"I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, but the situation has changed a great deal since then." -Ben Graham

That quote always makes my ears ring! Or should I say eyes burn.

I remember Buffett and Munger chastizing the "helpers" of the financial industry at last years annual meeting. In that vein an index is probably the best choice for most investors- less fees.

There is no reason however to belittle methods that have proven to beat the indexes over long term even with zero portfolio correlation. I'll have to pick up the book to see how Bogle presents the argument. He is right, it is time consuming, but so is watching TV.

Although Graham did cool on the idea of individual stock selection – I think he was speaking more to what's discussed in Security Analysis rather than The Intelligent Investor. He's right in that a lot of what he wrote in Security Analysis is no longer a rewarding activity largely because his techniques were adopted by everyone else. Read some of the examples he gives in the book and you can see that these kinds of opportunities rarely exist today.

For individuals, I think the much, much simpler rules he put forth in the Intelligent Investor are what he had in mind.

The combination of computer databases (and now the internet) along with activist investors, private equity, etc. has removed much of what is discussed in Security Analysis, because those kind of obvious quantitative opportunities are much rarer.

Today, quantitative techniques must be coupled with some (possibly small) qualitative techniques to achieve excellent results in terms of individual stock selection. Of course, doing things like just buying small, low P/E stocks works well. But, that's not individual stock selection – that's more akin to what David Dreman wrote about and Joel Greenblatt's magic formula as well.

Graham was interested in purely quantitative techniques – and I think those, on an individual stock selection basis, have really vanished. Even when I, say, buy an insurance company below book value – I look for qualitative considerations. Is it a niche business? Does management have a big stake? How's it been run in the past? Does it have a history of solid underwriting results? What does Best rate it? etc. – I don't think Graham even liked going that far qualitatively.

So, I think cheap still works. And a diversified cheap portfolio certainly works. But, in terms of individual stock selection, I think the analytical competition has become so fierce over the last half century or so that purely quantitative techniques for finding specific stocks are not necessarily that reliable.

But, if you read The Intelligent Investor, you'll note that some of the things described really aren't purely quantitative techniques. He emphasizes the quantitative – especially by comparison to today's investment writers – but really he mostly lays down what not to do. He allows for individual stock selection based on qualitative techniques (but, then basically say "I don't advise it", "diversify instead") within the limits of sticking to stocks that are reasonable cheap, financially secure, etc.

A note for those picking stocks in today's market – he suggests limiting yourself to stocks selling for no more than 15 times average earnings of the last three years. Today, just limiting yourself to 15 times current earnings would knock out a fair portion of many investors portfolios who believe there choices are quite conservative.

"So, I think cheap still works. And a diversified cheap portfolio certainly works. But, in terms of individual stock selection, I think the analytical competition has become so fierce over the last half century or so that purely quantitative techniques for finding specific stocks are not necessarily that reliable."

I'm glad to have found some real investors on the internet because they are few and far between even away from the internet. I haven't met one person who has read books by Graham,Buffett and is as interested as I am in true investing. I believe diversification for someone who knows what they are doing decreases returns unless you know tons of companies well and bought them way below what they're worth. I'm a member of the American Association of Individual Investors aaii.com and they have this model stock portfolio of real money I believe and it looks only at quantitative variables of micro-caps and I am kind of baffled sometimes at how without anything else they have a 1000% plus historical return not always beating the index and S&P 500 but smashing it long-term. I think its crazy not to know anything else and I stick to research but this is interesting.

No bulletin board or pink sheet stocks will be purchased.

Price-to-book-value ratio must be less than 0.80. (This figure will change gradually with changes in overall market values.)

Market capitalization must be between $17 million and $200 million. (This figure will change gradually with changes in overall market values.)

The firm's last quarter and last 12 months' earnings from continuing operations must be positive.

No financial stocks or limited partnerships will be purchased.

No foreign stocks will be purchased because of different accounting and/or withholding tax on dividends.

The share price must be greater than $4.

In order to reduce trading by avoiding stocks that are forever marginal, any stock that was sold within two years will not be rebought.

Note first item under stock order rules concerning spreads when buying shares.

Price-to-sales ratio must be less than 1.2. (This figure may change gradually with changes in overall market values.)

