Defensive investor

– following a ‘simple portfolio policy – which any investor can carry out with little expert assistance.’ The lay investor can achieve ‘a creditable, if unspectacular, result with minimum of effort and capability… since anyone 0 by just buying and holding a representative list 0 can equal the performance of the market averages, it would seem a comparatively simple matter to ‘beat the averages’.

Enterprising Investor

– Graham warned should have a ‘clear concept of the differences between the market price and underlying value… and should firmly base his stock selection on the margin-of-safety principle.” Such an investor, he emphasised, “cannot enter the arena of the stock market with any real hope of success unless he is armed with mental weapons that distinguish him in kind – not in a fancied superior degree 0 from the trading public.”

He laid out 4 areas in which enterprising investor might practise his aggressive policies:

  1. Formula timing
  2. Growth stocks approach
  3. Bargain issues
  4. Special Situations

Popular maxims…but very true!

  1. if you speculate you will (most probably) lose your money in the end
  2. Buy when most people (including experts) are pessimistic, and sell when they are actively optimistic
  3. Investigate, and then invest

5 standard methods by which more than ordinary profits may conceivably be made by the aggressive investor:

  1. General trading – this is, anticipating or participating in the moves of the market as a whole, as reflected in the familiar “averages”
  2. Selective Trading – that is, picking out which, over period of a year or less, will do better in the market than the average stock.
  3. Buying cheap and selling dear – that is, coming into the market when prices and sentiment are depressed and selling out when both are exalted
  4. Long-Pull Selection - that is, picking out companies which will prosper over the years far more than the average enterprise (These are often refereed to as the growth stock)
  5. Bargain purchases – that is, selecting issues which are selling considerably below their true value, as measured by reasonably dependable techniques.

popular kinds of investments… defensive investor will buy:

  1. United States Savings Bond ( and/or tax saving securities) 2a. a diversified list of leading common stocks, at prices that seem reasonable in the light of past market experiences  or 2b. shares of leading investment funds

Aggressive investor will buy…

1, 2a, 2b as above 3. Growth stocks, but with caution 4. Also or alternatively, representative common stocks when the general market is historically low 5. Secondary common stocks, corporate bonds, and preferred stocks at bargain levels 6. Some exceptional convertible issues, even at full prices.

The selection of common stocks for the portfolio of the defensive investor is a relatively simple matter. Here we would suggest 4 rules to be followed:

  1. There should be adequate though not excessive diversification. This might mean a minimum of 10 different issues and a maximum of about 30
  2. Each company should have a long record of continuous dividend payments. The acid test is the payment of dividends during the great depression years, 1931 – 33.
  3. Each company should be large, prominent, and conservatively financed. Indefinite as these adjectives must be, their general sense is clear.

Youth investors…

There is a great advantage for the young capitalist to begin his financial education and experience early. If he is going to operate as an aggressive investor he is certain to make some mistakes and take some losses. You can stand these disappointments and profit by them. We urge beginner in security buying not to waste his money in trying to beat the market. Let him study security values and tests out his judgement on price vs. value with the smallest possible sums initially.

selling …

A simple application of this idea would be to sell off 10% of your holding when the market advances 10% above a chosen base or central level; then to sell 20% of the remainder when it advances another 10% and so on. Repurchases would be made after the market had declined to the central level and on some similar schedule. Following this plan, you would have sold all your stock if and when the market level reached double the base figure, and you then have realised a profit of 37% above the base.