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Tuesday, April 3, 2007

The Intelligent Investor

This used to be one of my favorite investment books. Nowadays, I don't pick it up as often, but sometimes, I will pick it up, flick through some pages, read the highlighted parts when I need some investment inspiration. In the past, I used to read it diligently, every word and every page, highlighting the key points that I didn't know before - I did this at least twice years ago.

Wikipedia has an introduction of the book here - http://en.wikipedia.org/wiki/The_Intelligent_Investor. It looks similar to the one I have, except mine has yellowed pages, marked with various coloured highlighters, and looked a lot older than it really is.

It's impossible to summarize a book like this in this blog. Everyone takes different things out from a book like this. Even the same person takes different things from this book at different times. To me, this is not the sort of book that will inspire one to earn 50% or 100% return from the stock market. Instead, it will teach you how to make intelligent investment amongst others, with "safety of principal" and "adequate return". (Graham believes that achieving a return similar to the market over the long term represents a great achievement - subsequent studies showed that 80%-90% of investors don't beat the market in the long-term).

Here is a small sample of the more interesting value investing concepts from various places in the book:

- "To invest successfully over a lifetime does not require stratospheric IQ, unusual business insights or inside information. What's needed is a sound intellectual framework to make decisions, and the ability to keep emotions from corroding that framework."

- A stock is not just a blinking ticker symbol... it's an ownership interest in an actual business with an underlying value that doesn't depend on its share price.

- The habit of relating (or comparing) what is paid (or price) to what is being offered (or value) is an invaluable trait in investment. A great company is not a great investment if you paid too much for the stock. An average company can be a great investment if it's given away close to nothing.

- Buying stocks is more intelligent when it is like buying groceries (looking for value and bargains) than when buying perfumes (when one typically tend to ignore the high price).

- The stock market is a pendulum, that swings between unsustainable optimism (giving high prices), and unjustified pessimism (giving low prices). Refuse to let other people mood swings govern your sound intellectual framework. Instead, the intelligent investor seeks to profit from this folly.

- Stock market fluctuations are certain. Prepare for it financially and psychologically. (E.g. in market crashes - you need both a lot of cash and a lot of courage to buy).

- No matter how careful you are, you can never eliminate the risk of being wrong. The future of security prices is never completely predictable. Always insist on a "margin of safety" to minimize the odds and the consequences of being wrong.

- Don't take foolish risks - it can put you so deep in the hole, that it's virtually impossible to get out.

- Being an intelligent investor is more "character" than "brains". The investor's chief problem - even his worst enemy - is likely to be himself. (To me, the hard part is not figuring out the sound intellectual framework, but sticking to it.)

- Whilst enthusiasm is necessary for great accomplishments elsewhere, on the stock market, it almost invariably leads to disaster. (e.g. stock market bubbles).

- Stocks become more risky, not less, as prices rises.

- Additional concepts for defensive (or passive) investors. 1. Limit the share universe to well-established stocks and funds. 2. Dollar cost averaging. 3. Portfolio or formula investing - "50/50 formula". (For 2. and 3., I used modified forms which I feel are more effective).

- Invest only if you feel comfortable owning the business, even if you have no way of knowing its daily share price. (or its daily volume; Buffett feels the same way too, as he always focus on "owners earnings" in his annual reports than the daily / closing share price).

- Graham thinks diversification can be achieved with 10 to 30 stocks (although if I'm not mistaken, I read somewhere that he himself holds nearly "hundreds" of stocks).

(If these concepts doesn't make sense, feel free to leave a comment or 2 here. All non-destructive comments and questions welcome! There's no such thing as a silly question. Graham goes into detail in many of the concepts in the book).

Most stock investors I know are not aware of the book. Fundamental and value investors might have heard it, but the few that has, have mostly yet to read the book in its entirity. Come to think of it, I have yet to know of another person who has actually read the book in its entirity twice (except for Buffett). The feedback I've heard is that it is heavy going, and it is ... but I must say that it has shaped my thinking a lot about investing intelligently. If it's any consolation, my first attempt to finished reading the book took me at least 4 years. If you are a value investor, and find the above concepts resonate within you, consider buying and owning this book as a lifetime friend and constant source of reference, especially if you still have decades of investing years ahead of you.

Special Note: If you are a trader ... sad to say Graham doesn't think too highly of traders ... during his time (he first wrote the book in 1949, and updated it several times in the 60s and until his death in 1976), he has yet to meet a trader who consistently beat the market in the long term. (Another interesting character in the early 1900s which Graham is certain to be aware of is Jesse Livermore, who is probably the world's greatest trader from that era - unfortunately, he lost nearly all his fortunes gained from trading, and eventually committed suicide ... ). What is interesting to me is that the few value investors I know are thrifty people who live simpler lives (including Buffett, the world's 2nd richest man), whereas the few traders I've heard about seem to have lived "the rich and extravagant life". Perhaps a generalization and stereotyping, but I can't help but wonder if that is because of the different approaches that successful value investors and traders acquire wealth - trading can bring wealth very quickly which can tempt one to spend it more lavishly, whereas value investors who patiently looks for bargains in the stock market tend to apply that habit to the other aspects of their lives, always subconsciously looking for value and bargain ... :-)

Happy reading and investing!


greenbull said...

Hi Seng,
i have not read the book myself. your few quotations are enough to inspire me to invest wisely from now on. i mentioned character building in my previous comment. Indeed, to be calm and unemotional, to be able to make the right decisions and have the courage and will to stick to them and the wisdom to change course when it is obvious that the decision is wrong are traits that will ensure success not just in the stock market but in life itself. i really appreciate your willingness to impart your knowledge and experience witothers. i asked you to recommend 5 stocks to invest in the medium to long term. perhaps i could venture by naming 10 stocks that i feel are safe to go in. appreciate your comments and advice.
Plunitude, mahsing, kfc, litrack, lionind, ncb, orient, onastel, acb, tebrau.....these are oounters i would go in and hold for a year or longer, if i have the money. feel free to comment, add or subtract from the list.

