20 September 2017

Book review: Ben Graham – Intelligent Investor

Benjamin Graham is the closest thing that the modern investment profession has to a founding father. Graham was born in London in 1894 but grew up and spent the majority of his life as a New Yorker.

Born into a wealthy Jewish family (his birth name was Grossbaum), Graham soon learnt some difficult lessons in financial hardship. When Graham was just seven years old his father passed away, leaving Graham and his mother with a porcelain business that soon went bust and forced the family into poverty. In an attempt to regain their lost wealth, Graham’s mother subsequently borrowed large sums of money in order to speculate on Wall Street, only to be wiped out in the crash of 1907. Luckily for Graham, his brilliant mind won him a scholarship to Columbia and by the age of 20 he had joined Wall Street as a clerk at a bond-traders. Graham went on to achieve exceptional investment returns up until his retirement in 1956.

Graham was not the first or last great investor, but what makes him unique are his efforts to establish investment as a professional and academic field. Above being a brilliant investor, Graham was a great teacher, scholar and innovator. Warren Buffett is Graham’s most famous disciple and has written many glowing tributes to Graham, who was Buffett’s lecturer at Columbia and later a close friend. My favourite of Buffett’s tributes to Graham and his legacy is The Superinvestors of Graham-and-Doddsville (https://www8.gsb.columbia.edu/articles/columbia-business/superinvestors) in which Buffett records the success of many of Graham’s students such as Walter Schloss, Bill Ruane and Charlie Munger – I will not do it justice so far better you read it yourself!

We still see echoes of Graham’s teachings throughout the investment world. Many financial analysts will not necessarily cheer Graham for this, but in the 1940s he was the first to develop a certification process for analysts known as the Qualified Security Analyst (QSA) – this idea eventually morphed into the Chartered Financial Analyst (CFA) designation. Today, over 170,000 aspiring investors globally study for the CFA and must pass 18 hours of exams over two+ years before they can gain the CFA accreditation – thanks Ben!

Graham published multiple works on investing, with Security Analysis being his magnum opus. Security Analysis, however, is thousands of pages long and is only marginally more readable than the Oxford English Dictionary. The Intelligent Investor has in fact become Graham’s most popular work, partly since it is shorter and more readable, but probably more down to the fact that Buffett describes it as “by far the best book on investing ever written”. Many of Graham’s illustrious students have written heartfelt and entertaining reviews of the Intelligent Investor that I cannot hope to emulate and am not going to try!

I will highlight one key message that I feel is at the heart of The Intelligent Investor – it is a lesson in how not to lose money. This may well go back to Graham’s childhood experience of lost fortunes, but at heart Graham was a risk manager and his message to students was to be meticulous in company analysis, disciplined in valuation and to avoid getting carried away on waves of market emotion. Graham’s concepts such as “Margin of Safety” and “Mr Market” may sound familiar today but they were revolutionary in their time and remain pillars of an effective investment strategy. This is a must read.

The JM Finn book club, consisting of a dozen or so investment professionals across the firm, was conceived in 2017 with the hope being that, month by month, some of the wisdom of investing gurus such as Warren Buffet, Charlie Munger, and Mohnish Pabrai, might rub off on their eager selves.

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