Escolar Documentos
Profissional Documentos
Cultura Documentos
Speculation Chapter 1
One of the most important and basic rules is to keep the activities of investment and
speculation totally separate. They should be kept in separate accounts and
compartmentalized in your mind. If you must speculate, Graham admonishes investors
to limit their allocation to no greater than 10% of investment funds.
Just as there is intelligent investing, there is intelligent speculation. Intelligent investing
involves: 1) analysis of the fundamental soundness of a business 2) a calculated plan to
prevent a severe loss and 3) the pursuit of a reasonable return.
Speculation involves basing decisions on the market price, hoping that someone will pay
more than you at a later date. Unintelligent speculation would include speculating when
you believe you are investing, speculating actively without the knowledge or skill to do
so properly, and speculating with money you cannot afford to lose.
It is to the benefit of many on wall street to promote speculation because it produces
money for the industry. Many trendy formulas and stock picking systems are
promoted based on past performance. They may work for periods of time but almost
always disappear as they become popular. This means a successful speculator must
constantly stay ahead of the latest trend. This is the opposite of intelligent investing
which involves fundamental analysis that does not fluctuate with each passing trend.
The bottom line is that any speculation should be reserved for a small and separate
portion of your funds (no more that 10%). This rule of separation protects your
investment funds from catastrophic losses caused by speculation.
Zweig notes in the commentary that market fluctuations will be dependent upon real
growth (increases of companies earnings and dividends), inflationary growth, and the
amount of speculation (increase or decrease) the public is putting on stocks at the
current moment.
Nobel Prize Laureate Robert Shiller was inspired by Grahams valuation approach when
he developed the Shiller PE 10. The PE 10 ratio compares the current S&P 500 index
price to an inflation adjusted average of profits over the past 10 years. It has provided
additional proof that Graham was right on target that price is the biggest determinant of
your investment returns.
Looking Forward In the coming chapter reviews you will learn about important Graham
concepts such as the defensive investor, the enterprising investor, Mr. Market, and a
margin of safety.
The
Defensive
Investor
and
Common
Stocks Chapter 5
The two main advantages of stocks are that they provide protection against inflation and
offer a higher rate of return than bonds/cash in the long run. These advantages can be
squandered if the investor pays too high a price for his stock.
Graham suggested four rules for the defensive investor:
1. Adequate diversification
Graham suggested between 10 and 30 different issues
2. Stick to large, outstanding (top 1/3 of industry group), conservative companies.
3. Each company should have 20 years of continuous dividend payments.
4. Limit the price you are willing to pay to
25 times average earnings over the last 7 years and
20 times earnings for last 12 month period
The defensive investor will most likely have to abandon growth stocks. Growth stocks
will usually be too expensive; and consequently, excessively risky for the defensive
investor.
The beginning investor should not try to beat the market, but instead concentrate on
learning the difference between price and value with small sums of money. In the long
run an investors rate of return will be determined by his or her knowledge, discipline,
and skill in paying a reasonable price for investments.
Even the defensive investor should be willing to sell stocks that have appreciated
significantly and can be replaced with more attractively valued securities.
The defensive investor should understand the difference between prediction (qualitative
approach) and protection (quantitative or statistical approach). The risky approach is to
try and predict or anticipate the future. The protection approach measures the
proportion or ratios between price and relevant statistics (i.e. earnings, dividends,
assets, debt, etc.).
Portfolio
Policy
for
the
Enterprising
He advises investors to avoid lower rated bonds and preferred stock unless there is
substantial upside potential in the price of the securities. Lower rated securities have a
tendency to plummet in adverse markets.
The small additional annual income you receive form lower rated securities is not worth
the risk unless there is the possibility of large capital gains. In other words, you should
not be buying lower rated issues at a price close to Par (100). A bond selling at 66 has
the potential of a 50% capital gain versus no capital gains for a bond bought at 100.
He also thought it was imprudent to buy new issues. He noted there are always
exceptions to the rule. However, generally new issues are brought to market when its
favorable for the company and with great hype and sales promotion; and therefore,
probably not a bargain price for the investor.