Seng said...

Hi Greenbull,

Thanks for your comments. So many interesting points ...

Maybe will just comment briefly.

1. In stock market, it's hard to know whether one has made the right decision at the time of buying. Often, the price goes lower after buying. It becomes a real test. Doubts and questions creep in (this is a good sign). Did I do the analysis properly? What have I overlooked? If it's such a good deal, why did the price goes down? If I still stand by my analysis, shouldn't I buy more? If not, why not?

2. To me, I derive courage when averaging down from a few sources. A strong personal belief is one of them. To me, the belief must be rooted down to something tangible, like cash balance, audited earnings, history of success, that will make me believe that the odds of improvement is better than average. Then, I find courage naturally.

3. As a matter of personal principles, I haven't yet recommended stocks to specific individuals because in my experience, every individual is different. E.g. a trader who likes liquidity might not like HEXZA, which currently have low liquidity and does not make it into the Active List. I'm happy to share what I buy and sell, what I think about the stock I buy and sell, but I leave it to visitors to decide whether they want to follow me or not. If they do, I'm happy that what I am doing is not completely useless, and if they don't, I tell myself that everyone is different, they must have good reasons not to follow, and I leave it as that. Since I can think of 100 other reasons (liquidity is only one example) why every individual is different, I feel uncomfortable recommending stocks to specific individuals, like yourself.

4. Wahh ... you ask me to comment on 10 stocks? Ok. How about if I tell you which of the 10 I own. I own PLENITUDE, MAHSING, LITRAK, NCB, ORIENT. I no longer own ACB. I don't own KFC, LIONIND, ONASTEL, TEBRAU. I feel TEBRAU is more speculative and didn't consider buying it at $0.60 ... yes, the price went up a lot, and there are many people who likes it, but I need to buy what I feel comfortable.

Recently, I bought HEXZA ($0.65-$0.67), OSKVI ($2.39), ICAP ($1.54) on slight weaknesses, because I feel there is a decent Margin of Safety. But my buys were mostly swapped with other shares, which I feel has lesser potential relatively. I don't do the swaps very often, as it can eat into profits. I also stick to my asset allocation rule, as a means to control risks. I use several other methods to control risks. When I have the time, I might write up on them a bit more.

Hope you find this useful.

PeterLeech said...


Probably you could share your BEST investment decision made and your WORST.
Also, you might also post your picture on the blog as i'm very curious on how a "retiree whom is full time on stock market" guy would look like :)

Just my 2cents. Thank you.

Anonymous said...

Hi Seng,

Comparatively I am still quite new to the stock market ( < 6/12 ). After being a doc for 5 years ( still in the government service), I decided the meager pay is going to lead me no way financially as I still have to take care the family's future.So the only way was to try to make the money work for me, and hence came the options of stocks and mutual funds. Besides reading those about financial planning, the first 2 books I bought were 1. Getting Started on Stock Market - Motley Fool and 2. The Five Rules for Successful Stock Investing - Pat Dorsey. Though not able to fully absorb the second book even after reading few times, I guess with these sort of motivation blogs from you, Max and Ben,I am confident things will turn around for me very soon. Currently I am reading the book - Trading for a living by Alexander Elder (recommended by Max as well), guess the next will be "The Intelligent Investor" on my bookshelf. Thanks for the blogs.

Seng said...

Hi Peter,

Since you asked ... my BEST and WORST investment decisions are probably made in 1998, just after the Asian Financial Crisis ... the WORST decision was to go in in a huge way, and saw the value of my original stock portfolio plummetting by nearly 50%. The BEST decision was to keep them there, and even bought more, and kept them all the way up a couple of years later, nearly doubling my entire portfolio. (it's actually nothing to shout about, as nearly everybody who did what I did might do even better than me!) Compared to 1998-99 period, what we've seen recently with 228 corrections are just noises ... Really.

As for a picture, I'm afraid I'm a low profile kind of guy. I can only tell you that I don't look anything that resembles Ben :-)


Seng said...

Hi tee c.s.

Sounds like you have a good head start in stocks. After university, I focussed purely on my career first for a much longer period, before venturing into stocks.

The list of books you have are quite interesting, although varying in styles. Motley Fool leans closer to Fundamental type investing, I haven't read Pat Dolsey's books, Elder's books sounds more Technical (charts) based, whereas Graham is definitely Fundamental Value investing.

As you are starting out, it's good to scan the investment fields for what type of styles you feel are more suitable to you (e.g. when you shop for the things you like, do you monitor and compare prices and/or wait for sales?). But eventually, to get a superior investment result, I believe you will need to master at least one style, and have a working knowledge about the rest - the exception might be Buffett and Graham who are purely Fundamental investors and claimed they don't use charts, but they are probably the rare exceptions. Anyway, this process will take years, just like becoming a good doctor or engineer or any other profession, so, the key, if you are still young (and sounds like you are) with decades of investing experience ahead of you, is to keep learning and evolving. Even Buffett, after a decade of very successful investing experience eventually evolved away from Graham, to practice his own unique investment style. A successful practitioner (regardless of profession I believe) always seeks to stay ahead of his peers, and you can only do that by continue to learn.

Best wishes.

Maxforce said...

Alright, time for a trader to make his comeback argument speech :P
However, before I begin, I must tell you, for a trader, I sure read this book in its entirety for a lot of times! Hahaha.

It is true that Graham does not think much of traders. At the same time, the feelings was rather mutual. Graham was not thought much either. Traders have consistency issue, and so does Graham's methods. Which method has better consistency? Which method has better chance of yielding say a fixed percentage of ROI per annum?

Graham's idea of investing for 20 years, or a lifetime is definitely no easy task. In fact only a handful of people I know, could have such a patience. Just imagine, its an equivalent of a long term savings of 20 years!!! This is why Graham was not thought much actually.

