Most value investors have read The Intelligent Investor and almost every professional money manager is at least somewhat familiar with Security Analysis. These books by Benjamin Graham are perennial classics and have a permanent place in my bookshelf. I first read The Intelligent Investor in 1995 after graduating from college with a degree in Finance. Along with most students of finance, I was well schooled in the Efficient Market Theory in all of its forms. Reading The Intelligent Investor changed my approach and no doubt saved me from major investment losses during the bubbles and crashes of the last decade.
Shortly after completing Security Analysis, Graham published a much less widely known book: The Interpretation of Financial Statements. This slim 144 page volume provides an excellent primer for those who are looking for an introduction to reading financial statements. While this volume is in no way a substitute for reading Security Analysis or The Intelligent Investor, it does pack in significant useful information in a small package. One important caveat to keep in mind is that accounting conventions and the nature of businesses have changed over the years, especially when it comes to dealing with intangible assets. Nevertheless, Graham’s insights are still worthwhile today.
Graham starts with balance sheet analysis and goes into quite a bit of detail, even including a chapter on intangible assets which were relevant even in his day. He covers the critical topic of analyzing a balance sheet with an eye toward liquidating value as well as the idea of picking stocks selling for less than net current assets (current assets – total liabilities). He uses some fairly outdated examples in the book (after all, it was written in 1937) but the basic concepts are still relevant today. I have found his method of analysis through the ratio method particularly useful.
Obviously it would be unwise to limit one’s toolkit for analyzing modern companies to the techniques Graham presented in this short book over 70 years ago. However, for those interested in a quick read on financial statement analysis from Graham’s perspective, this is a book worth reading.