the great-grandson of an unsurpassably named famous Warsaw rabbi, Yaakov Gesundheit.
Buffett took classes from Graham at Columbia Business School and later worked for him for two years, 70 years ago. The Intelligent Investor was Graham's second book, a popularizing follow up to his and David Dodd's more technical "Security Analysis."
After the 1949 original, "The Intelligent Investor" was reissued three more times in Graham's lifetime, with sedimentary layers of financial lessons from the first three quarters of the 20th century.
Graham delivers his investing "principles and attitudes" within references to the 5¼ bonds from the "Belgian Congo" or contemporary-for-1972 discussions of "American Tel & Tel. at 73½" and the merits of Series E U.S. savings bonds. Graham has a dry wit and keeps it light on the polymathy.
He was also 79 at the publication of his last edition, which can meander and repeat. And so for this edition, Zweig provides footnotes and follow-on commentary, sometimes nearly as long as the original chapter: postscripts to Graham's advice, wisdom from other market sages, it-is-ever-thus references to GameStop Corp. or SPACs, and his own morally urgent advice.
Graham's Lessons
While Graham's opus is about both intelligence and investing, it is less about how to make money than how not to be an idiot. "To achieve satisfactory investment results is easier than most people realize," he writes; "to achieve superior results is harder than it looks."
Graham is at his best when laying out the program for the former: how to be a "defensive" investor, with low expectations.
It's the advice professional investors want to paste to the forehead of every cardiologist brother-in-law asking for stock tips.
It's the advice the Graham did so much to codify: Never trade on margin, know you'll lose money when you speculate, have a diversified portfolio of around half stocks and half bonds, and accept that it's "virtually impossible to make worthwhile predictions about the price movements of stocks" and "completely impossible" for bonds.
(This is also the advice that will be much less fun to abide if the S&P 500 returns only 3% annually over the next decade, as Goldman Sachs recently forecast, compared with 13% over the last decade.)
Zweig is particularly good at explaining how golden is our age for defensive investing with cheap index funds and instant portfolio rebalancing.
Warily, Graham also writes about how to try to be a market-beating "enterprising" investor.
This part is addressed to amateur investors who think they're professionals and, implicitly, professionals who act like amateurs. In an essay reprinted at the end of the book, Buffett distills the essence of Graham's teachings: "buying the business, not buying the stock." Everything else is just speculating.
Unfortunately, human nature makes it hard to buy the business and not the stock.
How to Be a Contrarian
And so Graham details specific attitudes you need to be a contrarian, to be technically fluent enough to see through hucksters and accounting tricks, to be steadfast enough in your opinions to ignore the constant chattering of "Mr. Market," to more heavily weigh a backwards-looking quantitative "protective" approach to analyzing securities over a qualitative "predictive" approach, and to always calculate formulaically your "margin of safety" — "the central concept of investment."
