TH E I NTE L L I G E NT I N V E STO R A BOOK OF PRACTICAL COUNSEL REVISED EDITION BENJAMIN GRAHAM Updated with New Commentary by Jason Zweig To E.M.G. Through chances various, through all vicissitudes, we make our way.... Aeneid Contents Epigraph iii Preface to the Fourth Edition, by Warren E. Buffett viii ANote About Benjamin Graham, by Jason Zweigx Introduction: What This Book Expects to Accomplish 1 COMMENTARY ON THE INTRODUCTION 12 1. Investment versus Speculation: Results to Be Expected by the Intelligent Investor 18 COMMENTARY ON CHAPTER 1 35 2. The Investor and Inflation 47 COMMENTARY ON CHAPTER 2 58 3. ACentury of Stock-Market History: The Level of Stock Prices in Early 1972 65 COMMENTARY ON CHAPTER 3 80 4. General Portfolio Policy: The Defensive Investor 88 COMMENTARY ON CHAPTER 4 101 5. The Defensive Investor and Common Stocks 112 COMMENTARY ON CHAPTER 5 124 6. Portfolio Policy for the Enterprising Investor: Negative Approach 133 COMMENTARY ON CHAPTER 6 145 7. Portfolio Policy for the Enterprising Investor: The Positive Side 155 COMMENTARY ON CHAPTER 7 179 8. The Investor and Market Fluctuations 188 iv v Contents COMMENTARY ON CHAPTER 8 213 9. Investing in Investment Funds 226 COMMENTARY ON CHAPTER 9 242 10. The Investor and His Advisers 257 COMMENTARY ON CHAPTER 10 272 11. Security Analysis for the Lay Investor: General Approach 280 COMMENTARY ON CHAPTER 11 302 12. Things to Consider About Per-Share Earnings 310 COMMENTARY ON CHAPTER 12 322 13. AComparison of Four Listed Companies 330 COMMENTARY ON CHAPTER 13 339 14. Stock Selection for the Defensive Investor 347 COMMENTARY ON CHAPTER 14 367 15. Stock Selection for the Enterprising Investor 376 COMMENTARY ON CHAPTER 15 396 16. Convertible Issues and Warrants 403 COMMENTARY ON CHAPTER 16 418 17. Four Extremely Instructive Case Histories 422 COMMENTARY ON CHAPTER 17 438 18. AComparison of Eight Pairs of Companies 446 COMMENTARY ON CHAPTER 18 473 19. Shareholders and Managements: Dividend Policy 487 COMMENTARY ON CHAPTER 19 497 20. “Margin of Safety” as the Central Concept of Investment 512 COMMENTARY ON CHAPTER 20 525 Postscript 532 COMMENTARY ON POSTSCRIPT 535 Appendixes 1. The Superinvestors of Graham-and-Doddsville 537 Contents vi 2. Important Rules Concerning Taxability of Investment Income and Security Transactions (in 1972) 561 3. The Basics of Investment Taxation (Updated as of 2003) 562 4. The New Speculation in Common Stocks 563 5. ACase History: Aetna Maintenance Co. 575 6. Tax Accounting for NVF’s Acquisition of Sharon Steel Shares 576 7. Technological Companies as Investments 578 Endnotes 579 Acknowledgments from Jason Zweig 589 Index 591 About the Authors Credits Front Cover Copyright About the Publisher The text reproduced here is the Fourth Revised Edition, updated by Graham in 1971–1972 and initially published in 1973. Please be advised that the text of Graham’s original footnotes (designated in his chapters with superscript numerals) can be found in the Endnotes sec- tion beginning on p. 579. The new footnotes that Jason Zweig has intro- duced appear at the bottom of Graham’s pages (and, in the typeface used here, as occasional additions to Graham’s endnotes). Preface to the Fourth Edition, by Warren E. Buffett I read the first edition of this book early in 1950, when I was nine- teen. I thought then that it was by far the best book about investing ever written. I still think it is. To invest successfully over a lifetime does not require a strato- spheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making deci- sions and the ability to keep emotions from corroding that frame- work. This book precisely and clearly prescribes the proper framework. You must supply the emotional discipline. If you follow the behavioral and business principles that Gra- ham advocates—and if you pay special attention to the invaluable advice in Chapters 8 and 20—you will not get a poor result from your investments. (That represents more of an accomplishment than you might think.) Whether you achieve outstanding results will depend on the effort and intellect you apply to your invest- ments, as well as on the amplitudes of stock-market folly that pre- vail during your investing career. The sillier the market’s behavior, the greater the opportunity for the business-like investor. Follow Graham and you will profit from folly rather than participate in it. To me, Ben Graham was far more than an author or a teacher. More than any other man except my father, he influenced my life. Shortly after Ben’s death in 1976, I wrote the following short remembrance about him in the Financial Analysts Journal. As you read the book, I believe you’ll perceive some of the qualities I men- tioned in this tribute. viii