Tuesday, May 22, 2007

Reflections for intelligent investor

Just read the introduction of the Intelligent investor by benjamin graham.

It pretty much says that the book is more about investing philosophies and mindset, rather than the exact details of how to select stocks. But I supposed in the clarification of the concepts, they would have to include some sort of examples to illustrate it, perhaps that's where I would have to read in between the lines to get out the gist of the stock selection based on Graham's method of value investing.

The most important points that I get out of the introduction chapter is this:

1. The future value of your investment depends on the price you pay now.

2. A stock that you buy is not just pixels on a computer screen - it represents a business with its growth that has nothing much to do with the stock price

3. To reduce the risk of being wrong, we must practice the 'margin of safety' principle. From other books I've read, it would be two-thirds the intrinsic value of the stock.

Hmm, so far so good. I agree totally. I had some difficulties applying no.3 though. Firstly, I do not know how to know the intrinsic value of a stock. Secondly, it's hard to control the emotions when the stock you like flew off. It's hard not to play catch up with the stock. I guess that is where discipline comes in.

Seems like both warren buffet and benjamin graham are very concerned with price to book value. Book value, as far as I know, can have different name like Net asset value (NAV). Basically, it's just total asset - total liabilities. I read somewhere that it's better not to include intangibles asset like goodwill, branding etc into the total assets.

Alright, that's all for now.