Jesse Livermore - dubbed as the World's Greatest Trader. And yeap, rightly so I would say. Started at the age of fifteen as a ranaway from home, he made millions, which in today's terms should be billions.

However, Livermore was not only a trader, he was also a speculator. He cornered many markets - e.g. cotton and coffee. He was a great bear raider that even JP Morgan had to sent emissary to ask him to stop or the whole financial system would have collapsed. One of the US President also met with Livermore to ask him to stop from cornering the coffee prices. Such was the influence of Jesse Livermore, the Speculator.

Was Jesse Livermore a Great Trader? You bet.

Was Jesse Livermore a Great Speculator?
Judging on the success of his cornering of certain markets, yes.
Judging that perhaps that is how he lost his fortune? Nope.

Yeap, my point was - there is a distinction between a trader and a speculator.

Warren Buffett, the World's Greatest Investor?
Was he the investor as preached by his guru - Benjamin Graham?
Nope. Otherwise, he would not be as successful as he is today.
Buffett gets himself involved in many instruments that would make Graham shrug and roll in his graves. Instruments such as commodities (E.g. Silver in 97), forex, and other derivatives. Buffett also made himself known in special workouts situations - e.g. m&a, deals, etc.
All these are hardly value investing as preached by Graham.
There's lots more but unfortunately it would be insufficient to cover it here. Suggested reading is
Trade Like Warren Buffett - JAMES ALTUCHER
Bet it would open your eyes, heart and mind. Haha, I sure was shocked when I first read it. But further verifications were made and it confirms the findings of the books.

Question is,
Could Warren Buffett, be as successful as he is by only using Graham's methods?
My take is, I dont think so.

And with what Buffett is doing today, I must say, I could not classify him as an investor anymore. He has become a speculator.

On another note, TA does not mean charts. Charts are a method of which TA could be "seen". TA is a measurement of psychology of the market.
TA does not mean trading either.
Trading is the buying/selling stocks/instruments as a commodity as if running a business.
One could trade with FA as well.
Yeap, one could trade with FA. :)

Anyway, I need my nap now :P

Seng said...

Hi Max,

Yes, I agree with you, that gambling & speculating is bad for one's financial wealth, whether one is a trader, or a value investor. It's a shame that Jesse had to speculate away all his wealth. Somehow, I just can't see Buffett and Graham doing this. Even today, Buffett still lives in his 3 bedroom house, drive his old car, and gave away nearly all his wealth to charity. This is a mark of a thrifty person, and not a gambler.

Buffett is certainly not a replica of Graham. To say that a student must be an exact replica of the teacher is too narrow a concept. A diligent student can have many teachers, but not all at the same time. Usually one at a time. And the mark of a true teacher is one who is happy when his student has surpassed him. Graham is certainly that.

In the Intelligent Investor, Buffett credits Graham for teaching him at least 2 important concepts in the book - Chapter 8 (Mr Market) and Chapter 20 (Margin of Safety). Even today, he still applies both concepts in his investment decisions. In the preface to the book, he believed that one will not get a bad result by learning from Graham, if one is focussed on the 2 chapters above.

It is also worthwhile noting that in 1988 (at the age of 58 years old) Buffett made his biggest purchase in Coca Cola. At that time, Coca Cola wasn't traditionally regarded as a value company. It wasn't trading cheap either - its P/E at the time was around 50+, one reserved for extremely high growth company. Some would even say speculative. During this time, people thought that Buffett is no longer a value investor. Why would a value investor like Buffett buys such a high P/E company? Certainly, Graham wouldn't buy such a high P/E company.

To me, this incorrect but prevalent view then of Buffett shows a misunderstanding of Graham's teachings. To me, the purchase marks a superior understanding of Margin of Safety, that went beyond Graham. But it doesn't mean that Graham's Margin of Safety is irrelevant and outdated. It was later explained why the purchase has large Margin of Safety.

If you've studied Buffett's Coca Cola purchase in detail, then you will know that Buffett has long studied Coca Cola's business and management (decades) before he actually made his biggest purchase in 1988. This is the mark of a value investor. Value investing is business based investing, with an assessment of intrinsic value and a Margin of Safety. It has nothing to do with price charts and volume.

Now why is Coca Cola a value purchase? To Buffett, Coca Cola has huge margin of safety (even with a P/E of 50) because Buffett was convinced (after a deep study of Coca Cola's business), that Coca Cola can sustain high double digit growth for decades to come. In my experience, most people do not understand how this is so mathematically, but, I will assume you understand this - if not, let me know.

As for Alcuther's book, whilst interesting, centres on Buffett's personal trading account, not Berkshire. By far, Berkshire is Buffett's biggest holding - more than 99% of Buffett's wealth in it it. To me, it make more sense to focus on Berkshire, which is built up largely from value investing principles, but this may be a personal style (i.e. Alcuther is not wrong to focus on Buffett's personal account). Interestingly, a review of Alcuther's book showed that Buffett still insists on Margin of Safety - Chapter 20 in Graham book (although possibly with a superior interpretation).

I belive Mary Buffett explains quite well how Buffett's foray into arbitrage, etc. falls within the context of value investing. I am writing this away from home, so, I don't have access to my books to quote you a specific reference. It seems to me, reading your comments below, that you've misinterpreted Buffett. Perhaps you can quote me a specific example as to how much money Buffett made by being a speculator. Then, we can compare that with how much money he's made as a value investor. This should put into context whether Buffett made most of his money from value investing or from being a speculator.


Maxforce said...

