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Twenty-one short lessons in two parts. Part 1 is how Benjamin Graham, Philip Fisher and Peter Lynch studied a company, in the order the ideas build on each other. Part 2 is about risk, time and yourself, from Warren Buffett, Charlie Munger, Howard Marks, John Templeton, Jeremy Siegel, Burton Malkiel, John Bogle and Daniel Kahneman. Each lesson ends with Try it on a stock you own: the place in Trendentum where you can do that step yourself, on a real holding. About five minutes a lesson. Nothing here tells you what to buy or sell; it shows how these investors thought, and where they disagree, so you can form your own view.
Part 1 · Studying a business
Taught investing at Columbia Business School from 1928 to 1956. Drew the line between investing and speculating, and gave the defensive investor seven tests. Warren Buffett was his student.
Security Analysis (1934, with David Dodd) · The Intelligent Investor (1949)
Lessons 1–6
Ran his own investment firm in San Francisco from 1931 to 1999. Looked for growing companies run by able, honest people, found out about them by asking around, and owned them for decades.
Common Stocks and Uncommon Profits (1958)
Lessons 7–8
Ran Fidelity’s Magellan Fund from 1977 to 1990, then wrote for private investors: know what kind of company you own, and be able to say why in two minutes.
One Up on Wall Street (1989) · Beating the Street (1993)
Lessons 9–10
Part 2 · Risk, time and yourself
Graham’s student at Columbia. Has chaired Berkshire Hathaway since 1970 and writes to its shareholders every year about how he thinks about businesses.
Berkshire Hathaway shareholder letters (from 1965) · the Owner’s Manual
Lessons 13–14
Buffett’s partner and Berkshire’s vice chairman from 1978. Known for collecting big ideas from many fields and for turning problems round.
Poor Charlie’s Almanack (his talks, collected)
Lessons 14–15
Co-founded Oaktree Capital Management in 1995. Has written memos to his clients since 1990, many of them about risk and market cycles.
The Most Important Thing (2011) · his memos
Lessons 16–17
Started the Templeton Growth Fund in 1954 and looked for companies in places and times other investors had given up on.
“16 Rules for Investment Success” (1993)
Lesson 17
Professor of finance at the Wharton School, now emeritus. Gathered two centuries of market history to compare shares, bonds and cash over long periods.
Stocks for the Long Run (1994)
Lesson 18
Princeton economist. Argued that prices already reflect most of what is known, so most people do as well with an index fund as with picking.
A Random Walk Down Wall Street (1973)
Lesson 19
Founded Vanguard, which began in 1975, and in 1976 launched what Vanguard calls the first index fund for individual investors. Spent his career arguing that costs decide more than skill.
The Little Book of Common Sense Investing (2007)
Lesson 19
Psychologist who, largely with Amos Tversky, studied how people decide under uncertainty. Nobel memorial prize in economics, 2002.
Thinking, Fast and Slow (2011)
Lesson 20
Co-founded the Baupost Group in 1982 and runs it still. Built a whole book on Graham’s three-word motto.
Margin of Safety (1991)
Lesson 3
Lesson 1 · Benjamin Graham
Graham drew the line that the rest of this school sits on. An investment is something you have looked into properly, where the money you put in is reasonably safe and the return you expect is reasonable. Anything else is a speculation — not wrong in itself, but a different activity, and dangerous when it is mistaken for investing.
“An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”
Three words carry the weight: thorough analysis (you studied the business, not just the price), safety of principal (a bad outcome does not wipe you out) and adequate (not spectacular). A share bought because it has been rising fails the first test however good the company is.
Lesson 2 · Benjamin Graham
Graham asked his readers to picture owning a share of a private business with a partner called Mr Market, who turns up every day offering to buy your share or sell you his, at a price that swings with his mood. Some days his price is sensible; other days he is gloomy and offers too little, or excited and asks too much. You never have to trade with him. His price is an offer, not a verdict on what the business is worth.
“Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them.”
The lesson is about where to look. The business changes slowly — a year of sales, a year of profit. The price changes every day. When the two disagree, the business is usually the steadier guide.
Lesson 3 · Benjamin Graham
Graham’s answer to being wrong was to leave room for it. Pay noticeably less than your best estimate of what a business is worth, and a mistake in that estimate, or plain bad luck, costs less. The gap between the two is the margin of safety.
“Confronted with a like challenge to distill the secret of sound investment into three words, we venture the motto, MARGIN OF SAFETY.”
For the defensive investor he turned the idea into two price tests: no more than 15 times the average earnings of the last three years, and no more than 1.5 times book value — or, if one is higher, the two multiplied together no more than 22.5. They are blunt on purpose; they keep you away from paying for hopes.