Graham didnt like foreign bonds because of their poor investment history. Zweig points
out in the commentary that some of Grahams criticisms have been mitigated with the
advent of exchange traded funds (ETFs) and mutual funds that specialize in lower-rated
securities and foreign bonds.
Portfolio
Policy
for
the
Enterprising
Stock
Selection
for
the
Enterprising
Investor Chapter 15
Graham contends that large portions of the stock market are out of favor because
investors concentrate on investments with the best growth prospects. They ignore
valuation and essentially pay whatever price the market is currently asking for the
perceived future growth.
The result is many sound companies, with more modest or moderate prospects, are
ignored and left out of favor. It is the intelligent investor who will attempt to take
advantage of this phenomenon by identifying companies whose share prices do not fully
reflect the real value of the company.
The enterprising investor can begin his search by looking for companies that meet the
following criteria. Unlike the defensive investor, the enterprise investor has no
minimum limit on the size of the company.
1. Strong Financial condition:
current assets at least 1.5 times current liabilities
total debt to net current assets ratio less that 1.1
2. Earnings Stability
positive earnings for at least 5 years
3. Currently pays a dividend
4. Current earnings greater than years ago
5. Stock price less than 120% of net tangible assets
(Benjamin Clark at ModernGraham.com does an excellent job of analyzing several
hundred stocks to examine whether they meet the criteria for the defensive or
enterprising investor.)
In addition, Graham offered two simple alternative methods for choosing high
probability stocks. One: purchase stocks with a low price/earnings ratio from a quality
list (i.e. Dow Jones Industrial Average List), and two: purchase a diversified group of
stocks selling under their working capital value (Net Net Stocks).
The common principle for the enterprising investor is finding bargains. You should
avoid lower tier issues unless they are validated as bargains.
In the commentary, Jason Zweig provides excellent content on Return On Investment
Capital (ROIC) and how it can be used to compare one company to another. He also
points out that successful investors have two things in common: First, they are
disciplined and consistent, and second, they put a great deal of thought into their
process, but give little thought to what the market is doing.
If every investor did their research and only bought stocks with a margin of safety below
the intrinsic value of the company, the market would be efficient and fairly stable. But
we know that this isnt true. The market swings wildly from day to day and takes large
swings in valuation over periods of euphoria and pessimism.
Graham used a parable with an imaginary investor named Mr. Market to illustrate how
an intelligent investor should take advantage of market fluctuations. This is a parable
about greed and fear, price and value, and how the intelligent investor will react.
I love this story because it is simple and yet profound in its real life application. Its a
mindset of looking for opportunities based on value and price, not on emotion or timing.
Its the discipline of avoiding owning assets that are priced above their real value.
The intelligent investor will attempt to take advantage of Mr. Market by buying low and
selling high. There is no need to feel guilty for ripping off Mr. Market; after all, he is
setting the price. As an intelligent investor you are doing business with him only when
its to your advantage; thats all.
It is important to be prepared for the inevitable market fluctuations with your finances
and your intellect. In other words, you should be prepared financially and emotionally
to to benefit from prices that are disconnected from their real values.
As an investor you should stop comparing yourself to others. Intelligent investing is not
whether you can beat the market or not. Its about sticking with your discipline and
meeting your own investing goals.
Avoid allowing Mr. Market to influence your behavior, but instead take advantage of his
irrational behavior by buying when he is despondent and selling when he is euphoric. If
you concentrate on owning sound businesses at reasonable prices the results will take
care of themselves.
However, the investor should expect no more than average results. It is important to be
cognizant of high fees, excessive trading, and erratic fluctuations in performance. Check
the performance for at least the last five years.
Be skeptical of any significant outperformance. Outperformance in rising markets may
indicate speculative behavior on the part of the portfolio manager. Usually these funds
end up with large losses.
The benefit of an investment fund is because it is a cost effective means to diversify your
portfolio with little effort on your part. It is those investors that are not satisfied with
average returns from their fund that subject themselves to undue risk through
speculative behavior, or succumb to outright fraudulent schemes. In other words, the
defensive investor should probably be satisfied with an index fund and/or closed-end
fund selling at a discount.
