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“Those who do not remember the past are condemned to repeat it.”
This record may be regarded as a persuasive argument for the principle of regular monthly purchases of strong common stocks through thick and thin—a program known as “dollar-cost averaging.”
Invest no matter the circumstance
By the time everyone decides that a given industry is “obviously” the best one to invest in, the prices of its stocks have been bid up so high that its future returns have nowhere to go but down.
The intelligent investor realizes that stocks become more risky, not less, as
their prices rise—and less risky, not more, as their prices fall. The intelligent investor dreads a bull market, since it makes stocks more costly to buy. And conversely (so long as you keep enough cash on hand to meet your spending needs), you should welcome a bear market, since it puts stocks back on sale.
The death of the bull market is not the bad news everyone believes it to be. Thanks to the decline in stock prices, now is a considerably safer—and saner—time to be building wealth.
Never mingle your speculative and investment operations in the same account, nor in any part of your thinking.
Graham urges you to invest only if you would be comfortable owning a stock even if you had no way of knowing its daily share price.3
People who invest make money for themselves; people who speculate make money for their brokers.
But the intelligent investor has no interest in being temporarily right.
Flashy gimmicks for beating the market are much the same: In short streaks, so long as your luck holds out, they work. Over time, they will get you killed.
You must never delude yourself into thinking that you’re investing when you’re speculating. Speculating becomes mortally dangerous the moment you begin to take it seriously. You must put strict limits on the amount you are willing to wager.
Never mingle the money in your speculative account with what’s in your investment accounts; never allow your speculative thinking to spill over into your investing activities; and never put more than 10% of your assets into your mad money account, no matter what happens.
It took 25 years for General Electric (and the DJIA itself) to recover the ground lost in the 1929–1932 debacle.
Time frame matters
The stock market lost money in eight of the 14 years in which inflation exceeded 6%; the average return for those 14 years was a measly 2.6%.
Since the advent of accurate stock-market data in 1926, there have been 64 five-year periods (i.e., 1926–1930, 1927–1931, 1928–1932, and so on through 1998–2002). In 50 of those 64 five-year periods (or 78% of the time), stocks outpaced inflation.
We suggest, however, that if the investor is in doubt as to which course to pursue he should choose the path of caution.
Even though investors all know they’re supposed to buy low and sell high, in practice they often end up getting it backwards.
FOMO
Staying humble about your forecasting powers, as Graham did, will keep you from risking too much on a view of the future that may well turn out to be wrong.
It has been an old and sound principle that those who cannot afford to take risks should be content with a relatively low return on their invested funds.
Experience teaches that the time to buy preferred stocks is when their price is unduly depressed by temporary adversity.
In other words, they should be bought on a bargain basis or not at all.
A traditional rule of thumb was to subtract your age from 100 and invest that percentage of your assets in stocks, with the rest in bonds or cash.
Common stocks are becoming generally accepted as a necessary component of a sound savings-investment program.
First, remember Graham’s insistence that how defensive you should be depends less on your tolerance for risk than on your willingness to put time and energy into your portfolio.
no one should ever invest in a company, no matter how great its products or how crowded its parking lot, without studying its financial statements and estimating its business value.
familiarity breeds complacency.
And your own eagerness to buy or sell a stock can lower your return.
No matter how many other people want to buy a stock, you should buy only if the stock is a cheap way to own a desirable business.
In the financial markets, hindsight is forever 20/20, but foresight is legally blind.
A great company is not a great investment if you pay too much for the stock.
The bigger they get, the slower they grow.
If you want to speculate do so with your eyes open, knowing that you will probably lose money in the end; be sure to limit the amount at risk and to separate it completely from your investment program.
Timing is of great psychological importance to the speculator because he wants to make his profit in a hurry.
Nearly all the bull markets had a number of well-defined characteristics in common, such as (1) a historically high price level, (2) high price/earnings ratios, (3) low dividend yields as against bond yields, (4) much speculation on margin, and (5) many offerings of new common-stock issues of poor quality.
A serious investor is not likely to believe that the day-to-day or even month-to-month fluctuations of the stock market make him richer or poorer.
the more successful the company, the greater are likely to be the fluctuations in the price of its shares. This really means that, in a very real sense, the better the quality of a common stock, the more speculative it is likely to be
He should never buy a stock because it has gone up or sell one because it has gone down.
The single best choice for this lifelong holding is a total stock-market index fund.
When you forget to view changing market prices in percentage terms, it’s all too easy to panic over minor vibrations.
Instead of fearing a bear market, you should embrace it.
Mutual funds are quite cheap, very convenient, generally diversified, professionally managed, and tightly regulated under some of the toughest provisions of Federal securities law.
Psychologists have shown that humans have an inborn tendency to believe that the long run can be predicted from even a short series of outcomes.
Index funds have only one significant flaw: They are boring.
the job of an index fund is to match the market’s return, not to exceed it.
Just as Plato says in The Republic that the ideal rulers are those who do not want to govern,
Patience is the fund investor’s single most powerful ally.
The intelligent investor will not do his buying and selling solely on the basis of recommendations received from a financial service.
As Ronald Reagan used to say, “Trust, then verify.”
For the more dependent the valuation becomes on anticipations of the future—and the less it is tied to a figure demonstrated by past performance—the more vulnerable it becomes to possible miscalculation and serious error.