You know we both have no idea how much was made from speculation or value investing?
Maybe speculation was not exactly the right word either. Its more of a syndicated move. Whether you can see Buffett as one or not, is not the issue. Fact is, he did capitalise on many of what can be construed as speculation and trading.
Of course, I agree with you that the Coca-Cola purchase was a higher understanding of value investing, but that is not what I am talking about.
"Workout" situations while Buffett was still managing his fund. Forex - which he is allegedly shorting the USD. And many others.
Did he make most from Value Investing? Or from Speculation? Or Is it Trading? Or even as a Businessman? I believe that this question would not have an easy answer.
To trade currencies for example, does not necessarily make one a gambler. It could make one a trader or a speculator. But I seriously do not see trading currencies as a mark of Value Investment. Of course, one may argue that one sees value in one currency versus the other. However, we must not forget that derivatives such as currency is by far one of the riskiest venture one could get into. Why? Because of the leverage.
If say, one wants to invest in a certain currency, it would be safer and more logical to hold the hard note, or to open a savings account holding the foreign currency than to have a trading account with leverage which needs constant managing and monitoring.

Seng said...


Let's deal with the facts, rather than one person's assumptions.


Here's a press release from Berkshire Hatthaway directly about this aspect in 1998 - http://www.berkshirehathaway.com/news/feb03981.html. Do read it carefully.

Notwithstanding the fact that his silver investment is small (only 2% investment portfolio), the press release gives some indication of how Buffett made his decision - "Over 30 years ago,..." "... Since that time he has followed silver's fundamentals". It is interesting that there's no indication that his purchase was based on past prices and volume traded in silver exchanges. I recommend you read his Annual Report immediately following his silver purchase in 1998 to understand his decision making process. You will quickly gather that he and Munger has a deep understanding of silver fundamentals from a silver supply and silver demand perspective.


It is actually quite easy to find out for example, how much Buffett makes from his Coca Cola investment, due to the disclosures made in his annual reports and his generally Buy & Hold approach for his serious long-term investments. You will find that that accounts for the majority of Berkshire's capitalization today.

Also, it is widely reported that Buffett made $70 million very quickly from his silver purchase.

I can tell you right now, Coca Cola "value added" is far, far greater. Compared to Coca Cola, his silver gains is only a small drop in the vast Berskhire ocean. Do read his annual reports.


Again, Buffett has for a very long time made his fundamental views known about the long-term problems with US chronic budget deficits. In one of his earlier Berskhire Annual Reports, he elaborated very eloquently this problem from a fundamental perspective. Many, many years later, he takes advantage of it ... Again, this is a man whom together with Munger, have a very deep understanding of the fundamentals behind currencies. (Read Berkshire's Annual Reports).


As for your assumption about leverage, Buffett abhors leverage - Berkshire is persistently in a net cash position, for as long as I can remember (that's decades). Instead, as he consistently mentioned in his annual reports, Berkshire's main problem has always been how to best employ its vast cash pool - it's a common problem that he refers to again and again in his Annual Reports. Again, read Berkshire's annual reports.


Again, I can only refer you to his Annual Reports. Read it carefully, because you will find that his decisions are based on careful business assessment of potential upside vs potential downside, and forming a calculated opinion based on a deep understanding of the business and the principles of value investing. He definitely has identified a mispricing situation, identified what the true value should be (i.e. Intrinsic Value), and ensured that he has a sufficient Margin of Safety before going into that situation.

Sorry if I seem blunt but you've made many long comments about Buffett without reading his annual reports. If you had, please refer to me the specific paragraph that led you to believe that he made those investments based on other than value investing principles. Then, we can have a more meaningful discussion.

Personally, I have followed and read Buffett's writings directly for nearly 10 years. His annual reports is something I personally look forward to reading. It's a shame Berkshire's annual reports don't get much exposure, because they are extremely educational. Perhaps, when I have the time, I might do an article on that, to avoid future misinterpretation of Buffett. His writings are highly recommended.


Maxforce said...

My friend,
I think you missed something.
Whether it is speculation, trading or investing, all three require deep understanding - whether it is FA or TA or some other methods.
All three, believe or not, is NOT gambling.
However, all three have different aspects and are distinct in nature.
One cannot speculate then call it a trade, nor can one call it investing later.
Of course, everyone could have their own definition. You are free to have your own.

Seng said...


When I wrote this topic (The Intelligent Investor), my main purpose is to share with my readers my inspiration and appreciation for Graham, as the founder of value investing. In your comments, you cast your personal doubts on Buffett as a value investor. I hope I have sufficiently indicated to you that Graham's teachings are still valid (Mr Market and Margin of Safety), and Buffett still uses the foundation that Graham sets, i.e. value investing principles, in his non-stock purchases. Since your last comment did not relate to Graham nor Buffett nor value investing, I will leave your comments at that (there's no point diverting nor clouding the issue, as this is not my main purpose). I hope this blog has given you a better appreciation of Buffett and Graham, which I personally believe will be useful for your future investing. If you have any doubts about Graham or Buffett in future, please don't hesitate to raise them here.

rask3 said...

Hi All,

Interesting arguments, I must say. Here are my two cents. First, the terminologies such as speculator, trader or investor are usually taken to represent ideals or strict boundaries. This ideals or boundaries does not exist in most cases, simply because we are living in a probabilistic world, not in a deterministic world.

As an example, a speculator can be considered as an investor if he had done his homework enough, to be reasonably certain that the odds of winning are in his favor or the potential loss of the position he has taken will be miniscule. It is crucial that the potential loss will not make much of a dent in his wealth. This is what the risk reward ratio is all about.

Regarding Buffet's current style of investment or trading, I would say he is not a Grahamite in the strict sense of the world. He has evolved with the times, simply because, the dynamic nature of the business world changes the fertile fileds. He has made many mistakes, learned from them and moved on.

The important lesson from Buffet and Graham that is timeless, is the margin of safety principle. To give an example, let us say you wish to put some money in two counters, say YTL Power and YTLE (mesdaq). Having studied their past histories and knowing the latest developments regarding YTLE, which one of the two provide a greater margin of safety? My bet would be on YTL Power.

My choice does not negate the possibility that YTLE could in future overtake the potential of YTL Power. It may very well do better. But, given the known facts, I would be more comfortable in putting my money into YTL Power.
Not only will I be able to sleep better, but the decision resonates with all that I know about value investing, little though that knowledge may be.


Maxforce said...

