Reject Status  -  Embrace Wealth

This book, like no other, examines the very deepest nature of stocks and bonds. Graham and Dodd, professors of investment finance at Columbia University, wrote this work during the lowest moments of the Great Depression. The tumult that had seen unprecedented stock market growth, and ultimate catastrophe, is encapsulated within their work. The bottom line for bonds: the investor must purchase only the most financially stable bonds from the most financially powerful companies… and not count on any legal recourse that ordinarily is attributed to bondholders as corporate creditors. The perspective on stocks is even more astonishing: common stocks are so volatile that the best method for most people is to purchase them in exceptionally diversified blocks, like in large mutual funds. The authors stress that, before ever purchasing an individual common stock, there should be a wide Margin of Safety; and you only get a margin of safety when you can purchase a stock at a ridiculous discount… typically at those moments when the market is extremely pessimistic and bad economic news is flowing like a mighty river.

Williams, writing in the 1940s, explores the nature of interest rates, economic growth, and the phenomenon of inflation. Among other conclusions, Williams finds that no new capital is necessary to make the stock market rise rapidly; people simply trade stocks among themselves… and the trading volume sends stock prices up. Additionally, Williams notes that, in the long-haul, the stock market cannot sustain an increased price level that is greater than the combination of annual GDP growth and the inflation rate. Reading this book, the reader quickly realizes that the same economic and financial forces are at work in the 21st Century as were during the middle of the last.

Mr Beinhocker easily achieves his fundamental goal in this book: he doesn't want to tell you what to do, but change how you think. Calling upon the latest research in the emerging field of Complexity, drawing parallels with forces seen in biological evolution, and describing how economies plod along for decades or centuries to only later explode through a mechanism called "punctuated equilibrium", Beinhocker delivers a tour de force. This book should be a must-read for every student of Economics in the coming decade.

This work is for the most intrepid financial students. Williams himself recommends that unless the reader specifically wants to immerse himself (he was writing in the 1940s) in the algebraic equations, he can otherwise skip most of the heaviest math. The most important reason to read this book is that Williams asserts and then expounds the single most important lesson to understand about stocks (along with other investment assets): “the value of a stock is the discounted future cash flows that it can produce.” Discounted future cash flows is a subject also explored in The Essential Buffett; and it is a theme that Buffett the Investment Master carries with him every day.