The Business of Value Investing.pdf

36 The Business of Value Investing

Later, in 1949, Graham published the The Intelligent Investor , a

much shorter yet equally effective text on the practical principles of

sound investing. It was Security Analysis for a more general audience,

although the book became much more than that. The core theme

of The Intelligent Investor hinged on the distinction between invest-

ment and speculation that was provided in Security Analysis:

An investment operation is one which, upon thorough analysis,

promises safety of principal and an adequate return. Ope rat-

ions not meeting these requirements are speculative.^1

Notice the three conditions that must exist for an investment:

thorough analysis, safety of principal, and an adequate return.

I think most investors would agree that satisfying these three condit-

ions is the cornerstone of all investing activity, regardless of what

you invest in. In Chapter 11 , I will discuss why growth investing and

value investing are merely two sides of the same coin. Part of the

value in any investment is the growth potential of the business. Ben

Graham came along and taught us how to value this future growth

and use those principles in paying sensible prices for the stock

today. As you will read throughout this book, a major determinant

between a successful investment and an unsuccessful investment is

the price you pay.

Ben Graham ’ s most famous disciple was Warren Buffett, who

today is undeniably considered as the world ’ s most successful and

accomplished investor. Beginning in 1965, when Buffett assumed

control of Berkshire Hathaway — at the time a Massachusetts textile

business — to 2007, Berkshire Hathaway ’ s book value per share grew

at an annual compounded gain of 21.1 percent. 2 Buffett took the

fundamentals that Graham had taught him and adapted them over

the years to produce the most successful long - term track record in

modern - day investing. It should come as no surprise that many pro-

fessional investors who want to follow Graham ’ s philosophies and

CH003.indd 36CH003.indd 36 9/2/09 11:07:03 AM9/2/09 11:07:03 AM