More Praise for The Warren Buffett Way, First Edition

Security Analysis,
coauthored with David Dodd,
and originally published in 1934; and 
The Intelligent Investor,
origi-
nally published in 1949.
Security Analysis
appeared just a few years after the 1929 stock
market crash and in the depths of the nation’s worst depression. While
other academicians sought to explain this economic phenomenon,
Graham helped people regain their f inancial footing and proceed with a
prof itable course of action.
Graham began his career on Wall Street as a messenger at the bro-
kerage f irm of Newburger, Henderson & Loeb, posting bond and stock
prices on a blackboard for $12 a week. From messenger, he rose to
writing research reports and soon was awarded a partnership in the
f irm. By 1919, he was earning an annual salary of $600,000; he was
twenty-f ive years old.
In 1926, Graham formed an investment partnership with Jerome
Newman. It was this partnership that hired Buffett some thirty years
later. Graham-Newman survived the 1929 crash, the Great Depression,
World War II, and the Korean War before it dissolved in 1956.
From 1928 through 1956, while at Graham-Newman, Graham
taught night courses in finance at Columbia. Few people know that
Graham was financially ruined by the 1929 crash. For the second time in
his life—the first being when his father died, leaving the family finan-
cially unprotected—Graham set about rebuilding his fortune. The haven
of academia allowed him the opportunity for ref lection and reevaluation.
With the counsel of David Dodd, also a professor at Columbia, Graham
produced what became the classic treatise on conservative investing: 
Se-
curity Analysis.
Between them, Graham and Dodd had over fifteen years
of investment experience. It took them four years to complete the book.
The essence of 
Security Analysis
is that a well-chosen diversif ied
portfolio of common stocks, based on reasonable prices, can be a sound
investment. Step by careful step, Graham helps the investor see the logic
of his approach.

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T h e E d u c a t i o n o f W a r r e n B u f f e t t
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The first problem that Graham had to contend with was the lack of a
universal definition for investment that would distinguish it from specu-
lation. Considering the complexities of the issue, Graham proposed his
own definition. “An investment operation is one which, upon thorough
analysis, promises safety of principal and a satisfactory return. Operations
not meeting these requirements are speculative.”
2
What did he mean by “thorough analysis”? Just this: “the careful
study of available facts with the attempt to draw conclusions therefrom
based on established principles and sound logic.”
3
The next part of Graham’s def inition is critical: A true investment
must have two qualities—some degree of safety of principal and a satis-
factory rate of return. Safety, he cautions, is not absolute; unusual or
improbable occurrences can put even a safe bond into default. Rather,
investors should look for something that would be considered safe from
loss under reasonable conditions.
Satisfactory return—the second necessity—includes not only in-
come but also price appreciation. Graham notes that “satisfactory” is a
subjective term. Return can be any amount, however low, as long as the
investor acts with intelligence and adheres to the full def inition of
investment.
Had it not been for the bond market’s poor performance, Graham’s
definition of investing might have been overlooked. But when, between
1929 and 1932, the Dow Jones Bond Average declined from 97.70 to
65.78, bonds could no longer be mindlessly labeled pure investments.
Like stocks, not only did bonds lose considerable value but many issuers
went bankrupt. What was needed, therefore, was a process that could
distinguish the investment characteristics of both stocks and bonds from
their speculative counterparts.
Graham reduced the concept of sound investing to a motto he
called the “margin of safety.” With this motto, he sought to unite all
securities, stocks, and bonds in a singular approach to investing.
In essence, a margin of safety exists when securities are selling—for
whatever reason—at less than their real value. The notion of buying
undervalued securities regardless of market levels was a novel idea in the
1930s and 1940s. Graham’s goal was to outline such a strategy.
In Graham’s view, establishing a margin-of-safety concept for bonds
was not too difficult. It wasn’t necessary, he said, to accurately determine

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T H E W A R R E N B U F F E T T W AY
the company’s future income, but only to note the difference between
earnings and fixed charges. If that margin was large enough, the investor
would be protected from an unexpected decline in the company’s in-
come. If, for example, an analyst reviewed the operating history of a
company and discovered that, on average, for the past five years the com-
pany was able to earn annually five times its fixed charges, then that
company’s bonds possessed a margin of safety.
The real test was Graham’s ability to adapt the concept for common
stocks. He reasoned that if the spread between the price of a stock and
the intrinsic value of a company was large enough, the margin-of-safety
concept could be used to select stocks.
For this strategy to work systematically, Graham admitted, investors
needed a way to identify undervalued stocks. And that meant they
needed a technique for determining a company’s intrinsic value. Gra-
ham’s definition of intrinsic value, as it appeared in