Hi Rask,

I agree on the margin of safety principle. I also agree on the evolution of Buffett from Graham.

However, speculation is speculation, trading is trading and investing is investing. They are three different separate elements.

All three require hardwork and a good money management to minimise risk to financial ruin.

While Graham, Buffett and virtually the whole of Hollywood paints traders as risk takers who are no better than gamblers. This however is very far from the actual truth.

Also when one trades Forex, one does not do so in actual same monetary term. Say right now to convert MYR to USD requires 3.46. ANd now we want to LONG MYR, SHORT USD, what happens? For every USD1.00, do we need to pay RM3.46? (assuming no commission here, and of course, USD/MYR is not openly traded, but just assume so - otherwise think of it as JPY :P)
We don't. We put in a "good faith margin" and leverage the trade. Depending on the deal, the leverage could be to a few hundred or few thousand times. This means, say your leverage is 200, for every USD1 you put in as a margin, you could trade up to an amount of USD200 worth.
Hence, I seriously do not see how trading, ie Shorting USD could be investing. That is either trading or speculation (if it involves trying to manipulate or trying to induce the market to move in a particular fashion)
However, that being said, if it happens that one wants to short the future, and invest in JPY, one could always, open a FOrex bank account denominated in JPY.
That would be investing.

Note the two difference.

PS: Just because it is Warren Buffett, does not mean he could only invest and not trade or speculate.

There are a number of other arguments which I could put forth, but I m under medication, so, thats all for now :P

Seng said...

Rask, Max, thanks for your comments.

Max, regarding your numerical example on currency, I am curious as to how did you know that Buffett trades currency the same way as you described? I noticed that in your assumption, you've assumed a leverage of 200. Now that I'm home, when I turn to page 16-17 of the 2006 Chairman's letter, Buffett himself described the way he plays currency, and I quote ...

"...When we first began making foreign exchange purchases, interest-rate differentials ..."

"... (later) the direct currency profits we have realized have come from forward contracts ... Why, you may wonder, are we fooling around with such potentially toxic material ... The answer is that derivatives, just like stocks and bonds, are sometimes wildly mispriced ..."

Now, Buffett writes the Chairman's Letter himself - it is not written by someone else. So, if Berkshire's 2006 Annual Report is to be believed, then, it seems that the way he plays currencies is quite different from your description. His initial exposure is through holding a direct position in overseas bonds, and nowadays, his exposure is through "wildly mispriced" derivatives, i.e. still based on his own assessment of intrinsic value and margin of safety.

Note that I have not made any assumption about the way Buffett invests ... instead I referred you directly to his own writings on this topic.

Note the difference.

Regarding your PS: "Just because it is Warren Buffett, does not mean he could only invest and not trade or speculate." Again, my question, just following along your (mis?)assumption is "So what?" "How can one personally benefit from this assumption, given that the man himself has never written nor described the methods he used to "trade or speculate", but has always described candidly the way he invests using value investing principles? Hopefully, you will not make new guesses or "interpret" the way Buffett trades or speculate. My preference is to stop making assumptions about the way Buffett "trades or speculates", and read his writings directly. The man has written extensively about value investing, so, isn't it better to read first what the man has actually written himself, given his incredibly successful methods? Of course, we might not agree entirely with what he's written, but at least, let's discuss from a factual point, rather than making assumptions which might not be fair and true.

Max, you can find more about Buffett's Annual Chairman's Letters in Berkshire's official website - http://www.berkshirehathaway.com/

It's highly recommended.

Note I am not criticizing the merits of trading and speculating vs investing. I believe there are merits in what has been described before in all 3 areas, and which style is a personal choice. My point is that according to Buffett's writings spanning as far as I can remember (several decades), nearly all of Berkshire's achievements have been described via value investing principles, and not via "trading or speculating" principles. So, I don't think it's fair if anyone tries to misrepresent the man or stretch the truth to claim that Buffett uses so and so a technique when he has not described it. On the other hand, if you actually saw a description by Buffett himself, please don't hesitate to point that out to me. We are all human - to err is human, to forgive is devine ... as long as we all have a genuine interest to learn, and not to make long speeches (yours truly included).


Maxforce said...

To say that Berkshire's and Buffett's success is solely due to Value Investing would be unjust as it undermines Buffett's other qualities.
Let's look at Buffett's autobiography then since its the only source that you would trust, I will oblige.

Quoted from Robert G Hagstrom, The Essential Buffett.

Buffett started off managing money at age 25, own investment $100 but with 7 limited partners, $105,000

This is salesmanship. My argument is that the startup with $105,000 is a tremendous feat for a 25 yr old who only put $100 of his own. This also shows the early businessman acumen that Buffett has.

American Express scandal 1964.
At the time, the charge-card and travelers-check company was mired in a scandal involving fake salad oil and the stock had lost nearly half its value. Buffett bought a sizable stake using 40% of the partnership's fund. Over 2 years, sold for $20m profit.
The purchase would be value investing - strong company at a discount and assuming Buffett has analysed that the scandal would only be of temporary in nature and would not affect the fundamentals of the company, which I am sure he did.
However, the exit in a mere 2 years could hardly be value investing. Could be considered a trade here. A trade is defined as a transaction of buying and selling, much alike how a business would buy and sell goods. Of course, there is "value" during the purchase in the sense that price appreciation is expected, otherwise, why buy in the first place?

1969 closed the partnership explaining that the market was highly speculative and value was difficult to find. Went on to take the helm of Berkshire Hathaway - an ailing textile company back then.
1985, ends Berkshire Hathaway - the textile company. This book does not do justice as it does not go into details of how Buffett did manage to churn a profit from Berkshire the textile company. Maybe some other time - but that would demonstrate further Buffett's business acumen and entrepreneurial skills.

1967, Buffett via Berkshire entered into the Insurance business. Rather than being a passive investor e.g. like what we could only do here, Buffett exercises control over these businesses by controlling the policy. Example - Refusal to compete in price.

