Investing Vs Speculation
In chapter 1 Graham talks about two major players in the market. The one is investor category and the other one is the speculator.
Here is what an investment and speculation looks like.An investment operation is one which, upon thorough analysis promises safety of principal and an adequate returns. Operations not meeting these requirements are speculations.
But the newspaper employed the word ‘Investor’ for almost everyone who buys or sells a security, regardless of what he buys, or for what purpose, or at what price, or whether for cash or margin( the amount you borrow from your broker to purchase shares exceeding your capital, you’ve to pay interest on the borrowings as well). By investing with borrowed money you make more when your stock go up but you can be wiped out when they go down.
Borrowed money and borrowed convictions have no place in the market.
Key takeaways :
Common stocks purchase of all kinds were quite generally regarded as highly speculative or risky at a time when they were selling on the bare minimum rates and due soon to begin their greatest advance in history.
In most periods the investor must recognise the existence of a speculative factor in his portfolio as it is inevitable to avoid buying businesses at somewhat higher prices which may comes under speculation. It is his task to keep this component within minor limits, and to be prepared financially and psychologically for adverse results that may be of short term or long term duration.
Everyone who buys a so-called “hot” stocks or “hot tips” is either speculating or gambling.
He also talks about portfolio allocation
Graham talks about building a portfolio of 75% stocks and 25% completely of high grade bonds.
As bonds tend to fluctuate much less than the stock prices. And investors can buy high grade bonds of any maturity period without having to worry about changes in the market value.
Finally he gives staright forward advices for the defensive Investor.
Defensive investors are those are conservative, capital protective and trying to avaoid extreme Volatility of the market while making decent returns by being with the well established businesses.
The two best advice for the defensive investors are :
1. The first is the purchase of the shares of well established businesses.
2.Dollar-cost averaging : which means an investor allocates fixed amount for each month or each quarter to buy stocks so that he can get more quantity when the price falls and good average price when the price appreciates.
Lastly he talks about avoiding short term selectivity :
Avoid buying shares of the company just before their earnings report and hoping that the company will post increased earnings.
My personal advice would be avoid those activities at all cost. I’ve experienced it and burnt my fingers as well.
These are some of the key takeaways from the chapter 1 of Intelligent Investor.
We will discuss more in the upcoming weeks !