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‘The Intelligent Investor’ Business Book Review

A great reference for business people, too.

A great reference for business people, too.

Most people think that ‘The Intelligent Investor’ by Benjamin Graham is a business book only for investors.    It’s certainly written for investors, but it has a secret.  It’s also written for business people.  Even small business people.

Investment is most intelligent when it is most businesslike…  And if a person sets out to make profits from security purchases and sales, he is embarking on a business venture of his own, which must be run in accordance with accepted business principles if it is to have a chance of success.

End of Chapter 20: “Margin of Safety” as the Central Concept of Investment.

Nevertheless, why review this investing classic when so many others have done the same?  We at GoodBusiness approach ‘The Intelligent Investor’ as the the guide to how we should think about our own company. Warren Buffett, whose Berkshire Hathaway company has bought more companies more successfully than virtually any other investor, says this about ‘The Intelligent Investor’:

I read the first edition of this book early in 1950, when I was nineteen.  I thought that it was by far the best book about investing ever written.  I still think it is.

Warren Buffet’s Preface to the Fourth Edition

If we want successful investors to invest in, or perhaps buy out, our small business, then we can’t do better than create the type of company Warren Buffett would like to buy.  That means creating the type of company Benjamin Graham recommends to investors.

Graham describes two kinds of investors; defensive investors and enterprising investors.    (To get the most from this discussion, we’re going to substitute the word “buyer” for “investor”. )  Our first lesson is that buyers (of a little bit or all) of our company don’t come in one size that fits a convenient pigeonhole.  Different buyers will evaluate the opportunity presented by our company differently.

What the Defensive Buyer Can Teach Us

First, Benjamin Graham advises the defensive buyer:

1. Each company should be large, prominent and conservatively financed

2. Each company should have a long record of continuous dividend payments.

3. The investor should simple some limit on the price he will pay… We suggest that this limit be set at not more than 25 times the average of the last seven years’ earnings, and not more than 20 times those of the last twelve-month period.

Chapter 5: The Defensive Investor and Common Stocks

Defensive buyers want to minimize the unknown and are satisfied with a modest return for their money.   They like size, they like continuity, and they prefer simple ways to figure out what our company is worth.

What does this mean for entrepreneurs like us?  It means that however much we love our work and feel that our small business is destined for great things, a conservative buyer isn’t interested.  They’d rather spend their money after we’ve grown to some size and paid off most of our debt.  They’ll wait until we’ve shown that we can turn a steady profit, year in and year out.  They’re willing to pay for profitability, but not much else.  We’ll have to be in it for the long, steady haul.

What the Enterprising Buyer Can Teach Us

Then, the more aggressive, harder working enterprising buyer gets some wise counsel:

1. Financial Condition: (a) Current assets at least 150% of current liabilities, and (b) debt not more than 110% of current assets, for industrial companies.

2. Earnings Stability: No deficit in the last 5 years

3. Dividend Record: Some current dividend

4. Price: Less than 120% of net tangible assets

Chapter 15: Stock Selection for the Enterprising Investor

Enterprising buyers are prepared to consider broader choices, but they too have specific criteria.

What does this mean for entrepreneurs like us?  It means that however rosy our sales outlook, however enthusiastic our customer base, an enterprising buyer looks at our financial health first and foremost.  Again, it’s a look backward; we need to have demonstrated good financial discipline.  We’ll have been careful with our own money instead of spending our way through other people’s money.  And yes… we’ll have shown that we’ve learned how to make a profit, repeatedly.

I’d like you to note something else, too.  Benjamin Graham, throughout ‘The Intelligent Investor’, distinguishes between investors and speculators.  Many of the startup buyouts we’re hearing about today, where “story” and “market” and “buzz” take center stage, involve speculators.  That’s a problem for us as entrepreneurs.  Here’s why.  A lot of those buyouts involve “earnouts” (performance-based payments to the sellers, above and beyond any payments received upfront at closing the deal).  Earnouts almost never work out the way we, the sellers, hope they will.  Even more discouraging are “clawbacks” (after-the sale money refunded to the buyer for subsequent business performance shortfalls).  Clawbacks are essentially buyers’ insurance policies… with us picking up the tab.  In another scenario, perhaps we’re paid in the stock of the buyer’s company.  We just Told a story about our product and its potential… while the buyer was telling a tale about his company’s health and growth.  We ‘re playing high stakes poker, betting that the story we bought was more truthful than the story we sold.

Business Principles from a Master Investor

In Chapter 20 Benjamin Graham directly compares the work of investing to the work of running a business.  He wants investors to treat their efforts like any responsible, prudent business owner.  He talks about business principles:

The first and most obvious of these principles is “Know what you are doing — know your business.”

A second business principle: “Do not let anyone else run your business, unless (1) you can supervise his performance with adequate care and comprehension or (2) you have unusually strong reasons for placing implicit confidence in his integrity and ability.”

A third business principle: “Do not enter upon an operation — that is, manufacturing or trading and item — unless a reliable calculation shows that it has a fair chance to yield a reasonable profit.  In particular, keep away from ventures in which you have little to gain and much to lose.”

A fourth business rule is more positive: “Have the courage of your knowledge and experience.  If you have formed a conclusion from the facts and you know your judgement is sound, act on it — even though others may hesitate or differ.”

This is old-school wisdom, in old-time language, but it’s surprisingly relevant today.  For instance…. Steve Jobs always liked to hear someone talk their presentation without slides or notes.  He understood that it’s the clearest way to figure out who knows their business.

For me, ‘The Intelligent Investor’ is two books in one; it depends on my perspective.  Sure, it’s one of the best investment guides available.  But it also offers priceless wisdom about building a salable company, if only we’re willing read slowly and understand deeply.  Whether we’re growing a company or investing our share of some well-deserved profits, Benjamin Graham has a lot to teach us.

May we make a suggestion?  Why not also read one or more business books by Richard Branson.  You might think that Benjamin Graham and Richard Branson are polar opposites from different ages.  But you’d be surprised to read the similarities in their best advice to us.  Which Richard Branson books.  Let us be your guide.

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10 Comments

  1. Thank you for the review, I am sure tempted now to get a whole book. As a young entrepreneur, I am always looking for new advices and useful knowledge on how to get my buisness up and going. Great bullet points!

    • Chris Chadbourne says:

      Alice, I can strongly recommend another book, too. The book is “Growing a Business” by Paul Hawken, and you can find it in used book stores or via http://www.abebooks.com for very little money. Whatever price you pay, “Growing a Business” is worth every little bit.

      • Thank you very much for your suggestion, I will check it out. I agree with you, I look at every book I buy as an investment into my buisness.

  2. I was hanging around your site and came across this gem. If a buyer thinks conservative than the business should too and whatever profit they make is a plus. I go into any situation expecting less just to push myself to do better.

  3. Looking at financial health does makes sense. Financial health is what makes up your business; It’s the difference between making it or going bankrupt.

  4. I like the in-depth analysis,keeps me yearning for more.I think The Intelligent Investor is a great book.

  5. Leonard Astor says:

    If only i knew how to give a thumbs up here!

  6. Leonard Astor says:

    You have some really extensive knowledge. I like the way you write and your bio is eye bulging for me. Keep writing!

    • Chris Chadbourne says:

      Thank you, Leonard. Actually, I’m surprised by how much I’ve learned since I started the site. (Also, truth to tell, how much I’d forgotten and need to remember.) Don’t worry… there’s plenty more to write about.

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