Also his initial entry into insurance earlier mentioned was via National Indemnity Company and National Fire & Marine Insurance Company. Later, he bought over GEICO - Government Employees Insurance Company and General Re Corporation, a reinsurance company to complement his initial insurance businesses.

These acquisitions give a solid foundation to Buffett's insurance empire. In business term, I believe this is called exploiting the value chain. And again, Buffett's businessman acumen and entrepreneurial skills showed. To call this value investing would be an underestimation.

Of course, then Buffett went on to purchase many more businesses.

At this time of Buffett's adventure with the insurance industry, he was yet the World's 2nd Richest Man. Actually he was the World's Richest Man before Bill Gates came by.

Anyway, as you could see - Buffett owed his successes largely to him being a businessman as well. And this is only an examination focusing mainly on one part of Buffett's journey to the World's 2nd Richest Man.

This is Buffett the Businessman post. Others will come soon.
I ll rest for today. Its almost 2 am. :P

Sciencegto said...

I am very glad that I learn a lot about investment from you guy. Thanks a lot.

"Buffett started off managing money at age 25, own investment $100 but with 7 limited partners, $105,000"

Now at age 25, I start learning a lot about investing that I think I should begin at early age.

Seng said...


I am really glad to see you've moved away from the claim that Buffett "trades or speculates" rather than applies value investing principles. I think that's a wise move. And your subsequent writings seem to be a more accurate representation of both Graham and Buffett, especially in the areas of business-like investing.

With regard to your query about why Buffett sold American Express 2 years later, you might wish to note that Berskhire still owns 151.6M of American Express shares as of 31/12/2006. (see page 15, 2006 Annual Report). It's possible he might have repurchased back, or only sold some, but I'm too tired to follow up the detailed history, as it would detract me from focussing on finding opportunities in Bursa.

Let's end our discussion here, since we're both tired. But I would encourage you to write more about Buffett in your own blog - personally, I find that I learn more about a topic when I write, although it can be time consuming.


Seng said...

Hi sciencegto,

I'm glad to hear your kind words. Thanks.

Buffett actually began investing at the age of 11, although he only met Graham and learnt the principles of value investing at a much later age (although still at a very young age - 20s?). After learning from Graham, his investing results improved tremendously.

For me, I came across value investing much later than Buffett, and after some time, my results have also improved tremendously.

To me, it's never too late to learn. The thing about investing is that it can be applied throughout one's lifetime. Given an average life expectancy of say 80, learning a good and reliable way to invest successfully (whichever methods) at the age of 25 gives another 55 years of additional income, which is very, very powerful. I believed it was Einstein who said that "compound interest should be the 8th wonder of the world" (or something like that). The important thing is to keep an open mind (be open to learning new things), observe carefully what one does (instead of what they say they do), develop an inquiring mind, think critically and independently, persevere (don't let a temporary setback becomes permanent), be humble, since a successful method, once learnt, can be applied for a very long time.


rask3 said...

Hi Max,

I agree with your reply to my post,though I would like to clarify a few things, mostly for the benefit of those new to the game of value investing. I didn't mean to say that speculation, trading and investing in stocks are all one and the same. As a value investor myself, it would be detrimental to my financial health if I didn't know what these terms represent.

While the differences between these approaches to money making are clear, you cannot ignore that all these are games of
probability. As an analogy, cats, lions and tigers are different species of animals, but a little knowledge of biology tells us they have engough similarities among them to be grouped under one genus. Graham's definiton of value investment was: A purchase of shares in an undertaking that promises safety of capital and an adequate return.

Of course the definition, being succinct, throws itself to further questions and enquiries. For example, does the term "promises safety of capital" mean a guarantee. I don't think so. From all that I know there are no guarantees in the stock market. The closest that you can come to a risk free investment are Treasury bills. Definitely, even the most promising of stock carries market risks, industry risks and company specific risks.

Graham's definition, however, is useful in the sense that it tells us to confine our stock pruchases where the odds of losing money on a stock is as minimal as it can get. He asked us to use our reasoning power, just as a businessman would in considering the purchase of an entire company. First ask, what if things go wrong with the company? How much will the loss be?

Secondly, the principle of diversification is another way of saying that no matter how well you know a company or an industry, you can never be sure. Hence the need to spread risks, over, say, 10 to 15 stocks at least. Again here, reasoning tells us that you have to trade off higher returns, that concentration can provide for lower risks that diversification can provide. The principles of sound investment invariably relies very little, if at all, on the predictive powers of a person and it relies very much on his reasoning powers.

On the other hand speculation and trading are games of probability where the odds are stacked against the player. This is a natural law.
How? The predictive powers of a human, no matter how intelligent he may be or however sophisticated the tools at his disposal, cannot be as reliable as his reasoning powers if he based his decision on Graham's defintion of stock investment.

Of course, there are successful speculators and traders, just as there are winners of lotteries. I salute those who can win games of probability with long odds, because very few can and I'm not one of them. Speculation or trading, is game where there are few winners and many losers. How else can it be?

I would like to reply to your comment on Buffet's stock and other investments, but I got to go now. May be another post soon.


Maxforce said...

Hahaha Seng, you re right about we re both tired.
But, the moment Buffett touches silver and currency, there goes his reputation as an investor rather than a trader.
To me, Buffett is not only an investor, but also a trader, a speculator and a businessman. Yes, Buffett justified the trades as an investment. But then, why did I move away from the trading & speculation part? No point having too much discussion if one's mind is already fixed.
Just give you an example: Wildly mispriced? Then all traders are investors then. Why? Traders buy and sell in anticipation of making a profit - definitely there is an expectation that market has yet to correctly price it.
That is a weak justification.

I will definitely blog about it in my own blog, no worries.

Maxforce said...

Just noticed your post.
Graham's definition worked very well back when I was an investor. However, when I became more and more of a trader, I find the definition troubling.

