The Intelligent Investor

Graham acknowledges that previous chapters addressing the enterprising investor have largely focused on which securities to avoid, rather than which to select. He now turns his focus to the question of selection.

First, he prefaces his advice with the warning that above-average returns in the stock market are extremely difficult to obtain. One reason is that there is immense competition and information is available to all market participants. With so many security analysts working on Wall Street and devoting considerable expertise and effort to uncovering undervalued stocks, it becomes increasingly challenging to find opportunities for above-average returns.

While acknowledging these challenges, Graham claims that to earn better-than-average returns, investors must follow “specific methods that are not generally accepted on Wall Street” (380). He then outlines several types of operations that he used when working in money management between 1926 and 1956: arbitrages, liquidations, related hedges, and bargain issues. These methods involve identifying and taking advantage of inefficiencies in the market, such as mispriced securities. However, Graham cautions that these methods require specialized knowledge and careful analysis, and they can be time-consuming.

Graham then discusses companies that have solid records but are currently unpopular in the market.