Finding closed-end funds selling at discounts can be much more profitable than openend funds (particularly when sales charges are included). Buying at a discount changes
the return on investment calculations significantly.
Mr. Zweig offers an absolute annual limit of 1% of your investment assets as advisory
fees.
The most important objective of the advisor may be to save you from your own worst
enemy, YOU. A good advisor will help you keep your emotions in control, especially at
important moments. Instead of panic selling, are you going to be prepared to buy when
prices have fallen? Instead of following the crowd, who might be buying at prices far
above intrinsic value, are you going to look elsewhere for better values?
For most investors, an advisor is a worthwhile engagement. Be sure your advisor cares
about their clients, understands the fundamentals of value investing, and has a
satisfactory amount of education and experience in investing.
The capitalization rate may differ depending on the quality of the investment. Graham
lays out five elements for the security analyst to consider: general long term prospects,
competence of management, financial strength and capital structure, dividend record,
and current dividend rate.
Making assumptions about the future creates greater risk. The more an investor relies
on future expectations, the greater the margin of safety he must require. But there is risk
in only looking at past results too.
In order to mitigate this problem, Graham recommends a two-part appraisal process.
First, establish a past-performance value based solely on history. Then contemplate
how much of an adjustment needs to be made to valuation based on future assumptions.
In the commentary, Jason Zweig adds modern illustrations of Grahams points. He
provides interesting examples of problems to watch for, as well as good signs to be
observant of.
Things
to
Consider
About
Per-Share
Earnings Chapter 12
Graham is adamant about not putting any importance in short term earnings. The more
an analyst relies on short term results, the greater the risk, and the more due diligence
that is required.
Earnings that are averaged over a long period of time (Graham uses 7 10 years)
provide a more reliable indicator of the future health of a company than short term
earnings. The shorter the time period of analysis the greater the scrutiny required of
special charges, income tax anomalies, dilution factors, depreciation changes, etc.
Jason Zweig, in the commentary, laments that even Graham would be shocked at the
size and degree that corporations pushed the limits of fraudulent accounting in recent
years. He provides great examples and pointers for avoiding these kinds of companies.
Graham points out the fallacy of such an argument. The convertible bond buyer is
usually giving up yield and accepting greater risk in exchange for the conversion right.
The company is possibly giving up common shareholders benefits of future growth.
The truth is, convertible issues must be evaluated individually, just as any other form of
security. The type of security, by itself, does not make it worth your investment.
However, investors should be especially leery of new convertible issues. This is because
companies usually issue convertibles during periods of time that are advantageous for
the company; such as near the end of bull markets. Most bargain convertible issues will
be found among older issues.
Zweig points out in the commentary that convertible bonds have historically provided
less total return, but more income, and less risk than stocks. Compared to bonds, their
total return is greater, but provide less income with greater risk. In reality they have
been more correlated with stock prices than bond prices.
or changes of conditions. Growth stocks should only be bought when the price provides
a margin of safety based on conservative projections.
Almost any investment has a price point at which the margin of safety is sufficient for
purchase. However, these investments are usually unpopular and out of favor with
market. The key is to require a safety buffer that is large enough to prevail against
adverse conditions.
Diversification
Diversification is a key companion of safety. Diversification is the margin of safety for
your portfolio as a whole.
First, we have put the odds heavily in our favor by requiring a margin of safety on each
individual investment. However, regardless of how well we have done, some will fail to
live up to our expectations. Having a safety buffer improves our probability, but some
investments will still be losses.
The idea of diversification is that the combined gains will be much higher than the
losses. The more opportunities we find that meet our safety requirement, the greater the
probability that the portfolio will have above average gains. Therefore diversification is
an important part of intelligent investing.
