Monday, 11 September 2017

Free Book: The Intelligent Investor – BENJAMIN GRAHAM

Published by Chukwu Emmanuel on Monday, 11 September 2017  | No comments

The Intelligent Investor – BENJAMIN GRAHAM

The purpose of this book is to supply, in a form suitable for lay- men, guidance in the adoption and execution of an investment pol- icy. Comparatively little will be said here about the technique of analyzing securities; attention will be paid chiefly to investment principles and investors’ attitudes. We shall, however, provide a number of condensed comparisons of specific securities—chiefly in pairs appearing side by side in the New York Stock Exchange list— in order to bring home in concrete fashion the important elements involved in specific choices of common stocks.

But much of our space will be devoted to the historical patterns of financial markets, in some cases running back over many decades. To invest intelligently in securities one should be fore- armed with an adequate knowledge of how the various types of bonds and stocks have actually behaved under varying conditions—some of which, at least, one is likely to meet again in one’s own experience. No statement is more true and better applicable to Wall Street than the famous warning of Santayana: “Those who do not remember the past are condemned to repeat it.”

Also Read: 25 Quotes By Benjamin Franklin About Wealth Creation

Our text is directed to investors as distinguished from speculators, and our first task will be to clarify and emphasize this now all but forgotten distinction. We may say at the outset that this is not a “how to make a million” book. There are no sure and easy paths to riches on Wall Street or anywhere else. It may be well to point up what we have just said by a bit of financial history—especially since there is more than one moral to be drawn from it. In the climactic year 1929 John J. Raskob, a most important figure nationally as well as on Wall Street, extolled the blessings of capitalism in an article in the Ladies’ Home Journal, entitled “Everybody Ought to Be Rich.”

His thesis was that savings of only $15 per month invested in good common stocks—with dividends reinvested—would produce an estate of $80,000 in twenty years against total contributions of only $3,600. If the General Motors tycoon was right, this was indeed a simple road to riches. How nearly right was he? Our rough calculation—based on assumed investment in the 30 stocks making up the Dow Jones Industrial Average (DJIA)—indicates that if Raskob’s prescription had been followed during 1929–1948, the investor’s holdings at the beginning of 1949 would have been worth about $8,500.

This is a far cry from the great man’s promise of $80,000, and it shows how little reliance can be placed on such optimistic forecasts and assurances. But, as an aside, we should remark that the return actually realized by the 20-year operation would have been better than 8% compounded annually—and this despite the fact that the investor would have begun his purchases with the DJIA at 300 and ended with a valuation based on the 1948 closing level of 177.

This record may be regarded as a persuasive argument for the principle of regular monthly purchases of strong common stocks through thick and thin—a program known as “dollar-cost averaging.”

Since our book is not addressed to speculators, it is not meant for those who trade in the market. Most of these people are guided by charts or other largely mechanical means of determining the right moments to buy and sell.

The one principle that applies to nearly all these so-called “technical approaches” is that one should buy because a stock or the market has gone up and one should sell because it has declined. This is the exact opposite of sound business sense everywhere else, and it is most unlikely that it can lead to lasting success on Wall Street. In our own stock-market experience and observation, extending over 50 years, we have not known a single person who has consistently or lastingly made money by thus “following the market.”

We do not hesitate to declare that this approach is as fallacious as it is popular. We shall illustrate what we have just said—though, of course this should not be taken as proof—by a later brief discussion of the famous Dow theory for trading in the stock market.

Since its first publication in 1949, revisions of The Intelligent Investor have appeared at intervals of approximately five years. In updating the current version we shall have to deal with quite a number of new developments since the 1965 edition was written.

These include:

1. An unprecedented advance in the interest rate on high-grade bonds.

2. A fall of about 35% in the price level of leading common stocks, ending in May 1970. This was the highest percentage decline in some 30 years. (Countless issues of lower quality had a much larger shrinkage.)

3. A persistent inflation of wholesale and consumer’s prices, which gained momentum even in the face of a decline of general business in 1970.

4. The rapid development of “conglomerate” companies, franchise operations, and other relative novelties in business and finance. (These include a number of tricky devices such as “letter stock,”1 proliferation of stock-option warrants, misleading names, use of foreign banks, and others.

5. Bankruptcy of our largest railroad, excessive short- and long- term debt of many formerly strongly entrenched companies, and even a disturbing problem of solvency among Wall Street houses.*

6. The advent of the “performance” vogue in the management of investment funds, including some bank-operated trust funds, with disquieting results.

These phenomena will have our careful consideration, and some will require changes in conclusions and emphasis from our previous edition. The underlying principles of sound investment should not alter from decade to decade, but the application of these principles must be adapted to significant changes in the financial mechanisms and climate.
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