Monday, June 02, 2008

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.


Derek said...

Hi LP,

I agree that this book is not for the faint-hearted. Like you, I got this book from the library and while the first few chapters were still bearable, the rest were like you said... very dry. In fact I was reading Jason Zweig's commentary instead of Benjamin Graham.


la papillion said...

Hi derek,

Haha, I am determined to finish it and I did :) It wasn't so bad lah, come to think of it.

ps. last time I was wishing jason zweig's commentary come quick to take my boredom from reading the main chapters, haha!

PanzerGrenadier said...

Dear la papillion

The book is sitting on my bookshelf with myself having ploughed through about 1/3 of it. Graham's language is pretty dry because of the formal way of speaking that was popular in his days?

It still has gems and reading about lessons on investor psychology is priceless... I read it almost half a year back, so may want to re-read it from page 1 again...hahahha

Be well and prosper.

la papillion said...

Hi PG,

Haha, his language is still okay. Have you read books in the 1900s? Those are really 'power'. But interestingly, I enjoyed reading ancient books because of the archaic language, but somehow when it comes to Ben, it's different.

Nevertheless, as you said, the contents still have a lot of gems to pick :) You should re-start your engine and read up the rest :)

Collin Yeo said...

Hi PG,

Like you, this book is still sitting on my shelf for quite some time already.

Tried reading until half of the book and I realised I forgot the content in the first few chapters.

Its really a challenge to finish this book. Guess the hidden message of Ben is not to educate us on the theory, but rather to hone our disciplinary and patient mindset. =D

la papillion said...

Hi collin,

Thks for visiting my blog :)

Haha, what a new way to view things! I didn't think of Old Ben training in in this way haha :)

JC said...


I read the book a few weeks ago. The only dry parts for me was when he writes about bond investments.

After reading his books, I realize the book was mainly about risk management. When he talks about margin of safety, he's talking about protecting your principal investment. He even writes, anything is a good investment if it's cheap enough!

la papillion said...

Hi JC,

Ben is very very conservative investor, since he had been through very bad times in the stock market and he personally lost quite a lot when he started on this business.

His value stance is quite different from Warren Buffett, in the sense that no business is unsuitable as long as the price is cheap enough. But always remember, he buys businesses (any) at cheap prices; he also diversified his risks of owning cheap AND bad business by buying a lot of such stocks.