14. BOOK REVIEW

BOOK REVIEW

Author: Benjamin Graham Publisher: Harper & Brothers Pages: 640

SUMMARY

Economist Benjamin Graham who gained fame for his book 'The Intelligent Investor', is often termed as the foremost expert in finance and investment. Known as the person who first developed the concept of value investing, he has laid down the specifics of his theory and its application in his book 'The Intelligent Investor'. Considered to be one of the most important books on the topic of evaluating companies with surgical precision, the concepts enumerated in the book allowed Benjamin Graham to excel at making money in the stock market without taking high amounts of risks. One of the major contributions of the author was the highlighting of the irrationality and group-thinking that was very prevalent in the stock market. Graham emphasised on the investments aiming to profit from the numerous whims of the stock market. His principles still influence a majority of the investors even today.

Early Years

Benjamin Graham graduated from Columbia University in 1914 and then went on to work on Wall Street. During his 15-year career, he was able to build a sizable portfolio but lost most of his money in the stock market crash of 1929 that marked the beginning of the Great Depression. The experiences gained from it helped Graham minimize the downside risk by investing in companies whose shares traded way below the companies' actual value. He very effectively utilized market psychology, thus using market fears to his own advantage.

What does the book teach you?

Benjamin Graham and David Dodd began teaching value investing at Columbia Business School in 1928 as an investment approach. Then in the year 1949, Graham and Dodd published The Intelligent Investor. Some of the highlights from the book include: One of the author's favourite allegory used very frequently is the one of Mr. Market. "Mr. Market," an imaginary person, goes every day to the stockholder's office, always offering to buy or sell his shares at various prices. The proposed prices sometimes tend to make sense, but often the proposed prices are way off, according to the prevailing economics.

Value Investing

Value investing, in its most basic sense, is deriving the intrinsic value of a common stock independent of its market price. Analysing the various indicators of a company, its assets, earnings, and dividend pay-outs can facilitate the determination of the intrinsic value of a stock, which can then be compared to its market price. If the intrinsic value is more than the market value, then the stock is undervalued in the market, and the investor should buy and hold until the holding becomes profitable when the market price con-

verges to the intrinsic value. This theory is known as The Mean Reversion Theory, which says that in due time, the market price and the intrinsic price will converge. And when they do so, then the market price truly will reflect the actual value of the company.

Benjamin Graham For mula

Benjamin Graham himself only purchased those stocks which traded at two-thirds of their net-net value so as to have some margin of safety. Net-net value is a value investing technique that was developed by Graham. In this, a company is valued based only on its net current assets.

Much later, he revised the formula to include both a risk-free rate of 4.4% (the average yield of high-grade corporate bonds in 1962) and the current yield on AAA corporate bonds.

Financial Reporting and Dividends

Many of the concepts and principles discussed in the book by Graham remain very relevant today. Graham was a strong critique of the corporations which had obscure and irregular methods of financial reporting, which caused investors difficulty in accurately gauging the health of a company. Graham was also a persistent advocate of companies that paid dividends to their shareholders instead of accumulating retained earnings.

Inf luence on War ren Buffett

Investor Warren Buffett who was mentored by Benjamin Graham describes the book as "by far the best book on investing ever written." He mentions that after reading it at age 19, he enrolled in Columbia Business School in order to study under Graham. There they developed a friendship which lasted all their life. He later worked for Graham at his investment company, the Graham-Newman Corporation, until Graham retired.

Warren Buffett follows the principles of value investing but also considers company performance, profit margins, company debt, nature, whether public or private, how reliant they are in terms of commodities, and how costly they are. All in all, 'The Intelligent Investor' is a superb read which is sure to tickle the reader's finasensical senses. It will provide the reader with an understanding of how value investing is to be used in the actual world of markets so as to earn returns while managing the risks effectively as well. Even though the book was written years ago, it is still considered a marvel in this age in financial circles. The concepts and principles covered are very much relevant in the present age and are bound to give you an edge. Happy Reading…