I made a post a couple of weeks ago sort of complaining about the lack of investing based discussion in this subreddit. So I'll open the floor to see the discussion I want to see.
-I'm still new to this investing world. I'm going through Graham's book again with colored pencils (no fucking really literal colored pencils and I bought them on sale too so I feel like that coincidentally reinforces being cheap the way Graham would want) and making sure I understand what he's trying to say and in his own words.
-There's people much smarter than me in this sub when it comes to investing. Listen to them. I'm just starting the talk here. That's all I'm aiming to do. This isn't normative. Graham, though an influential voice in investing, is one voice among many. But studying Graham is a great place to start. He's a dense but worthy read. Nobody reads this book and leaves stupider because of it, paraphrasing Warren Buffett.
So we start:
Chapter 1: Investment vs. Speculation: Results to be Expected by The Intelligent Investor
-(p.18) "An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative."
He's strict with his requirement. He doesn't want to lose any money that he doesn't absolutely have to lose. At the onset he defines investing as inherently informed as someone can be. Anything less than the educated commitment to your money is speculation. On page 19 he addresses this odd phrase, paradoxical in its structure, "reckless investor". There's no such thing as a reckless investor. An investor is not reckless. If someone is reckless with their money then they're speculators. Now we also have to keep in mind that Graham himself sat through the Great Depression and the myriad of rises and falls the market embarked on. Historical context does inform his viewpoints and why he stands strict on his idea of what it means to be an investor over what it means to be a speculator.
-(p.19) "...in the easy language of Wall Street, everyone who buys or sells a security has become an investor, regardless of what he buys, or for what purpose, or at what price, or whether for cash or on margin."
Yeah no he calls bullshit on that.
-(p.20) "In most periods the investor must recognize the existence of a speculative factor in his common-stock holdings. 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 or long duration."
He recognizes that there's always the uncertainty factor. You can do all the quantitative analysis you can and still be wrong. The capriciousness inherent in the market and all its forces therein makes investing, no matter how well informed and reasserted with analysis, always have a speculative factor. But it's your job as an "intelligent investor" to minimize that as much as possible. Why would you want your money to not guarantee you, as far as a guarantee can be given, a return on its invested purpose?
-(p.21) "Outright speculation is neither illegal....nor (for most people) fattening to the pocketbook."
By and large, people can't afford to be dumb with their money. Hell I'm writing this and I work a part-time job and I know he's right. I can't afford to lose money in the stock market. So if you put your money somewhere then you better know what you're doing and you better know it like the back of your hand.
-On page 22 he addresses the reality of people and their speculative habits. Sometimes it's fun to speculate when you know you can be ahead. And so he goes: "If you want to try your luck at it, put aside a portion-the smaller the better-of your capital in a separate fund for this purpose. Never add more money...just because the market has gone up...Never mingle your speculative and investment operations in the same account, nor in any part of your thinking."
This bull market we've been on for the longest time would've given him nightmares.
-(p.22) "We have already defined the defensive investor as one interested chiefly in safety plus freedom from bother."
There's a reason why the trope on this subreddit, and most of investing at large, for average people like us, is to just dump money into an S&P 500 index fund, presumably from Vanguard, and just leave it alone. That's the safest thing to do. It leaves you alone and your money is guaranteed to bring you back something (this is a gross oversimplification, I know).
-(p.22) "We recommend that the investor divide his holdings between high grade bonds and leading common stocks; that the proportion held in bonds be never less than 25% or more than 75%, with the converse being necessarily true for the common-stock component; that his simplest choice would be to maintain a 50-50 proportion between the two, with adjustments to restore the equality when market developments had disturbed it by as much as, say, 5%. As an alternative policy, he might reduce his common stock component to 25% "if he felt the market was dangerously high", and conversely to advance it toward the maximum of 75% "if he felt that a decline in stock prices was making them increasingly attractive."
This is a solid take away point, if nothing else. Why take more risk when you don't need to, and when taking less risk can give you a guarantee of your original investment? He continues to mention that he was saying this 50-50 allocation in 1958. Back when the DJIA (Dow Jones Industrial Average) was at 892. Yes read that last sentence again, that's not a typo. "At normal levels of the market...obtain an initial dividend return of 3.5% to 4.5% on his stock purchases...the half and half division between bonds and stocks would yield about 6% before income tax. Stocks were used as a hedge against inflation because he knows that bonds will be decimated by high inflation.
-(p.23) "It should be pointed out that the above arithmetic indicated expectation of a much lower rate of advance in the stock market than had been realized between 1949 and 1964. That rate had averaged a good deal better than 10% for listed stocks as a whole..."
Graham always aired on the side of serious caution. Always be a pessimist when it comes to expecting returns. He knew good and well this party can't last forever with stocks return way over 10%. I seriously would want to know how bad his skin would be itching with this current bull market.
-(p.28) "It is true that the art of skillful or shrewd investment is supposed to lie particularly in the selection of issues that will give better results than the general market...we are skeptical of the ability of defensive investors generally to get better than average results-which in fact would mean to beat their own overall performance."
Even for the experts at this whole investing thing, beating the market is hard to do. Very hard. To say that a defensive investor can try and do it, and succeed, is something Graham almost has to be skeptical about.
-(p.29) His idea of dollar-cost averaging. "...Which means simply that the practitioner invests in common stocks the same number of dollars each month or each quarter. In this way he buys more shares when the market is low than when it is high, and he is likely to end up with a satisfactory overall price for all his holdings."
DCA methods are a staple on this subreddit. Now we have some backdrop for where Graham is saying it from.
-(p.31) "How many enterprising investors could count on having the acumen or prophetic gift to beat the professional analysts at their favorite game of estimating long-term future earnings?"
There's people trained to do this investing game that people like us want to play in. It's another reason why you'll read here on this subreddit about dumping money into index funds and leaving it alone. Trying to beat the market is not impossible but it's really hard to do, especially knowing that there's people out there who are trying to beat the market too, and they're trained better than you are on how to do it.
Now to be clear, an enterprising investor doesn't mean a non-defensive one. An enterprising investor just makes more efforts to invest aggressively. A defensive investor is someone who just wants to put their money somewhere to grow and be left alone. Which is fine and understandable. An enterprising investor wants to put in a bit more work towards their investments.
That might be a good place to stop for now. It's a lot of information to take in for sure. But discussion is to help us question and learn. Do you think his concerns are valid now, in the midst of a massive bull market and these high valuations?
Submitted March 01, 2018 at 11:24AM by howtoreadspaghetti http://ift.tt/2oIwill