Seth Klarman, who co-founded the Baupost Group in 1982, made the motto the title of his own book, Margin of Safety (1991). His case, in our summary rather than his words: nobody can know exactly what a business is worth, so the gap between the price and your careful estimate is the only protection against your own mistakes and against bad luck — and an investor who insists on it will often find nothing worth buying, and has to be content to wait.
Lesson 4 · Benjamin Graham
Graham wrote for two kinds of investor. The defensive investor wants safety and freedom from bother, and accepts an ordinary return for it. The enterprising investor is willing to put in real time and care, in the hope of doing better. Neither is superior; the mistake is to take the enterprising investor’s risks while giving it the defensive investor’s time.
For the defensive investor he set seven tests (chapter 14): adequate size, strong finances, earnings in each of the past ten years, an unbroken dividend for twenty years, earnings per share up by at least a third over ten years, and the two price tests from lesson 3. Few companies meet all seven.
Lesson 5 · Benjamin Graham
The first four lessons judge one share at a time. Graham also wrote about the whole: how much of your money is in shares at all, how many companies, and when to buy. For the defensive investor he gave a range rather than a number — never less than a quarter in shares and never more than three quarters, the rest in bonds or cash, moving towards the low end when prices look silly high and towards the high end when they look silly low, and sitting near half when unsure (The Intelligent Investor, chapter 4).
On how many: enough companies that one mistake cannot sink the whole, few enough that each can still be studied — he suggested ten to thirty (chapter 5). On when: a fixed sum at regular intervals, whatever the market is doing, so that the price decides how many shares the money buys rather than your mood. He called it dollar-cost averaging, and his case for it was that an ordinary investor who keeps to it does better than most attempts to pick the moment.
And on what to expect: chapter 3 is a century of what shares actually returned, including long stretches that returned nothing. It is where “adequate” in lesson 1 gets its measure, and its lesson is modest expectations.
Lesson 6 · Benjamin Graham
Lessons 1 and 3 lean on three figures: what the business sells, what it earns and what it owes. The company reports them every year; the skill is reading them without being fooled. Graham’s chapter 12 is a list of the ways the headline profit per share misleads — a single good year taken as the norm, one-off gains counted as profit, costs pushed into a “special” line, new shares that leave each old share with a smaller slice, and accounting choices that flatter.
His remedies were plain. Use the average profit of several years, not the latest figure. Read the notes, not only the headline. Compare the profit with the cash that actually came in. Count the shares as well as the profit, because what matters is the slice each share owns.
Lesson 7 · Philip Fisher
Where Graham looked for safety in the numbers, Fisher looked for a business that could keep growing for years. In Common Stocks and Uncommon Profits (1958), chapter 3, he listed fifteen points to look for. A few can be read from the accounts — whether sales have room to grow, what research spending produces, whether the profit margin is worthwhile and holding up, whether growth will need so many new shares that existing owners gain little. Most are about the people: the depth and integrity of management, the sales organisation, relations with staff, a long-range view of profits, and whether management talks as freely in bad times as in good.
The points are not a pass mark. Their value is in knowing where a company stands on each, and which ones you could not answer.
Lesson 8 · Philip Fisher
Fisher’s word for finding things out the way a journalist would (chapter 2): talking to customers, suppliers, competitors, people who used to work there. No set of accounts says whether the sales team is good or the executives trust each other. People who deal with the company often know.
For a private investor today the sources are different but the idea holds: the company’s own announcements and presentations, what its customers say, reviews from people who work there, how management answered questions on the last results call — and what changed between this year’s annual report and last year’s.
Lesson 9 · Peter Lynch
In One Up on Wall Street (1989), Lynch sorted companies into six kinds, because each is owned for a different reason and goes wrong in a different way. Slow growers grow about as fast as the economy and are usually owned for the dividend. Stalwarts are large companies growing about 10–12% a year. Fast growers are smaller and growing 20–25%; the question is how long that can last. Cyclicals rise and fall with the economy or a commodity price. Turnarounds have fallen on hard times. Asset plays hold something valuable the market has overlooked.
Knowing the kind tells you what would count as the story changing: a fast grower whose growth slows, a cyclical whose inventories pile up, a turnaround still short of cash.
Lesson 10 · Peter Lynch
Lynch’s test before owning a share, from One Up on Wall Street: could you explain, in about two minutes, why you are interested in it, what the company has to do to succeed, and what could get in the way? If the explanation is “it’s been going up”, there isn’t one.
