The Intelligent Investor is the first book I ever read on investing and I pay homage to it as the namesake of my blog. Although what I do could not be more dissimilar than the value investing practiced by Benjamin Graham, it’s hard to overstate the impact reading this book had on me.
Shortly after the Intelligent Investor, I tried Security Analysis which, unfortunately was way over my head at the time and I ended up putting it down. I thumb through it from time to time and today I came upon a part I want to share. What’s so incredible about this book is that the investing lessons he was sharing in the 1930s will forever be valid.
Here’s Graham and Dodd:
Exact appraisal impossible: Security analysis cannot presume to lay down general rules as to the “proper value” of any given common stock. Practically speaking, there is no such thing. The bases of value are too shifting to admit of any formulation that could claim to be even reasonably accurate. The whole idea of basing the value upon current earnings seems inherently absurd, since we know that the current earnings are constantly changing. And whether the multiplier should be ten or fifteen or thirty would seem at bottom a matter of purely arbitrary choice.
But the stock market itself has no time for such scientific scruples. It must make its values first and find its reasons afterwards. Its position is much like that of a jury in a breach-of-promise suit; there is no sound way of measuring the values involved, and yet they must be measured somehow and a verdict rendered. Hence the prices of common stocks are not carefully thought out computations but resultants of a welter of human reactions. The stock market is a voting machine rather than a weighing machine. It responds to factual data not directly but only as they affect the decisions of buyers and sellers.