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The market is a pendulum that forever swings between unsustainable optimism (which makes stocks too expensive) and unjustified pessimism (which makes them too cheap). The intelligent investor is a realist who sells to optimists and buys from pessimists.
“Those who do not remember the past are condemned to repeat it.”
Obvious prospects for physical growth in a business do not translate into obvious profits for investors. The experts do not have dependable ways of selecting and concentrating on the most promising companies in the most promising industries.
Once you lose 95% of your money, you have to gain 1,900% just to get back to where you started.
“Obvious prospects for physical growth in a business do not translate into obvious profits for investors.”
“An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”
There is intelligent speculation as there is intelligent investing. But there are many ways in which speculation may be unintelligent. Of these the foremost are: (1) speculating when you think you are investing; (2) speculating seriously instead of as a pastime, when you lack proper knowledge and skill for it; and (3) risking more money in speculation than you can afford to lose.
The defensive investor must confine himself to the shares of important companies with a long record of profitable operations and in strong financial condition.
To enjoy a reasonable chance for continued better than average results, the investor must follow policies which are (1) inherently sound and promising, and (2) not popular on Wall Street.
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
Oscar Wilde joked that a cynic “knows the price of everything, and the value of nothing.”
For most of us, 10% of our overall wealth is the maximum permissible amount to put at speculative risk. 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.
The more the investor depends on his portfolio and the income therefrom, the more necessary it is for him to guard against the unexpected and the disconcerting in this part of his life.
real growth (the rise of companies’ earnings and dividends) inflationary growth (the general rise of prices throughout the economy) speculative growth—or decline (any increase or decrease in the investing public’s appetite for stocks)
The only thing you can be confident of while forecasting future stock returns is that you will probably turn out to be wrong. The only indisputable truth that the past teaches us is that the future will always surprise us—always! And the corollary to that law of financial history is that the markets will most brutally surprise the very people who are most certain that their views about the future are right. 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.
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. (A 28-year-old would put 72% of her money in stocks; an 81-year-old would put only 19% there.)
mere statistical chore to identify companies that have “out-performed the averages” in the past. The investor can obtain a list of 50 or 100 such enterprises from his broker.† Why, then, should he not merely pick out the 15 or 20 most likely looking issues of this group and lo! he has a guaranteed-successful stock portfolio?