"Promises safety of capital and an adequate return"
Even a trader would be an investor. Why? A trader should emphasize 3 things at a minimum -
1) Trading system which has more than 50% probability.
2) Emotional control - much like what is emphasized by Graham as well though a slight change is needed.
3) Discipline to carry out stop loss and to trade as per the trading system.

Law of averages would ensure that say one uses a trading system which has 55% chances of winning, would yield an adequate return over the long run.

Traders lose when they do not have either of the three mentioned above. But then, same goes with investors. Assuming, an investor which does not have "the investor's temperament" as described by Graham - constantly feeling the need to check the quotation (I m more of a position trader, I m not concerned with it either), what happens? Most likely the investor would lose as well.

90% of the people in the market loses. This is a fact. Are the 90% from traders/speculators? Haha, that would be a myth. Even investors were bitten in 97.

But anyway, most of the people in the market are neither an investor, a trader nor a speculator. They are gamblers. Kiyosaki got this one right - its not the investment that is risky - its the investor.

"On the other hand speculation and trading are games of probability where the odds are stacked against the player"
Graham has a serious misconception of trading. I could show you numerous trading systems which has more than 50% success rate and coupled with money management techniques, it would fall nicely into Graham's investment definition. (Its not a feat, any trader worth his salt could do it - that means a lot of traders could show you such a system)

Seng said...


I don't mind if you want to write long comments, but the moment you say this - "No point having too much discussion if one's mind is already fixed." - I hope you were referring to yourself, but in the context of your comments, it doesn't sound like it. So, if you were referring to me, don't mistake my focus on stocks as a sign of a fixed mind, nor my generosity and earlier silence as a sign of weakness.

My advise, before you point a finger at anyone, is to always remember that there are 4 fingers pointing back at yourself.

1. "the moment Buffett touches silver and currency, there goes his reputation as an investor rather than a trader." - the moment he touches it, and his reputation is gone without asking questions and investigating deeper? Who's mind is actually fixed here?

2. Berkshire's press release on silver - no comment? Did you refer to the Annual Report as I suggested? If not, why not? (some people might think that you didn't because you presumed that as a worthless exercise, i.e. a sign of a mind that is already fixed. It would be presumptious of course, as you could be just be recovering and felt tired to investigate, and your wish to comment back quickly is stronger, or a million other explanations which is probably irrelevant to the comment box under the Intelligent Investor and stock investing)

3. 1997 Annual Report extract. "...silver. Last year, we purchase 111.2m ounces. Market to market, that position produced a pre-tax gain of $97.4m ... (slightly different from $70m reported, as I based on Internet sources, rather than actual Berkshire report which I didn't have with me at that time) ... Thirty years ago, ... Ever since, I have followed the metal's fundamentals ... in recent years, bullion inventories have fallen materially, and last summer Charlie and I concluded that a higher price would be needed to establish equilibrium between supply and demand ..." Does this sound like a methodology which TA books or TA associations recommend to trade silver? Certainly, I note that one Nison book I read on candlesticks doesn't refer to monitoring silver bullion inventories - I wonder if there is any TA books that recommend to monitor bullion inventories first.

4. Berkshire 2004 Annual Report. Chairman's letter, page 16, and I quote ... "Some people may look at this table and view it as a list of stocks to be bought and sold based on chart patterns ... Charlie and I ignore such distractions and instead view our holdings as fractional ownership in business ..." "this thinking has been the cornerstone of my investment behaviour since I was 19. At that time, I read Ben Graham's The Intelligent Investor and the scales fell from my eyes ..." - any comment?

Actually, until you made the personal comment on fixed mind, I wasn't that interested to comment back, since your comments on silver and others have largely no practical relevance to me personally (since I don't invest in silver, and focus largely on stocks). So, I find Buffett's personal writings on stocks to be highly relevant and useful, and would recommend it strongly to anyone wishing to improve their stocks performance.

"Wildly mispriced? Then all traders are investors then. Why? Traders buy and sell in anticipation of making a profit - definitely there is an expectation that market has yet to correctly price it.
That is a weak justification."

Again, I'm not sure if you're still talking about stocks. It is tiring talking to someone who keeps jumping from stocks to silver to currencies, to salesmanship, to so many other topics and not confine himself to stocks.

Now, don't get me wrong - I'm not saying TA is useless, just because Buffett don't use it in his stock investments. My point is

1. Don't call anyone here having a fixed mind.

2. Don't misrepresent Buffett as someone who uses Technical Analysis on stock investing (or abandoned Value Investing in stocks simply because of your personal speculation/conjecture that he uses other methods in other areas, rather than relying on Buffett's own personal writings & actions).

3. Please respect the topic discussed (here is a comment under the Intelligent Investor, which is relevant to stocks), not your personal forum for making a claim that Buffett is a trader and a speculator in areas outside stocks.

Don't get me wrong too. You have many good comments in your blogs, and on trading systems applicable to stocks. Please continue to feel free to share your experience, just give a little respect to the topic being discussed when you wonder here. It doesn't mean you can't talk about other topics, but there must be a limit too. I trust you know where I am coming from.

Perhaps if you sensed that Buffett has deviated from Value Investing in his stock investments, would it be wiser to try to pinpoint exactly which stock investment he made that has deviated from Value Investing? It should be less tiring if we focus on one point at a time, rather than 10 points at the same time.

Kind regards,

Maxforce said...

Touchy, touchy, aren't we?

Again, I emphasize that TA does not mean trading and FA does not mean investment.
This is to reply the comment -
"Does this sound like a methodology which TA books or TA associations recommend to trade silver? Certainly, I note that one Nison book I read on candlesticks doesn't refer to monitoring silver bullion inventories - I wonder if there is any TA books that recommend to monitor bullion inventories first."

There are people who trades based on FA. This may be rather rare in our local front but this is common in overseas.
FA or TA is merely a method.
Trading or Investing or Speculating is an activity.
The activity may be carried out with a specific method or not.

Another example, Jesse Livermore was touted as World Greatest Trader right? Does he even use TA? Charts?
Nope, none. All he had during that era was tape reading. Price quotations, No charts.
THis is to emphasize on the point that TA is NOT equivalent to Trading or vice versa.

