Book Review: “The Intelligent Investor”, by Benjamin Graham 4th edition with liner notes by Jason Zweig.
I believe I first read “The Intelligent Investor” at some point around 2005. It was really an incredible coincidence that I ran across it during the time I did. I was looking to expand my own knowledge base, and at the same time, I just happened to be working at Countrywide financial, which ended up being one of the largest players in the mortgage meltdown in 2007.
I was just so perfectly prepared for that bear market because of that. I had very recently taken my first two accounting courses in college as well, and had been tinkering with individual stocks before that. What happened was that I was working this part time gig for a few hours each night with this accounting firm, because I didn’t feel like I had a good understanding with what my teacher had taught vs. what made an investment successful .
There used to be an older gentleman who would be in that office from time to time, and I remember that I found out he was into the stock market, and I mentioned how well my Sirius Sattellite Radio had done that day, up something like 5%. The response he gave was something I’ll never forget: “Do you really think that 5 or 10 years down the road, that number would be meaningful?”. Answered honestly, I couldn’t say that I had any idea. He directed me to start reading about Warren Buffett.
So I did. The first book I read about Buffett was a biography, “Buffett: The Making of an American Capitalist” by Roger Lowenstein, and the other was Mary Buffett’s “Buffetology”. Those two books overwhelmingly pointed to Benjamin Graham as the source of Warren’s investment mentality, and so I picked up the 4th edition of “The Intelligent Investor”. I took to the material immediately, and had never seen anything else like it. Inside of just a couple of pages I understood what I was doing incorrectly. I was chasing momtentum and news, and what Graham taught me to do instead was look at the business as if I were the owner, and try to estimate it’s intrinsic worth from there.
Graham changed everything for me. I immediately understood where both my strengths and weaknesses were, and when the 2007 housing market crash hit, I was so well prepared that I took in more than a 400% gain before 2008 ended. That volatility continued well into the next year, and I doubled my holdings inside nearly every couple of weeks during that madness. I haven’t tracked my performance for a while now, but I know that by 2012 I was sitting an an increase approaching 50,000% of my initial capital.
What Graham really hit home with in his writing was on buying companies that earned profits. To that point I had been purchasing stocks on news, and on dips in their charts. I had thought that was what “Buying Low” was. Graham tought me to think about the future of a business, not it’s past, but by using the businesses’ past as your guide.
Graham ‘s core concept is centered around a “Return to mean”. A business that’s been doing the same things for a long time tends to keep doing them, so you get in there and buy them when they are having a temporary, but solvable problem. Alternatively, he gives you tips on how to value the assets on a company’s balance sheet, so that you can know if a true catastrophe is in the cards for a struggling company. You learn to find greater chances for rewards with substantially less risk involved.
More than anything, he teaches you to be fearless in the face of a fearful, easy dismayed stock and bond market. You learn to prepare for these times, and how to hedge your losses when there is risk involved. Best of all, you learn that all of these things are entirely within yourself to control. Graham’s book is so complete that you could probably never read any other and outperform at least 80% of the market easily. With a bit of fine tuning that comes from practice, I think I’ve got this number into a range of 98%.
Since that time, I’ve become a contributor for Seeking Alpha as well as a few smaller sites, and have introduced a couple of new concepts to the field. I have a chart named after me called the “Waterman Life Cross”, and am developing a new method around what I call “Insult Theory”, which is a way of using investor sentiment to guage if there is serious interest in a stock, or if the owners don’t understand the business at all. Graham was the foundation for both methods, and I believe that anything good that comes in the future will also be due to his writings.
Matthew Waterman, Contributor at Seeking Alpha
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