At the start of the most famous stock investing book of all time, Security Analysis, Warren Buffett opens the text's preface with a very interesting story. He tells the reader that to this day, there are only 4 investing books that he commonly references. The first book is well known to most, Adam Smith's The Wealth of Nations. The book was published in the late 1700's and has been used by hundreds of countries around the world to establish their capitalistic roots.
The next two books he mentions were both written by his former business professor at Columbia University - Benjamin Graham. The two books that Graham wrote were The Intelligent Investor and Security Analysis. The comments are obviously profound because the preface that I'm referring to is for the second book. After Buffett talks about how these three books have pretty much shaped his entire investing philosophy, he then mentions that the fourth book is a second copy of Security Analysis provided by a family member of the late author.
Having read all three books, I can honestly say that the wealth of information is a bit overwhelming. The books are written at a graduate level and seem nearly impossible to understand for new investors. Although this might be an initial setback for most, perseverance and determination can help those determined few. Here's a quick overview of the information you'll find in these timeless books.
The Wealth of Nations This book is huge and difficult to understand. With that said, it's a book mostly about macro-economics. Smith teaches readers about the fundamental aspects of money and free markets. The part that I found truly amazing is how he takes extremely complex ideas and simplifies them. For example, his discussion on money and how it's nothing more than a symbol of the work conducted by it's holder, is something that will change your perspective on many economical issues. Capturing the 800 plus pages of this text in a single paragraph is almost comical to attempt, but hopefully these few sentences provided a glimpse into it's purpose.
Security Analysis This book is also huge and difficult to understand. The book is broken down into a few key parts, fixed income securities (Bonds), Preferred Stock, and Common Stock. The book was written during the Great Depression, so the companies that it references are often old and different than those of today. What's not different is the approach to valuing them. One of the most impressive aspects of Graham and Dodds Security Analysis is how they teach investors to value common shares in the same light as bonds and Preferred Shares. This is something that very few writers and investors understood then and now. I would highly recommend that any reader thoroughly understand most accounting terms and financial techniques before attempting to read this text.
The Intelligent Investor Although this book was meant to be a dumbed-down version of Security Analysis, I believe most novice readers still struggle with the books content. Although Graham was one of the smartest investors to every write, a lot of his ideas are lost in his inability to write for the common investor. One of the most important chapters in the book is where Ben Graham provides a physical representation of the stock market with a character he calls "Mr. Market." I would recommend reading this book simply for this chapter alone. It provides some of the most important stock investing guidance a trader could ever posses.
In the end, these three books took a middle class kid from Omaha to being one of the richest people in the world. Although Warren Buffett wasn't born with the expertise to tackle these complex books right off the bat, his hard work and determination where the guide to his success. Although I might not recommend starting your financial journey with these books, any true investor will eventually end up at their doorstep.
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