Your passion has probably increased to learn more from the father of value investing. I
highly recommend owning a copy of The Intelligent Investor. I encourage you to
highlight and underline as you read. There is so much wisdom and practical application
Timeless
Investing
Quotes
from
The
Intelligent Investor:
To invest successfully over a lifetime does not require a stratospheric IQ, unusual business
insights,orinsideinformation. Whatsneededisasoundintellectual frameworkformaking
decisionsandtheabilitytokeepemotionsfromcorrodingthatframework.(pg.ix)
Thesillierthemarketsbehavior,thegreatertheopportunityforthebusinesslikeinvestor.(pg.
ix)
Theintelligentinvestorisarealistwhosellstooptimistsandbuysfrompessimists.(pg.xiii)
Nomatterhowcarefulyouare,theonerisknoinvestorcanevereliminateistheriskofbeing
wrong.OnlybyinsistingonwhatGrahamcalledthemarginofsafetyneveroverpaying,no
matterhowexcitinganinvestmentseemstobecanyouminimizeyouroddsoferror.(pg.xiii)
Bydevelopingyourdisciplineandcourage,youcanrefusetoletotherpeoplesmoodswings
governyourfinancialdestiny.Intheend,howyourinvestmentsbehaveismuchlessimportant
thanhowyoubehave.(pg.xiii)
Thepurposeofthisbookistosupply,intheformsuitableforlaymen,guidanceintheadoption
andexecutionofaninvestmentpolicy.(pg.1)
Nostatement is moretrue andbetter applicable to Wall Street thanthe famous warningof
Santayana:Thosewhodonotrememberthepastarecondemnedtorepeatit.(pg.1)
Wehavenotknownasinglepersonwhohasconsistentlyorlastingly makemoneybythus
followingthemarket.Wedonothesitatetodeclarethisapproachisasfallacious asitis
popular.(pg.3)
The defensive (or passive) investor will place chief emphasis on the avoidance of serious
mistakesorlosses.Hissecondaimwillbefreedomfromeffort,annoyance,andtheneedfor
makingfrequentdecisions.(pg.6)
Thedeterminingtraitoftheenterprising(oractive,oraggressive)investorishiswillingnessto
devotetimeandcaretotheselectionofsecuritiesthatarebothsoundandmoreattractivethan
theaverage.(pg.6)
Theinvestorschiefproblemandevenhisworstenemyislikelytobehimself.(pg.8)
For99issuesoutof100wecouldsaythatatsomepricetheyarecheapenoughtobuyandat
somepricetheywouldbesodearthattheywouldbesold.(pg.8)
Thedistinctionbetweeninvestmentandspeculationincommonstockshasalwaysbeenauseful
oneanditsdisappearanceiscauseforconcern.(pg.20)
Nevermingleyourspeculativeandinvestmentoperationsinthesameaccountnorinanypartof
yourthinking.(pg.22)
Toenjoyareasonablechanceforcontinuedbetterthanaverageresults,theinvestormustfollow
policieswhichare(1)inherentlysoundandpromising,and(2)notpopularonWallStreet.(pg.
31)
Speculativestockmovementsarecarriedtoofarinbothdirections,frequentlyinthegeneral
marketandatalltimesinatleastsomeoftheindividualissues.(pg.31)
Aninvestorcalculateswhatastockisworth,basedonthevalueofitsbusinesses.(pg.36)
Aspeculatorgamblesthatastockwillgoupinpricebecausesomebodyelsewillpayevenmore
forit.(pg.36)
Peoplewhoinvestmakemoneyforthemselves;peoplewhospeculatemakemoneyfortheir
brokers. And that, in turn, is why Wall Street perennially downplays the durable virtues of
investingandhypesthegaudyappealofspeculation.(pg.36)
Confusingspeculationwithinvestmentisalwaysamistake.(pg.36)
Thevalueofanyinvestmentis,andalwaysmustbe,afunctionofthepriceyoupayforit.(pg.
83)
ThemoststrikingthingaboutGrahamsdiscussionofhowtoallocateyourassetsbetweenstocks
andbondsisthathenevermentionsthewordage.(pg.102)
Thebeautyofperiodicrebalancingisthatitforcesyoutobaseyourinvestingdecisionsona
simple,objectivestandard.(pg.105)
Weurgethebeginnerinsecuritybuyingnottowastehiseffortsandhismoneyintryingto beat
themarket.Lethimstudysecurityvaluesandinitiallytestouthisjudgmentonpriceversusvalue
withthesmallestpossiblesums.(pg.120)
Thereisnoreasontofeelanyshameinhiringsomeonetopickstocksormutualfundsforyou.