Price-to-book-value ratio must be less than 0.80. (This figure will change gradually with changes in overall market values.)

Well that will certainly shrink the universe of companies that you'll have to research.

You mentioned not being that familiar with Graham. By all means pick up a copy of the Intelligent Investor and if you enjoyed it follow it up with Security Analysis.

I think I would recommend picking up the most recent revised copy of Security Analysis. I started reading the original 1934 version, and by God is it dry. It has a lot of great info, but I find myself having to reread it over and over.

"I believe diversification for someone who knows what they are doing decreases returns unless you know tons of companies well and bought them way below what they're worth."

Even Graham, though a proponent of diversification (though not the extreme diversification often seen today), recognized that diversification works counter to stock selection:

"Let him emphasize diversification more than individual stock selection. Incidentally, the universally accepted idea of diversification is, in part at least, the negation of the ambitious pretensions of selectivity. If one could select the best stocks unerringly one would only lose by diversification."

I think his criteria for stock selection for the defensive investor was really an attempt to introduce rigor to amateur stock selection that he felt would often lack it. If you follow his criteria (in letter or spirit) you will be working with a group of stocks which should perform adequately. At the very least, he is directing you away from the most common folly of stock selection – the purchase of a security without adequate consideration of its price.

Jason wrote:

"I think I would recommend picking up the most recent revised copy of Security Analysis. I started reading the original 1934 version, and by God is it dry. It has a lot of great info, but I find myself having to reread it over and over."

I can't say I agree. My personal preference is for the 1940 edition; however, the 1934 is also excellent. In many ways, the 1940 edition is an elaboration of the 1934 – particularly in the area of common stocks selection.

A few points on Graham's style.

In a podcast, I compared Graham to the Roman writer Tacitus. That's a compliment as well as a warning. It means the writing is extremely dense in meaning, even when it appears straightforward. The reasoning is clear to the point of being accepted as a logical argument in a philosophy class.

Even when you disagree with Graham's conclusion, you don't disagree with his reasoning. His style is very objective in appearance, but you feel like it's extremely personal and idiosyncratic in what he says and how he says it. He's never truly casual, but you have a clear sense that what you're reading was written by Graham and no one else. Every opinion, though stated with the weight and reason of fact, is clearly coming from him and you never lose that sense.

He never lets a point or counterpoint pass unremarked. In this, he's most like Tacitus. Most writers don't do this. Today, it's almost unheard of. We simply ignore the other guy's argument, unless we're trying to pick it apart – Graham never does this.

When he's advocating diversification (as in the quote in my above comment) he nearly simultaneously picks apart the core of the argument for diversification. He says, in practice, I like diversification, but make sure you understand what you're really doing is keeping your selective tendencies in check. In essence, you're taking out insurance. To the extent you're successful in picking stocks, diversification is an anchor, but it's an anchor that hedges your bets in a way I've found to work well in practice and to be advisable for the amateur.

That's what he's saying. Most people who advocate diversification won't touch the idea that you're actually working against your own instincts – your own decision making. Graham does that.

You'll also notice this when he discusses growth stocks. He's quite dismissive of them, but he almost always makes the counterpoint that if you could pick growth stocks – if you could clearly see what will come to be – higher multiples are warranted and you will be more than compensated for your skill.

He's very logical and he submits every argument to reason. He's not satisfied with giving you his opinion. That makes him at once the most rewarding and frustrating investment writer of all time. That's why I compared him to Tacitus, as absurd as it seems, because I can think of no other writer that can simultaneously enlighten and frustrate with a style that is both superficially objective and yet undeniably personal.

If you've only approached Graham through other people's interpretations, you need to go out and buy Security Analysis, The Intelligent Investor, or the Interpretation of Financial Statements. You need to give these books an honest try, because the way Graham thinks is probably even more important than what he thinks.

Graham isn't just about net current asset values. He's about a way of looking at investing, a way of tackling the subject. He brought a relentlessly analytical mind to a field of study that had never seen anything like it before and has rarely seen anything like it since.

Graham is a must read in his own words. A lot of people have said they had to come back to him later in life. Even if that is true, you should try to meet him in his own words as soon as possible with an open mind. It's an entirely different experience from reading anything else on the topic of investing – but, it's a rewarding experience, even if you have to try more than once.

