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ARE YOU AN INVESTOR OR A SPECULATOR?

"Our text is directed to investors as distinguished from speculators, and our first task will be to clarify and emphasize this now all but forgotten distinction." 1

"In the past we have made a basic distinction between two kinds of investors to whom this book was addressed – the 'defensive' and the 'enterprising'. The defensive (or passive) investor will place chief emphasis on the avoidance of serious mistakes or losses. His second aim will be freedom from effort, annoyance, and the need for making frequent decisions. The determining trait of the enterprising (or active, or aggressive) investor is his willingness to devote time and care to the selection of securities that are both sound and more attractive than the average." 2

"Our main objective will be to guide the reader against the areas of possible substantial error and to develop policies with which he will be comfortable. We shall say quite a bit about the psychology of investors. For indeed, the investor's chief problem – and even his worst enemy – is likely to be himself... We have seen much more money made and kept by 'ordinary people' who were temperamentally well suited for the investment process than by those who lacked this quality, even though they had an extensive knowledge of finance, accounting, and stock-market lore." 3

"...Before attempting such a venture the investor should feel sure of himself and of his advisers – particularly as to whether they have a clear concept of the differences between investment and speculation and between market price and underlying value." 4

"An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative." 5

"In most periods the investor must recognize the existence of a speculative factor in his common-stock holdings. It is his task to keep this component within minor limits, and to be prepared financially and psychologically for adverse results that may be or short or long duration." 6

"...Speculation is fascinating, and it can be a lot of fun while you are ahead of the game. If you want to try your luck at it, put aside a portion – the smaller the better – of your capital in a separate fund for this purpose... Never mingle your speculative and investment operations in the same account nor in any part of your thinking." 7

"The defensive investor must confine himself to the shares of the important companies with a long record of profitable operations and in strong financial condition." 8

"In our view the search for these would not be worth the investor's effort unless he could hope to add, say 5% before taxes to the average annual return from the stock portion of his portfolio." 9

"As Graham advised in an interview, 'Ask yourself: If there was no market for these shares, would I be willing to have an investment in this company on these terms?'" 10

"From this there has developed the general notion that the rate of return which the investor should aim for is more or less proportionate to the degree of risk he is ready to run. Our view is different. That rate of return sought should be dependent, rather, on the amount of intelligent effort the investor is willing and able to bring to bear on his task." 11

Excerpts and summary of "Rules for Common Stocks" 12

  1. There should be adequate though not excessive diversification;
  2. Each company should be large, prominent, and conservatively financed;
  3. Each company should have a long track record of continuous dividend payments;
  4. Limit on the price in relation to its average earnings over, say, the past seven years.

 

"... it is our thesis that a properly executed group investment in common stocks does not carry any substantial risk of this sort [deterioration] and that therefore is should not be termed 'risky' merely because of the element of price fluctuation. But such risk is present if there is danger that the price may prove to have been clearly too high by intrinsic-value standards..." 13

"There are two possible ways by which he [an enterprising investor] may try to do this [profit from prices fluctuations]: the way of timing and the way of pricing. By timing, we mean the endeavor to anticipate the action of the stock market – to buy or hold when the future course is deemed to be upward, to sell or refrain from buying when the course is downward. By pricing we mean the endeavor to buy stocks when they are quoted below their fair value and to sell them when they rise above such value... We are equally convinced that if he [investor] places his emphasis on timing, in the sense of forecasting, he will end up as a speculator and with a speculator's financial results. The distinction may seem rather tenuous to the layman, and it is not commonly accepted on Wall Street..." 14

"It is our belief that shareholders should demand of their management either a normal payout of earnings – on the order, say, of two-thirds – or else a clear-cut demonstration that the reinvested profits have produced a satisfactory increase in the per-share earnings." 15

© Daniel Dower (2011)

   


1 The Intelligent Investor by Benjamin Graham (1973) with commentary by Jason Zweig (2003), page 1
2 Ibid, page 6
3 Ibid, page 8
4 Ibid, page 10
5 Ibid, page 19
6 Ibid, page 20
7 Ibid, page 22
8 The Intelligent Investor, page 28

   


1 The Intelligent Investor by Benjamin Graham (1973) with commentary by Jason Zweig (2003), page 1
2 Ibid, page 6
3 Ibid, page 8
4 Ibid, page 10
5 Ibid, page 19
6 Ibid, page 20
7 Ibid, page 22

 

 

 

 

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