Review on the book "The Intelligent Investor"
The Intelligent Investor: A Book of Practical Counsel, Revised Edition, written by by Benjamin Graham, updated with New Commentary by Jason Zweig, published by HarperCollins, in Jul 2003.
This is definitely the classic book on stock and bond investment. The revised edition is updated with Jason Zweig's new commentary that reflects the investment environment as of 2003 which is very helpful for modern-day readers to apply Graham's discussions under context. Despite the various changes since its initial publication, the principles of value investing remain unchanged and have been applied successfully by great investors like Warren Buffett.
In this book, the author makes it clear the distinction between investors and speculators. Then the author classifies investors into defensive (passive) and enterprising. It is important to know that the classification is based not on how much risk one can take but on the knowledge, experience and temperament of the investors. The author suggests that most investors should choose the defensive type: It is relatively straightforward to obtain average returns for defensive investors but very difficult to achieve above-average results. The key reasons are that the future of security prices is never predictable and that investors' judgment may be strong.
Therefore, the scheme throughout this book is that investors should use margin of safety to guide their investment. That is, they should invest only when through thorough analysis, they believe that the purchase price is sufficiently lower than the underlying business' value. So they can approach the future in the way of protection rather than in the way of prediction. A corollary to this rule is that they should diversify reasonably to guide against misjudgment.
Overall the author has covered much more topics and given much more insights than what we can cover in such a short review. When reading this book together with other books on Warren Buffett's investment style, one may notice the difference between Graham and Buffett in that the latter is also influenced by other people including Philip Fisher, John Burr Williams and Charles Munger as discussed in detail in the book "The Warren Buffett Way," for which we have a separate review.
Readers can see easily that Buffett belongs to the camp of enterprising investors and his investments are recommended only for knowledgable and experienced investors in Graham's book. So readers are encouraged to think over how to apply the learned principles to their own investment.
Since this book is meant for laymen investors, one should not expect that studying this book alone can help him/her achieve above-average returns. However at least this book can guide investors against costly errors. If readers take the author's discussions and reasoning to their heart and do objective analysis of themselves, they may decide being defensive might suit them better.
However, there is one crucial question lingering though: What actual returns can defensive investors expect from dollar-cost averaging in an index fund or a diversified list of common stocks? The author discusses this strategy a few times briefly in this book but doesn't give clear conclusion. We believe investors should investigate themselves and form the answer of their own first before diving into the adventurous world of investment. :-)