Nick said"You mentioned not being that familiar with Graham. By all means pick up a copy of the Intelligent Investor and if you enjoyed it follow it up with Security Analysis."

I've read The Intelligent Investor at least a couple times, It's my favorite book on investing and have a copy of my own and I have a copy of Security Anaylsis 5th edition. I havent read all of Security Anaylsis becuase I don't like his flowery writing. I meant by not knowing his history I don't know much about his personal history and the companies he's owned and what the markets were like when he bought them.

As far as Security Analysis, if you've only read the 5th edition, you might want to see if you can browse the 1934, 1940, or 1951 editions since those are the three that I think of when I think of Security Analysis. For me, any quote from the 5th edition is like quoting an apocryphal book of the Bible. I won't condemn it; but, it's not canon and it's not Graham - it doesn't have the same standing.

I think you're right that he wouldn't have been able to continue Graham's success – at the size he's now working with. But, a lot of the money he made for the partnership was done using Graham's methods. People still use them today. Also, I'm fairly certain Buffett's personal portfolio uses Graham's methods – or what we would consider Graham's methods, even if Graham didn't outline them precisely in some formula.

But, quantitative security analysis and arbitrage is something Buffett has definitely done outside of Berkshire even within the last decade or so. Read James Altucher's "Trade Like Warren Buffett" for some examples. For the partnership years, see Sanborn Map and Dempster Mill. Also, for an example of a kind of synthesis of Buffett's experience and his elaboration on Graham's techniques see Blue Chip Stamps, an acquisition that helped fuel the Berkshire Hathaway compounding machine. That one probably combined the spirit of Graham with Buffett's own keen interest in and understanding of the insurance business – since it was really all about float.

Don't forget that Berkshire itself was a Grahamian purchase – and that Buffett learned the arbitrage trade from working with Graham and employed it both at his partnership and at times with Berkshire.

Finally, when Buffett has said things like give him a million dollars and he could earn a 50% return on it – he's obviously talking about techniques he learned from Graham and used in his partnership. He certainly doesn't mean you could invest in the kinds of things Berkshire buys these days and earn annual returns anywhere near that high.

But, you're certainly right in that these techniques wouldn't have worked for Berkshire fairly early on, because they can't work on a large enough scale. Even before he closed the partnership, Buffett had deviated from Graham in making some very, very concentrated bets and in considering some qualitative aspects.

Still, I think the real move away from a heavily Graham influenced approach was in 1972 when Berkshire bought See's candy. That really started him down a heavily qualitative approach that can be seen in purchases like Coke – but also, and perhaps even more importantly, in the purchase of wholly owned businesses for Berkshire which has been an important part of Berkshire's growth and will probably become even more important in the future.

However, for those with less money to invest, say those who only need to find ideas in the millions of dollars rather than the hundreds of billions, the kind of Graham derived ideas that Buffett put to good use in the partnership years can still do wonders. They're rarer than they once were, but there are enough of them to fill a personal portfolio.

And Buffett would rank as a top-notch money manager on his partnership record alone.

Even before Berkshire, he had an enviable record.

thank you so much for these book recommendations. I guess Munger had a big influence on him later on to. I might read up on him. Is there a place on this site anywhere that's the best to throw around ideas on current prospects worth taking a position in?

You could try the forum here.

Oh, I just tested my link and I see you've already posted in the forum. Start a thread on the topic your interested in.

I read reviews and shake my head at how they are simply way off the mark. The review of the Bogle book is so off it is funny. I do not know if any of the other commentators above have read the book. I have and it does not have anything to do with rejecting the value style of investing. Look for my review on my site in the next day or two.

But long story short, in one sentance here is why Pressley's review is wrong:

Bogle says that if you have a choice between investing in MUTUAL funds or an INDEX fund, go with an INDEX because over time the fees charged (managemnt, transaction, tax) by the MUTUAL fund will eat away return such that it will not beat the INDEX.

Thats it. That is all he says. Why go through the hassle of figuring out which managere to choose, which fund to choose, which style to choose, what fees to pay, etc etc etc, when you are just better off in a total maket index.

