Security Analysis by Benjamin Graham and David L. Dodd
This is the book that started value investing back in 1934. It established the principle that what you pay for a stock (a share of a company) or a bond (a loan to the company) should be based on the intrinsic value of the company and its financial strength. The book goes through in detail how to establish that intrinsic value.
Some other important points covered by the book:
- The concept of a margin of safety, in other words paying less for the stock than the intrinsic value to cover the variances of the market.
- Paying much more attention to the fundamentals of the company than what it might do in the future.
- The difference between investing and speculation.
- The illustration of “Mr. Market” who offers widely different prices for the same stock or bond.
This book is a classic and worth reading for the serious value investor, to get a sense of history and the foundation for value investing. For valuing a company in modern times, I prefer Bruce Greenwald’s method as described in Value Investing from Graham to Buffett and Beyond which is based on the same principles, but updated and distilled down.