Buttheresoneresponsibilitythatyoumustneverdelegate.You,andnoonebutyou,must
investigatewhetheranadviseristrustworthyandchargesreasonablefees.(pg.129)
Thousandsofpeoplehavetried,andtheevidenceisclear:Themoreyoutrade,thelessyoukeep.
(pg.149)
Wedefineabargainissueasonewhich,onthebasisoffactsestablishedbyanalysis,appearsto
beworthconsiderablymorethatitissellingfor.(pg.166)
Inanidealworld,theintelligentinvestorwouldholdstocksonlywhentheyarecheapandsell
themwhentheybecomeoverpriced,thenduckintothebunkerofbondsandcashuntilstocks
againbecomecheapenoughtobuy.(pg.179)
Inthefinancialmarkets,hindsightisforever20/20,butforesightislegallyblind.Andthus,for
mostinvestors,markettimingisapracticalandemotionalimpossibility.(pg.180)
Agreatcompanyisnotagreatinvestmentifyoupaytoomuchforthestock.(pg.181)
Theintelligentinvestorgetsinterestedinbiggrowthstocksnotwhentheyareattheirmost
popularbutwhensomethinggoeswrong.(pg.183)
Itisabsurdtothinkthatthegeneralpubliccanevermakemoneyoutofmarketforecasts.(pg.
190)
Itshouldberememberedthatadeclineof50%fullyoffsetsaprecedingadvanceof100%.(pg.
192)
Eventheintelligentinvestorislikelytoneedconsiderablewillpowertokeepfromfollowingthe
crowd.(pg.197)
Pricefluctuationshaveonlyonesignificantmeaningforthetrueinvestor.Theyprovidehimwith
anopportunitytobuywiselywhenpricesfallsharplyandtosellwiselywhentheyadvancea
greatdeal.(pg.205)
Thespeculatorsprimaryinterestliesinanticipatingandprofitingfrommarketfluctuations.The
investorsprimaryinterestliesinacquiringandholdingsuitablesecuritiesatsuitableprices.(pg.
205)
Alwaysrememberthatmarketquotationsarethereforconvenience,eithertobetakenadvantage
ofortobeignored.(pg.206)
Neverbuyastockbecauseithasgoneuporsellonebecauseithasgonedown.(pg.206)
The investor should be aware that even though safety of its principal and interest may be
unquestioned,alongtermbondcouldvarywidelyinmarketpriceinresponsetochangesin
interestrates.(pg.207)
NothingimportantonWallStreetcanbecountedontooccurexactlyinthesamewayasit
happenedbefore.(pg.208)
Mr.Marketdoesnotalwayspricestocksthewayanappraiseroraprivatebuyerwouldvaluea
business.Instead,whenstocksaregoingup,hehappilypaysmorethantheirobjectivevalue;
and,whentheyaregoingdown,heisdesperatetodumpthemforlessthantheirtrueworth.(pg.