He absoulty doe snot discuss the merits of indexing as compared to the selction of stocks you any kind of analysis. he simply arges that most investors will be better off indexing than any other means.

Bogle does not at all anywhere in the book say that a focused (or enterprising) investor who invests the time should index. He simply agrees with what Buffett says "the know nothing investor can actually out perform most investment professionals" by investing in an index fund.

That's it.

And for those who want to say "yeah but what about the mutual funds that beat the market." Ok this is what Bogle does

He took the 36 year period from 1970-2006. Found that at the start of 1970 there where 355 equity funds.

223 of those went out of business.

Another 60 underperformed the S&P by more than 1%

So far that means that over a 36 year period 283 funds (80%) failed to out perform the index.

48 funds equaled the index +/- 1%

So far 331 out of 355 funds that existe din 1970 either did not beat or merely equaled the index.

that leaves 24 - 1 out of 14 of the orginal 335- so thats a 86% chance yo would have selected a mutual fund that did not beat the index.

of those 24, 15 did not beat the index by more than 2%

so that leaves 9 funds that outpaced the S&P gretaer than 2% over the 36 year period.

of those nine, 6 reached their peak against the index long ago and have had negative returnsd since 1982, 83, 93, 93, 83, and 91. Which means that unless you got in early before they were "hot funds" and peaked you have lost money compared to the index.

which just leaves three of the orginal 355 that have beat the index consistently ove rthe 36 years Davis New York venture, Fidelity Contrafund and Frnaklin MutualShares.

Bottom line: If you are limited to buying mutual funds (say in your 401k) or an index you shold go for the index. Or if you are the type who doe snot wan tto do much work you houdl go for an idex.

Steven,

Thanks for correcting the perception that Bogle was bashing value investing. This kind of thing sometime happens when a book comes out but hasn't been widely read.

Overall, I've been pleased with this series from Wiley - and Bogle is always a great interview. So, will the book meet my expectations?

Thanks Steven be sure to post a link to your review when you're done with it!

I'm sure we all want to see your review. I'm looking forward to it.

Depends. If you want to read a sobering tale of just how powerful indexing can be and how long the odds are to beat indexing then this is a great book.

If you have read his other books it makes the same points, although in a much more straight forward (some might say strident) manner.

If you read my first article that Geoff posted on his site you can see that I actually discuss without citing Bogle's that 80% of mutual fund managers can't beat the market.

I think he is getting on in years and he just wants to make is point to help as many as he can.

The book is actually pretty scary. Over and over Bogle shows using simple math just how relentless a total stock market index is as compared to fund managers. It is alomost as if the index is the temrinator...it keeps coming and won't stop..never rests...does not sleep.... you have to do all those things.

In the end I think this is the best of the three books in the little book series for a new investor. Why? Because it sets the baseline of what must be done. You can buy the U.S./Intl total index and know that you will do no better or worse than what business will do over time. The index eliminates stock market risk. This requies little or know effort and about $10-20 for every $10,000 invested. Compare that to the mutual funds who charge 100-300+ with no guarantee they will beat the market and for most people this book is awesome because it shws them a way to be in the market with little effort anf a chance to do as good over many years as the best.

Or you can spend hours ad hours reading reports...books...etc...thinking about businesses...hoping that you can beat the index...and I mean hoping because so few professionals manage to do it year after year for decades.

Face it not all of us are above average. IF 100 peole read what I am writing and manage their own accounts...not all of us will beat the index. A few will most wont and a lot will just end up matching it but with a lot of wasted effort and stress.

So this book is great because it makes you take a close look and ask yourself whether you hve what it takes to beat the index when so many others can't. And not just this year or next...but for the next 30 years. Or to put it another way, are you as good as Chriss Davis, Michale Price, or Warren Buffett? Cuz you better be for that is who has been able to outpace the index year after year after year for 36 years. No body else has. That's what it takes...anything less and you might be better off indexing.

Thats why this book was not properly reviewed by the Pressely fellow. The book does not say value investing is bad...it just useses simle math to show that the odds of you praticing it in a manner which will allow you to beat the index is not very good.

Think about the average person who has some money in a 401k or some other