The Intelligent Investor Review

I've finally finished reading The intelligent investor by Benjamin Graham, though I bought the book last year. Well, it's going to be the first of my reading. I expect myself to re-read certain chapters again and again.

Actually I thought I'll never be able to finish. I don't really fancy his rather arcane way of writing - a little to rigid for me, though his content is as interesting in the past as in the present. To force myself to finish reading, I actually borrowed the same book from the library. Having a dateline of 3 weeks to finish the book before my book is due makes it an extra incentive to finish it.

To be frank, not all chapters are interesting. It's good that Jason Zweig's commentary after each chapter makes the dry bit a little more bearable. But past 1/4 mark, I think the stuff becomes more of a page turner, especially the infamous chapter 8 and chapter 20. May I add one more chapter too? It's under Appendixes, pg 537 - The Superinvestors of Graham-and-Doddsville by Warren Buffett. I think that chapter should be my guiding light when the market grows dim and the wind blew those candlesticks off - it's pretty inspiring.

Let me share my thoughts on this book:

1. First of all, I am puzzled by my definition of margin of safety. You know the usual drill...find the intrinsic value, slap in a margin of safety of say 40%, and you'll get a magic price where you know the company is 'cheap'. Nowhere in the book (i might be wrong) did I see Benjamin Graham (I shall call him Ben from now) mention that, and I truly wonder wherefore did I ever had that idea ingrained into me.

On page 515, it was stated in the footnotes that Ben gave a lecture in 1972. He mentioned that 'The margin of safety is the difference between the percentage rate of the earnings of the stock (also called earnings yield) at the price you pay for it and the rate of interest on bonds, and that margin of safety is the difference which would absorb unsatisfactory developments".

I see this written in Buffettology book too. That's one big realisation for me. Let's say the long term bond rate is 5%. We need to get an earnings yield of at least 5%, which translate to a PE of 20x. Anything more than 20x PE wouldn't have that margin of safety. I'm thinking 10% earnings yield will give me a good margin of safety, so a PE of 10 or less is more like it.

2. Another thing that I carried away with me after reading this classic is the idea of the hot sector. Never fling money at Mr.Market's latest, craziest fashions and remind oneself with quiet confidence that, "This, too, shall pass away".

3. I understand what is meant by an aggressive and defensive investor. It's not whether one can take risk. It's how much work one is willing to spend that determines which type of investor one belongs too. I am thus, by definition, an aggressive investor.

I wouldn't recommend this book to anyone without a true passion in investing. Firstly, it's very thick - and that alone is sure to repel casual readers away. Secondly, one needs to have at least a cursory knowledge of accountings. Without that, the book is an alien tome of indecipherable jargons. There are some chapters which deal with philosophy though, so perhaps I'm exaggerating a little here.

But for those who do want to read this classic, hear this from me. The investing world is dividend into two kinds of people - those who had read The Intelligent Investor and those who have not read it.