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Book Review by Vijar Kohli: The Intelligent Investor

  • May 15, 2024

Vijar KohliEditor’s Note: This is the third book review we are publishing as part of our Get Paid to Read contest. Andrés Giraldo’s excellent review of The Man Who Solved the Market by Gregory Zuckerman was published right before Jim Simons passed away last week and in some sense was a tribute to a legend in the industry.

In an age of meme stock rallies pushing stock to unfathomable heights, Vijar Kohli’s review of the investing classic The Intelligent Investor by Benjamin Graham is timely. Vijar Kohli is the Co-founder of Golden Door Investments.

How the Intelligent Investor changed my views on stocks

The Intelligent InvestorIt was in my second year of college when I first learned about value investing.

Like most excited young investors, I read dozens of investment books. Eventually I stumbled across the ‘Oracle of Omaha’ and learned that Warren Buffett studied at the school of Benjamin Graham. Graham wrote several books, one of them being the Intelligent Investor.

But buying digital or audio books wasn’t as simple as it is today. At the time, I had two options: go to my local library or Barnes and Nobles. I did both often. So I bought the revised paperback edition by Jason Zweig and read it in three days.

The Intelligent Investor opened the doors to value investing

Like many other Buffett disciples, I read every investment book I could get my hands on. Joel Greenblatt, Mohnish Pabrai and many others.

But very few stuck out to me. It might have been because I was studying finance and accounting in business school. Financial modeling was part of every class. But I found most models were useless. It was important to understand the variables, but models were susceptible to change. I needed a more concrete way to value businesses.

And Ben Graham spoke my language. He valued businesses based on earnings, cash flows and book value, which made sense to me. Simple valuations with a margin of safety would make investing easier.

My first time learning about Mr. Market

You might have heard of Buffett discussing the stock market being a voting machine vs weighing machine and referencing Mr. Market. These concepts are from the Intelligent Investor. Specifically in chapters 8 and 20.

For starters, I recommend reading the revised edition with the latest commentary from Jazon Zweig. It gives readers recent examples of how to apply Intelligent Investing in the market today. My favorite examples were related to valuing Internet stocks during the dot-com bubble.

Looking back at the 90s, it is simple to understand which businesses were overvalued based on fundamental analysis. But at the time, I imagine it was very difficult not to speculate for two reasons.

First, there is a euphoria that comes from speculating on investments that go up 30-40% in a short period. Second, these bull markets only last two to three years. Meaning, even if you are a disciplined investor, it is easy to fall into the bubble territory if you don’t have a sound investment strategy.

Learning about the margin of safety

This was an important yet simple concept misunderstood by many investors. The problem with the margin of safety is that novice investors don’t know the intrinsic value of a business. Even professional investors struggle with it. I know I did for many years.

The problem is you don’t know if you’re buying a business at a 30% or 50% discount. Or maybe at a premium. What’s your investing timeline? Is it two years or two months? All of these factors impact how you view the margin of safety when it comes to investing.

I recommend reading a copy of Seth Klarman’s Margin of Safety book to learn more. Seth is the billionaire investor who compounded capital at 20% annually at the Baupost Group. He had an impressive track record.

His book was published in 1991 and is hard to find because it is out of print. But he is the recent investor I have come across who studied margin of safety in great detail.

How to value businesses

In the Intelligent Investor, Graham emphasized the importance of simple valuation models over complex ones when buying stocks. This was important to me because I wanted to screen thousands of stocks like Buffett did when he read the Moody’s manual for ideas.

Fortunately for me at the time, I read this book right after the Great Recession hit in 2008. Which meant two things as an investor. First, everything was of value since the entire market was in distress. Second, only companies with strong balance sheets would survive the recession. Meaning, only the best companies survived the credit crunch. So anything on the stock market at the time was worth buying and studying. It was a very profitable time to be a value investor.

Later on, when I read Security Analysis, I understood the importance of valuing a business based on earnings (P/E ratio) and the book value (P/B ratio). Both of these metrics were helpful in screening thousands of stocks.

Thoughts on speculation vs. investing

Reading the Intelligent Investor was my gateway into the world of valuing the fundamentals of business. As a young investor, technical analysis seemed cool but the charts and graphs never made much sense to me.

But since I was studying finance and accounting at the time, valuing the fundamentals of a business was more of my language. At the time, most business schools didn’t offer any courses in value investing. Many still don’t. Which is why I found it fascinating that Warren Buffett sought Ben Graham to teach him the ways at Columbia University in 1951.

In the Intelligent Investor, Graham distinguishes between investing (analyzing businesses and buying with a margin of safety) and speculation (relying on market trends and emotions). He emphasizes the importance of being an investor, not a speculator, to achieve long-term success.

Remember, that a stock is not just a ticker on a screen. It is an ownership interest in an actual business. This is the fundamental idea you will find over and over again in the Graham school of investing.