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 (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 5 ¼ bonds from the “Belgian Congo” or contemporary-for-1972 discussions of “American Tel & Tel. at 73 ½” and the merits of Series E US 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.
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. 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.” If you think as a lay person that you are set up to do all this, Zweig’s floss-after-every-meal exhortation that investors considering a stock should read the company’s last three annual reports and proxy statement seems intended to drive you straight back to index funds.
Eventually — you can almost hear Graham sigh — The Intelligent Investor provides specific strategies. Graham never describes himself as a “value investor,” but his advice all comes back to that: a suspicion of technology and growth stocks; a cheer for “bargain issues;” a “solution” in dividend-paying “light and power” shares; a caution against “new issues” (aka IPOs). “Even if one or two can be found that can pass severe tests of quality and value,” he writes, “it is probably bad policy to get mixed up in this sort of business.”
This last piece of grandfatherly advice, Zweig notes, is still good. On the rest, well, the best we can say is that it worked in Graham’s day. According to the most basic Fama-French model and growth indexes, which compare the cheapest one-third of the market (on a price-to-book-value basis) to the mostly highly valued third, value beat growth three out of every four years from 1940 to 1970.
For the past 30 years, however, growth has beat value two out of every three years. Even Berkshire Hathaway now owns more than $90 billion of Apple shares.
Why this has happened is one of the great debates of modern finance. There are many suspects: in how tech companies have swallowed our minds, economy, and markets; in how software scalability, globalization and “natural” monopolies have allowed giant enterprises to still grow fast. Cliff Asness recently wrote a thoughtful (and funny) paper in which he proposes other hypotheses: the rise of index investing; the zero-interest environment that drove everyone (in his words) “cray-cray”; and another impact of technology, in enabling an enormous volume of goofball amateur investing and coordinating it to act in unison.
A contemporary read of The Intelligent Investor provides us one with more suspect. Graham doesn’t call himself a value investor, but the book — maybe with a nod to Great Grandpa Gesundheit — is centrally about values. (Zweig: “In the end, the advice in this book isn’t only about what kind of investor you want to become. It’s also about what kind of person you want to become.”) And the values in Graham’s original book are clearly of a subscribe-to-the-symphony, dress-for-the-plane, read-the-whole-newspaper 1950s sensibility: rational, decorous, quantitative, suspicious of flash. Some rewards may follow very hard work.
We now live in an age where adults wear pajamas on planes and get their news from TikTok. This doesn’t mean people are worse now or were great then. But it makes it hard to cite rooted, eternal values from which to judge movies or art or religious practice. “Everything is in and nothing is out,” novelist David Lodge said. Wall Street by now knows that it’s not more rational than other industries, so why should securities valuations be more immune to a cultural trend than any other aspect of our lives? Goodbye to Clement Greenberg on color, or Lionel Trilling on authenticity, or Benjamin Graham on never paying more than 1.3 times tangible-asset value.
But there is an optimism in The Intelligent Investor — in its calls for humility, in its reminder that markets always surprise and turn. Value investing and investing values may become profitable again, without warning, long after we declared that era done.
In the meantime, we can all be defensive investors. That path is easy, and in the book.
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