Written down, the same few sentences do a second job. When results come out, or the price moves sharply, you can check whether the story you bought still holds — instead of deciding on how the price makes you feel. Writing what would make you sell, before you need to, is the most useful sentence of all.
Lesson 11 · The speculative part
Most investors want some speculation — an explorer before it finds anything, a company not yet making money. The danger is not owning one; it is letting the speculative part grow until it decides how the whole portfolio does, or forgetting which holdings are which.
The questions for a speculative holding are different from Graham’s. How long does the cash last at the rate it is being spent? How many new shares has it issued to keep going, and when? Are the people running it buying or selling? Is anyone betting against it? None of these says whether it will succeed; together they say how much has to go right.
Lesson 12 · Putting it together
All three investors looked at many companies to find a few. Graham’s tests, Lynch’s kinds and the speculative checks can be applied to a whole sector at once — the companies of each market’s main index in that sector — so you can see every company that sits within the lines you care about — and then do the thorough analysis of lesson 1 on the handful that interest you.
A list like this is a starting point for reading, never a list of answers. Every company on it still needs the two-minute drill.
Part 1 was about studying a business. Part 2 is about everything around it: what risk really is, how markets swing, what time does, whether picking shares is worth it at all, and the investor’s own mind. Nine lessons, from investors and researchers who often disagree with each other — where they do, the lesson says so.
Lesson 13 · Warren Buffett
Buffett, Graham’s student, has for decades asked Berkshire Hathaway’s shareholders to see their shares the way he sees the businesses he buys: not as a code that flickers on a screen, but as a slice of a real company.
“We hope you instead visualize yourself as a part owner of a business that you expect to stay with indefinitely, much as you might if you owned a farm or apartment house in partnership with members of your family.”
If a share is part of a business, the first question is whether you understand the business. Buffett’s answer is that nobody needs to understand every company — only to know which ones they do.
“You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.”
A useful test: could you explain to a friend what the company sells, who pays for it, and why they choose it over the alternatives? If not, the company is outside your circle for now. That is not a judgement on the company — it is a fact about what you can and can’t assess.
Lesson 14 · Warren Buffett and Charlie Munger
Graham looked for companies priced well below what they owned. Buffett started there too, and later changed his mind — he credits his partner Charlie Munger for it. A low price on an ordinary business, he concluded, is often worth less than a fair price on a business that keeps earning well for decades.
“Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices.”
What makes a business last? Something competitors find hard to copy: a brand people pay more for, costs lower than anyone else’s, customers for whom switching is a nuisance, a network that grows more useful as it grows. Buffett’s word for it is a moat.
“A truly great business must have an enduring “moat” that protects excellent returns on invested capital.”
A moat leaves traces in the accounts: profit margins that hold up year after year, through good years and bad, while competitors’ rise and fall. The traces are not proof — a moat can be crossed, and Buffett has written about businesses whose moats wore away, newspapers among them — but they are where to start looking. And “fair price” still matters: Graham’s two price tests from lesson 3 — a P/E no more than 15 times the average earnings of the last three years, and a price no more than 1.5 times book value — are one way to see what is being paid.
Lesson 15 · Charlie Munger
Munger, Buffett’s partner for more than four decades, borrowed a habit from a nineteenth-century mathematician: when a problem is hard to solve forwards, turn it round.
“Invert, always invert.”
For an investor, inverting means asking “what would make this a bad investment?” before “what would make it a good one?”. Too much debt for a bad year. One customer who provides most of the sales. A product the next technology makes unnecessary. New shares issued again and again. Management that explains away every disappointment. Each of these is easier to spot than the next big winner, and avoiding them does much of the work. In the same speech Munger told the story of the man who wanted to avoid one place:
“I wish I knew where I was going to die, and then I’d never go there.”
Lesson 16 · Howard Marks
Marks has written letters to his clients since 1990, and many are about one word: risk. The usual definition — how much a price bounces around — measures something easy to count. What investors actually fear is losing money permanently, and that depends on things that may never show up in the bouncing.
“Risk means more things can happen than will happen.”
Only one future happens, but many could have. A decision that worked may still have been a big risk; one that lost money may have been sensible. So judge your holdings by what could happen, not only by what has.
Marks’s second idea is about thinking one step further than the crowd:
“First-level thinking is simplistic and superficial, and just about everyone can do it (a bad sign for anything involving an attempt at superiority). Second-level thinking is deep, complex and convoluted.”
First-level: “It’s a good company, so it’s a good investment.” Second-level: “It’s a good company, everyone knows it, and the price already says so — what would have to happen for that to be wrong, and how likely is it?”