Look, if you based on the Graham's definition of investment, then as I said, all traders are investors.
Again, I emphasize that traders have at least 3 things:
1) Trading system which has more than 50% probability.
2) Emotional control - much like what is emphasized by Graham as well though a slight change is needed.
3) Discipline to carry out stop loss and to trade as per the trading system.

And with these three, it would fit to Graham's definition of investment which "Promises safety of capital and an adequate return"

1. Why safety - Money management techniques would safeguard the trades/trader, limiting the exposure or risk taken. This is normally in two folds - one in the form of stop loss. Another is the size of the trade, hence no overtrading is done.

2. Adequate return - The system which has more than 50% accuracy. And with emotional control to execute the system, adequate return will be guaranteed over the long run. Law of averages promises this.

On Buffett, its actually not my sole opinion. Traders, investors, speculators, many people around the world has found that Buffett is truly the master who not only could invest, but trade as well, has strong business acumen and salesmanship and also a genius in speculation. If you like, you could make a few searches and you ll already find that. But it may not be what you d like to read.

Look, sorry Seng to burst your idol's image but this is the way I look at it. And if you d like to know, I am not the only person with such an opinion.
Fact is, if one merely invests or trades, one will never have a chance to replicate Buffett's successes. (Not that one needs to, to live a comfortable life, just hypothetically)

Seng said...

Young Max,

Everyone who buys shares will eventually need to sell their shares (during their lifetime or thereafter by their executors). So, of course everyone's a trader.

Ben Graham's book is merely one method. It is normal to contrast against another method, e.g. TA. Else, why the long discussion?

Hmmnn ... since you are clearly stubborn and I haven't really found anything of true substance in your last comment that is worthwhile to respond to, so, I have no further comments.

Maxforce said...

Hahaha all came to naught.
Nevermind, quite gotten used to it.
Good luck in your trades then.

grahamsmun said...

Hi Seng,
I concur with u that Buffet is more a value investor and according to an interview with him he admitted that he is 60% to 70% Graham and 30% to 40% fisher.
He had adopted fisher method to include quality of business beside quantity value.
On the issue of investment or speculation in fact if u look into intelligent investor Graham cover speculation as well(look at enterprising investor chapter).Speculation will be equivalent to investment if there is enough margin of safety to compensate for risk taking.
As for Buffet he is actually employing investment principle of margin of safety when he bought saloman brothers and amex but his margin safety include fisher's principle of franchise value, thats is only different from graham method.
Recently he bought into worldcom bonds, even when the co is financial distress similiar to graham principle of buying into railway share in distress.
Warren has always been a value investor however, today it include intangible which has a franchise value to compute the true investment intrinsic value.
As for TA warren has never practise timing in fact he always critize TA in his investment letter to shareholder.
Please note investment and speculation is a twin brother, if we work on the principle of margin of safety.

Seng said...

Hi grahamsmun (interesting nick)

On page 18, Chapter 1, Graham wrote

"What do we mean by "investor"? Throughout this book, the term will be used in contradistinction to "speculator" ..."

I totally agree with Graham - "investing" and "speculating" are 2 different things.

Within the context of the entire book, it is clear that Graham does not condone speculation. Neither do I. There are far too many retailers in Bursa - the uncles and aunties - who "speculates" and lose money. Even in a bull run, they lose money ... no one in their right mind can condone this, if we are a truly caring society.

Your play with words is clever (to attach a margin of safety on speculation), but I think could be potentially confusing and dangerous. If we, writers of investment blogs, condones speculation (no matter how we define it), it would most likely cause confusion and be misinterpreted by new / busy readers who don't understand or have the time to read the fine-print. That might not be a desirable outcome. If there is "margin of safety", I would prefer to call it "investing". Perhaps a bit too simplistic in your books, but I think the distinction is easier and more practical in real life.

Just my honest viewpoint.


grahamsmun said...

Hi Seng,
I m a practioner of Graham investment method,I don't agree with ur comment that investment and speculation do not exist side by side.
Lets take a life ie.
Courts Mammoths at Rm 0.83
It is well known due to financial woes, that the london parent co need to dispose this company.
Basing on graham methods of financial computation this company should intrinsically worth minimum of Rm 1.00 and it is speculated this exercise would not take more than 1 year, a new investor will takeover hence there will be a GO.
Basing on this scenario we will gain Rm 0.17 or 20% if we invest now.We are intelligently speculating that in 1 yr this co will be taken over.
Hexza-We find the company has a good value and we investing basing financial appraisal but we do not know when we will dispose the share and we buy and wait for latter re-rating.
In this example, both use FA of Graham but for speculation ie Courts we have a time value whereas we realised our investment in 1 yr time (in normal situation will not invest if not expect takeover) whereas in Hexza we buy bcos the current fundamental justify.
This method speculation is different from TA speculations methods(with no financial base) in here we calculate the risk reward and the financial margin of safety and decision are all financially driven.Thus how we call this not investment?

Seng said...

Hi Grahamsmun,

"We are intelligently speculating that in 1 yr this co will be taken over."

In my opinion, if that is the extent of your thought process, then, it is speculation and dangerous.

However, if you also consider the potential downside, and came to the conclusion that there is virtually low risk, and if you also consider the safety margin (and decide that there is a lot), and if you also practices other forms of risk control such as not over-trading, not borrowing hugely to make this "bet", keeping the position within tolerable risks (as you personally define it), and finally, after having done a proper assessment, you then concluded that it's a BUY, and then act on it (e.g. you might even wait for the "fat pitch"), then, that becomes "investing" in my book. Why? Because of the wider sound intellectual framework. Whilst you are still "speculating" on one smaller aspect (the possible takeover and possible gain), you have also methodically considered and eliminated the rest of the downside risks, that overall, the proposed trade has a higher upside gain than lower downside risks. To me, that is "investing".

See the difference?