Book of the Week: The Intelligent Investor

12 Oct 2013

The Intelligent Investor was written by Benjamin Graham, Warren Buffett’s sensei. If reading this book will make me an intelligent investor like Warren, I’m all for it. The first thing you will notice about the book is that is very thick, over 500 pages. The original book was nearly as thick, because my edition 2006 has additional commentary and footnotes. Having more pages does not necessarily increase the value. One of the commentaries suggested that Graham’s advice about avoiding mortgages and junk bonds was outdated, because of new investment vehicles. The same investment vehicles that were responsible for the financial crisis. I’ll think I’ll keep to Graham’s advice. Inflation and Taxes Real gains after accounting for taxes and inflation are what you care about. Which investments you chose depend on your own personal tax situation. One should also be ready to take advantage of any tax savings you can find. Inflation and taxes are just as important as returns. Market There is no market, only underpriced and overpriced stocks. One needs to change the mindset of investing from picking a thoroughbred horse to buying groceries. You’re not out there to pick a winner. You need to find a good deal and eat what’s on sale. Wash Rule I totally forgot about this, because I avoid taking losses. The wash-sale rule states that you if you sell and buy back a stock, you need to wait more than 30 days to buy back the stock in order to take a loss when you sold it the first time. This less you get some tax savings while retaining a stock you want to keep. Value Formula for Growth Stocks Value = Current (Normal Earnings) x (8.5 plus twice the expected annual growth rate) Two Types of Investors There is the passive defensive investor and the active intelligent investor. An important part about being an intelligent investor is to be disciplined enough to stick to a given plan regardless of the market. Being a passive investor is similar to the advice given in David Swensen’s Unconventional Success. Buy market index funds at regular intervals to take advantage of dollar-cost averaging. You can do this by making a habit to buy an index fund every time you get your paycheck. It takes work to be an intelligent investor. You actually have to read the accounting books of the companies and do some analysis to see if they are actually overpriced or underpriced. It is a bit scary to see the different ways companies try to cook the books. Being an intelligent investor is not very glamorous. You either just go on cruise control and track the market or spend a lot of find going over accounting statements. Buy stocks like groceries. Purchase The Intelligent Investor from Amazon.com or check it out from your local library.