The Intelligent Investor
The Essays ofWarren Buffett: Lessons for CorporateAmerica
Recently I had a chance toreread two books on investingthat most knowledgeableinvestors would highlyrecommend to physician-investors.One of them is by Benjamin Graham (HarperBusiness;2003) and the other is (The Cunningham Group;2001). Both books aretrue classics in that everytime one reads them,they come away withnew insights into andappreciation for the artof investing.
In the preface to therecently published fourthedition of , Warren Buffettsays, "I read the first editionof this book early in1950, when I was 19. I thought then thatit was by far the best book about investingever written. I still think so."
Any author would be flattered bysuch an endorsement from Buffett,except maybe Graham, who I suspectknew this all along. What's more, theendorsement is from one of Graham'searly and favorite students from histeaching days at Columbia University.So maybe he would have just smiledand felt gratified. In any case, by thetime Graham passed away in 1974, hewas widely recognized as one of thegreatest investors of all time. He wasone of the lucky geniuses who receivedample recognition during his lifetime.
Buffett makes some interesting remarksin the book's preface, including,"What's needed is a sound intellectualframework for making decisions andthe ability to keep emotions from corrodingthat framework. This book preciselyand clearly prescribes the properframework. You must supply the emotionaldiscipline." Notice his emphasison the role that emotions and behaviorsplay in successful investing. This isthe area where the majority of physician-investors fail miserably.
The intellectual framework Buffett isreferring to is value investing. It is fair tosay that Graham originated the conceptof value investing, which in essence saysthat one should buy stocks only at a significantdiscount from their intrinsic values to maintain a margin of safety, andthen wait patiently for the market to recognizethe value and bid up the price ofthe stock. In this book and his previousbook, Security Analysis, Graham detailsthe intellectual framework for findingand investing in value stocks.
There is little doubt that value investingcan produce outstanding investmentresults over time. Graham and several ofhis students, including Buffett, haveamply demonstrated that over their longinvestment careers. As true mastersalways manage to do, both Graham andBuffett make value investing seem simple.
Unfortunately, it isn't. And while hundredsof investment advisors and fundmanagers claim that they are valueinvestors, most are either poor studentsor allow emotions to corrode the frameworkrecommended by Graham. It isalmost laughable to recall that at theheight of the stock market bubble, manyfund managers, who claim to be valueinvestors, were actually buying stocks atmany times their intrinsic values andfound ways to rationalize their actions.
Wisdom of Buffett
The Essays of Warren Buffett
The Intelligent Investor
actuallydoes not contain any essays by him assuch. It is instead a compilation ofexcerpts from his famous letters to theshareholders from the annual reports ofBerkshire Hathaway, of which he is theCEO and largest shareholder. Theexcerpts cover a wide range of topics andrepresent some of the clearest thinkingabout and invaluable insights into investment,corporate finance, corporate governance,and so forth. It is a small book ofabout 200 pages, as opposed to the 600-page . Pound forpound, or page for page, it may be thebest book on finance ever published.
Could you benefit from reading eitherof these books? You should not have anydifficulty guessing my answer to thatquestion. I will caution you, though, thatunless you have a deep interest in financeand investing, you may find both bookssomewhat demanding, and maybe evendisappointing, because neither promisesor provides any magic formula to getrich overnight or even in a few years.There are, of course, too many suchbooks on the shelves of bookstores, andwe all know how well they deliver ontheir promises.
The other problem is that financialgeniuses like Graham and Buffett makewhat they do look simple and obvious.You and I should not be under any illusionthat by reading these books over oneor two weekends we can become greatvalue investors. Nonetheless, the knowledgeyou acquire will be invaluable inhelping you choose the right investmentadvisors or mutual funds.
Chandan Sengupta, author of TheOnly Proven Road to InvestmentSuccess (John Wiley; 2001), currentlyteaches finance at theFordham University GraduateSchool of Business and consultswith individuals on financial planning and investmentmanagement. He welcomes questions or commentsat email@example.com.