Lesson 17 · Howard Marks and John Templeton
Markets don’t move only with the businesses inside them. They also move with the crowd’s mood, which swings further and more often than the businesses do.
“The mood swings of the securities markets resemble the movement of a pendulum.”
Marks’s point is that the pendulum spends very little time in the middle: it swings from greed to fear, from “nothing can go wrong” to “nothing will ever go right”. John Templeton, who started the Templeton Growth Fund in 1954, made his name by looking where the mood was worst. He also described what the swing does to most people:
“Yes, they tell you: ‘Buy low, sell high.’ But all too many of them bought high and sold low.”
The other side. Nobody can see the top or the bottom on the day; Bernard Baruch called anyone who claimed to a liar (see Investing principles). Knowing roughly where the pendulum is — calm or swinging, hopeful or gloomy — is not the same as knowing what happens next. It is context for your own decisions, not a signal.
Lesson 18 · Jeremy Siegel
Siegel, a finance professor at the Wharton School, gathered two centuries of American market history for Stocks for the Long Run (1994). His central finding: over a day or a year, shares swing far more than bonds or cash; over decades, after inflation, they have been the steadier way to keep and grow what money can buy.
“Although it might appear to be riskier to hold stocks than bonds, precisely the opposite is true: the safest long-term investment for the preservation of purchasing power has clearly been stocks, not bonds.”
The lesson for an investor is about time, not about shares beating everything: money you may need in two years and money you won’t touch for twenty face different risks, and the same daily swing means something different for each.
The other side. Siegel’s history is mostly one country’s, and it was a very successful one. Other markets have had far longer droughts: Japan’s main index took about 34 years, from its peak at the end of 1989 to early 2024, to regain its high. “The long run” can be longer than a person has — and an index of hundreds of companies is not the same as a handful of shares.
Lesson 19 · Burton Malkiel and John Bogle
Every lesson so far assumes that studying companies is worth the effort. Two of the most respected people in investing argue that, for most people, it isn’t. This school includes them because an honest school has to.
Burton Malkiel, a Princeton economist, argued in A Random Walk Down Wall Street (1973) that prices already reflect most of what is known, so picking winners is far harder than it looks.
“Managed funds are regularly outperformed by broad index funds, with equivalent risk.”
John Bogle founded Vanguard and in 1976 launched what Vanguard calls the first index fund for individual investors — a fund that simply owns every company in an index, at very low cost. His reason was arithmetic: before costs, investors as a group earn the market’s return; after costs, they earn less, and the more they pay, the less they keep.
“Cost turns out to be everything.”
Where that leaves a stock picker. Graham’s own advice to the defensive investor was a broad spread of large, conservatively financed companies, chosen with little effort. Picking can still make sense for someone who enjoys the work, keeps costs low, and judges the results honestly against what an index fund would have done. Many investors do both: a core in a low-cost index fund, and the shares they have studied around it. Which suits you is your call.
Lesson 20 · Daniel Kahneman
Kahneman, a psychologist, won the Nobel memorial prize in economics in 2002 for work done largely with Amos Tversky on how people actually decide when the outcome is uncertain. Two of their findings sit behind many investing mistakes. The first is that a loss hurts more than a gain of the same size pleases.
“A salient characteristic of attitudes to changes in welfare is that losses loom larger than gains.”
That is why people hold a fallen share “until it gets back to what I paid”, and sell a rising one early to lock in the pleasure — the pattern Terrance Odean found in ten thousand brokerage accounts (see Investing principles). The price you paid matters to you; it means nothing to the market.
The second is that the mind has a fast, effortless way of judging and a slow, deliberate one, and the fast one answers first.
“System 1 operates automatically and quickly, with little or no effort and no sense of voluntary control.”
The fast mind is excellent at most of life and poor at markets: it reacts to a red number on a screen before the slow mind has asked whether anything about the business changed. Decisions written down in advance, while calm, are the slow mind getting there first.
Lesson 21 · Putting it together
Every investor in this school ended up with rules they wrote for themselves and kept to when it was hard: Graham’s tests, Fisher’s points, Lynch’s drill, Buffett’s circle, Munger’s inversions, Bogle’s costs. The rules differ. What they share is that they were decided in advance, with a clear head, and written down.
A one-page set of your own rules might answer:
None of this tells you what to buy. It tells you how you will decide, which is the part you control.
Quotations are reproduced as written, with their sources. The rest of each lesson is our summary of the books named, not their words. For the ideas behind Trendentum’s other readings, see Investing principles; for any term, Learn the terms.