Financial knowledge

Warren Buffett's 1949 financial bible: outdated or timeless?

Legendary investor Warren Buffett attributes much of his success to The Intelligent Investor, a book by Benjamin Graham that was first published in 1949. In today’s multimedia world, getting through its over 600 pages can seem like quite a challenge – but it can pay off.

Stephan Lehmann-Maldonado, guest author
Warren Buffett in a suit and a red tie
The "Oracle of Omaha" seems to have always been ahead of his time - but for decades has sworn by a book from 1949. How much can we learn from it today? © Mark Peterson/Redux/laif

Warren Buffett bought his first stock when he was eleven. At the age of 13, he filled out his first tax return, and at 19, he discovered his investing bible: The Intelligent Investor. The book, which was first published in 1949, was written by his professor Benjamin Graham.

Profile picture of Benjamin Graham in black and white
The teacher of a legend: Buffet's investment strategies are based on the insights of his professor Benjamin Graham. © Wikipedia

Since reading The Intelligent Investor, Buffett has closely adhered to Graham’s principles. And it has obviously served him well; the “Oracle of Omaha”, who is now over 90, is widely considered the most successful investor of the last 50 years.

That’s why I’ve always thought there must be merit to Graham’s advice. And so, a few weeks ago, my curiosity finally got the better of me and I bought the book. I was full of enthusiasm when I started reading it, and lapped up the foreword by Warren Buffett. It’s interesting and sets the bar very high.

But with every page I read, I became increasingly worried about the pages that were still ahead. I had to keep pinching myself to keep motivated. I felt like a high school student struggling through Faust, Part I. I was fully aware that I was holding an important piece of writing in my hands – but the language constantly reminded me that the book had been written many decades ago.

Always topical

Warren Buffett in a cowboy hat
Warren Buffett, "one of the most important American investors of our time", according to the Los Angeles Times. © KEYSTONE/EPA/LARRY W. SMITH

Benjamin Graham worked to keep his book up to date until the end of his days. He tested his theories again and again, questioned himself and introduced new data. He would therefore likely have approved of the fact that the newer editions contain comments from the financial journalist Jason Zweig. Sometimes, these comments are even more insightful than Graham’s own words. But above all, they show that Graham’s assessments were often right on the mark.

Ultimately, however, The Intelligent Investor was likely less illuminating for me than it was for Warren Buffett. And that is probably due in no small part to the book’s success. When it was first published, Graham’s insights were groundbreaking. The book laid the foundations for value investing, an investment strategy that aims to identify undervalued stocks using metrics such as price-to-earnings ratio (P/E ratio). His arguments were so convincing that they can be found on just about any reputable financial website. However, this widespread popularity means the book is unlikely to contain any surprises for experienced traders.

Stock markets for beginners

To find out whether this book continues to provide a relevant introduction to financial markets in the present day, I asked my 19-year-old son to read it. His conclusion was that “With a bit of effort, someone with little prior knowledge of the subject is able to understand it and extract the key messages. The wisdom imparted by Graham is still relevant today. But he would probably have been very much against a number of the more recent trends in stock markets.”

The intelligent investor book cover
Graham is regarded as the father of value investing, and his book "The Intelligent Investor" remains highly regarded. Rightfully so?

High-frequency trading, cryptocurrencies, structured products and exchange-traded index funds (ETFs) would probably have caused Graham’s eyes to pop out of his head. There is no way he could have imagined these developments. And that makes it all the more astonishing that many of his principles have remained so timely and relevant.

Benjamin Graham was an analyst, which is reflected in the logical structure of his book. He explains what he considers to be an intelligent investor – namely the opposite of a speculator who always follows the herd. He introduces readers to capital markets and he outlines strategies for different types of investors. What may slightly irritate European readers is his focus on the American stock market (it should be noted, however, that this is the market for which the most comprehensive data exists). In addition, Zweig’s sometimes extensive comments seem at times more like a homage to Graham than a factual update of his work.

No love lost for gold

One of the advantages of Graham’s book is that you don’t have to read it from start to finish. Instead, you can go to specific chapters and consult the “father of fundamental analysis” on selected topics.

But even the “intelligent investor” got one thing wrong. Graham did not feel that gold could protect the purchasing power of the US dollar. He believed that, in contrast to shares, gold was an unproductive asset and criticised the fact it does not generate profits. That said, if you have the ability to invest like Graham and his most renowned disciple Warren Buffett, you probably don’t really need gold in your portfolio to make a fortune.

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Five of Benjamin Graham’s key investment principles

  1. Investor type is important.
    Defensive or aggressive? Graham had his own definition for these two investor types. According to him, a defensive investor is someone who avoids risks and devotes little time to investing. An aggressive investor, on the other hand, is someone who is heavily involved in stock markets and snatches up profitable companies. As a result, aggressive investors are able to take what might seem like greater risks. So can the characteristics of these two types be combined? No, that would be the worst of all evils!
  2. Don’t look back.
    Just because the price of a security has been trending steeply upwards does not mean this will continue. “Intelligent” investors should not be blinded by Wall Street success stories. All too often, “nonsensical” prices end up crashing.
  3. No accounting tricks.
    If you’re investing in stock markets and don’t know how to read a balance sheet, you’re living dangerously. Graham recommends scanning financial reports to look for accounting tricks. Bad managers try to inflate share prices without creating value. Graham therefore insists people should follow the “buy assets worth 1 dollar for 50 cents” strategy (in other words, they should invest in undervalued stocks).
  4. Keep cool.
    Volatile markets should not faze investors. Benjamin Graham recommends they adopt an “I don’t care mentality”. How others view the market is irrelevant – the main thing is that they stick to their value-oriented strategy.
  5. Numbers instead of words.
    Good shares should be bought and held. It is therefore important that shares pay dividends and that those dividends are increased as continuously as possible. But even if an investor invests only in blue chip stocks, they should be sure to avoid concentration risks; diversification is the key to successful investing.
A picture of gold bars
If you invest like Graham and his most prominent disciple Warren Buffett, you don't need gold in your portfolio. © iStock/Volkova
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