Benjamin Graham. The Intelligent Investor Fourth Revised Edition (Harper and Row, 1973). Warren Buffett has repeatedly told the story of how this book started him on his investing career. In 2009, Buffett told PBS “I read a book, what is it, almost 60 years ago roughly, called The Intelligent Investor and I really learned all I needed to know about investing from that book, and in particular chapters 8 and 20…I haven’t changed anything since”.
Chapter 8 entitled “The Investor and Market Fluctuations” discusses the classic mistake of buying when everyone is buying and selling when everyone is selling. Graham warns (1973, p.94) “It is easy for us to tell you not to speculate; the hard thing will be for you to follow our advice.” And (pp. 106-107)”The true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would be spared the mental anguish caused him by other persons’ mistakes of judgment.”
Chapter 20 entitled “Margin of Safety” as the Central Concept of Investment” Graham writes (p. 277) “…to distill the secret of sound investment into three words, we venture the motto, MARGIN OF SAFETY.” What this means is that we need to pay for a stock a price that is lower than its intrinsic value. To guard against over optimism and faulty projections the price we should pay should be lower than intrinsic value by a substantial margin (30% below intrinsic value is a typical margin of safety for value investors although there are times when even Warren Buffett abandons this benchmark).
