The Intelligent Investor Book Analysis: Chapter 7: The only strategy that works

Quick Overview

Benjamin Graham concludes in Chapter 7 of The Intelligent Investor that the only reliable strategy for the enterprising investor to achieve better-than-average results is buying bargain issues, after systematically eliminating market timing, paying full price for growth stocks, and specialized 'special situations' as viable options for most investors.

Key Points: Graham identifies four strategies for the enterprising investor: market timing, buying growth stocks, buying bargain issues, and buying into special situations, explicitly excluding modern speculative tactics. Market timing is eliminated because it requires a 'special talent or "feel" for trading' rather than measurable intelligence that can be applied to facts and figures. Buying growth stocks at full price fails because investors overpay for expected prosperity, and Graham notes professional growth funds barely beat the index, concluding, 'The more enthusiastic the public grows about it... the riskier a proposition it becomes.' The complete formula for beating the market requires two conditions: (1) an objectively sound strategy and (2) a policy 'different from the policy followed by most investors or speculators.' Graham's minimum definition of a true 'bargain issue' is one where the indicated value is 'at least 50% more than the price,' meaning buying $1.50 of value for every dollar spent. A highly effective bargain test involves buying stocks selling for less than the company's net working capital alone, which means the buyer pays nothing for fixed assets; this strategy yielded a 75% portfolio gain over two years compared to 50% for the S&P 425 in one historical test. Graham warns investors they must choose between being a passive defensive investor or an active enterprising investor, stating there is 'no room in this philosophy for a middle ground' between the two classifications.

Context: This analysis covers Chapter 7 of Benjamin Graham's seminal work, "The Intelligent Investor," a book considered Warren Buffett's favorite, originally written in 1949. The chapter focuses on defining the specific, actionable strategies available to the 'enterprising investor'—one willing to devote significant time and effort—to seek better-than-average investment returns, contrasting this intensive approach with the passive defensive strategy.