I was reading "The Intelligent Investor by Benjamin Graham" and came across a series of calculations that I'm not getting as to how it has been arrived at. I'm quoting the entire text from the book as follows:

Assume that Investor A buys some open-end shares at 109% of asset value, and Investor B buys closed-end shares at 85% thereof, plus 1 1⁄2% commission. Both sets of shares earn and pay 30% of this asset value in, say, four years, and end up with the same value as at the beginning. Investor A redeems his shares at 100% of value, losing the 9% premium he paid. His overall return for the period is 30% less 9%, or 21% on asset value. This, in turn, is 19% on his investment. How much must Investor B realize on his closed-end shares to obtain the same return on his investment as Investor A? The answer is 73%, or a discount of 27% from asset value. In other words, the closed-end man could suffer a widening of 12 points in the market discount (about double) before his return would get down to that of the open-end investor.

I didn't get "end up with the same value as at the beginning" part. Any help with this would be appreciated.

Moving further, for person A; 21% return on asset value is understood but how can the return on investment be 19%? His effective investment is $109 and his return on that money is $30 which translates to (30/109)*100=27.52% and not 19%. If $21 return is considered on $109 investment then that turns out to be 19.27%, near to which Graham stated. But 19.27% is absurd as we have already considered the $9 in the total investment so it cannot be deducted from the profits. I have the same question for person B.

1 Answer 1


Just look at the cash flow:

Buy stuff for $109

Four years later get $30 paid out from earnings and $100 proceeds of sale, total is $130

So that $109 investment turned into $130. That's a gain of $21 on the $109 investment, and that, as the question says, is 19.27%.

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