213)
TheintelligentinvestorshouldntignoreMr.Marketentirely.Instead,youshoulddobusiness
withhimbutonlytotheextentthatitservesyourinterests.(pg.215)
Mr.Markets jobis toprovideyouwithprices;yourjobistodecide whetheritis toyour
advantagetoactonthem.Younonothavetotradewithhimejustbecauseheconstantlybegs
youto.(pg.215)
Investingisntaboutbeatingothersattheirgame.Itsaboutcontrollingyourselfatyourown
game.(pg.219)
Thebestwaytomeasureyourinvestingsuccessisnotbywhetheryourebeatingthemarketbut
bywhetheryouveputinplaceafinancialplanandabehavioraldisciplinethatarelikelytoget
youwhereyouwanttogo.(pg.220)
Onlyintheexceptionalcase,wheretheintegrityandcompetenceoftheadvisershavebeen
thoroughly demonstrated, should the investor act upon the advice of others without
understandingandapprovingthedecisionmade.(pg.271)
Beforeyouplaceyourfinancialfutureinthehandsofanadviser,itsimperativethatyoufind
someonewhonotonlymakesyoucomfortablebutwhosehonestyisbeyondreproach.(pg.274)
Iffeesconsumemorethan1%ofyourassetsannually,youshouldprobablyshopforanother
adviser.(pg.277)
The ideal form of common stock analysis leads to a valuation of the issue which can be
compared with the current price to determine whether or not the security is an attractive
purchase.(pg.288)
Theonlythingyoushoulddowithproformaearningsisignorethem.(pg.323)
Highvaluationsentailhighrisks.(pg.335)
Even defensive portfolios should be changed from time to time, especially if the securities
purchased have an apparently excessive advance and can be replaced by issues much more
reasonablepriced.(pg.360)
Adefensiveinvestorcanalwaysprosperbylookingpatientlyandcalmlythroughthewreckage
ofabearmarket.(pg.371)
Thebestvaluestodayareoftenfoundinthestocksthatwereoncehotandhavesincegonecold.
(pg.371)
Itsnonsensicaltoderiveaprice/earningsratiobydividingtheknowncurrentpricebyunknown
futureearnings.(pg.374)
Calculate a stocks price/earnings ratio yourself, using Grahams formula of current price
dividedbyaverageearningsoverthepastthreeyears.(pg.374)
Avoidsecondqualityissuesinmakingupaportfoliounlesstheyaredemonstrablebargains.(pg.
389)
Toseehowmuchacompanyistrulyearningonthecapitalitdeploysinitsbusinesses,look
beyondEPStoReturnonInvestedCapital(ROIC).(pg.398)
WallStreethasafewprudentprinciples;thetroubleisthattheyarealwaysforgottenwhenthey
aremostneeded.(pg.409)
Althoughtherearegoodandbadcompanies,thereisnosuchthingasagoodstock;thereare
onlygoodstockprices,whichcomeandgo.(pg.473)
Intheshortrunthemarketisavotingmachine,butinthelongrunitisaweighingmachine.(pg.
477)
Theintelligentinvestorshouldrecognizethatmarketpanicscancreategreatpricesforgood
companiesandgoodpricesforgreatcompanies.(pg.483)
Thesecretofsoundinvestmentintothreewords:MARGINOFSAFETY.(pg.512)
Themarginofsafetyisalwaysdependentonthepricepaid.Itwillbelargeatoneprice,smallat
somehigherprice,nonexistentatsomestillhigherprice.(pg.517)
Thereisacloselogicalconnectionbetweentheconceptofasafetymarginandtheprincipleof
diversification.(pg.518)
Diversificationisanestablishedtenetofconservativeinvestment.(pg.518)
Itisourargumentthatasufficientlylowpricecanturnasecurityofmediocrequalityintoa
soundinvestmentopportunityprovidedthatthebuyerisinformedandexperiencedandhe
practicesadequatediversification.For,ifthepriceislowenoughtocreateasubstantialmargin
ofsafety,thesecuritytherebymeetsourcriterionofinvestment.(pg.521)
Investmentismostintelligentwhenitismostbusinesslike.(pg.523)
Losingsomemoneyisaninevitablepartofinvesting,andtheresnothingyoucandotoprevent
it.Buttobeanintelligentinvestor,youmusttakeresponsibilityforensuringthatyounever
losemostorallofyourmoney.(pg.526)
Byrefusingtopaytoomuchforaninvestment,youminimizethechancesthatyourwealthwill
everdisappearorsuddenlybedestroyed.(pg.527)
Beforeyouinvest,youmustensurethatyouhaverealisticallyassessedyourprobabilityofbeing
rightandhowyouwillreacttotheconsequencesofbeingwrong.(pg.529)
Successfulinvestingisaboutmanagingrisk,notavoidingit.(pg.535)
Atheart,uncertaintyandinvestingaresynonyms.(pg.535)
Withoutasavingfaithinthefuture,noonewouldeverinvestatall.Tobeaninvestor,youmust
beabelieverinabettertomorrow.(pg.535)