Session 2: Investment versus Speculation – Results to be Expected by the Intelligent Investor
- An investment operation is on which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.
- A margin account enables you to buy stocks using money you borrow from the brokerage firm. By investing with borrowed money, you make more when your stocks go up but you can be wiped out when they go down. The collateral for the loan is the value of the investment in your account so you must put up more money if that value falls below the amount you borrowed.
- Never add more money to margin account just because the market has gone up and profits are rolling in. That’s the time to think of taking money out of your speculative fund. Never mingle your speculative and investment operations in the same account, nor in any part of your thinking.
- Since you cannot predict the behavior of the markets, you must learn how to predict and control your own behavior
- The defensive investor must confine himself to the shares of important companies with a long record of profitable operations and in strong financial condition.
- Aggressive investors may buy other types of common stocks, but they should be on a definitely attractive basis as established by intelligent analysis.
- A supplementary practice for the defensive investor: The device 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
- The investor faces obstacles of two kind – the first stemming from human fallibility and the second from the nature of his competition
- The investor who selects issues chiefly on the basis of current year’s superior results, or on he is told he may expect for next year, is likely to find that others have done the same thing for the same reason.
- It is theoretically possible for an investor to benefit greatly by making correct predictions when stock market as a whole is making incorrect ones.
- To enjoy a reasonable chance for continued better than average results, the investor must follow policies that are inherently sound and promising, and not popular on stock market.
- In “selling short” (or “shorting”) a stock, you make a bet that its share price will go down, not up. Shorting is a three-step process: First, you borrow shares from someone who owns them; then you immediately sell the borrowed shares; finally, you replace them with shares you buy later. If the stock drops, you will be able to buy your replacement shares at a lower price. The difference between the price at which you sold your borrowed shares and the price you paid for the replacement shares is your gross profit (reduced by dividend or interest charges, along with brokerage costs). However, if the stock goes up in price instead of down, your potential loss is unlimited—making short sales unacceptably speculative for most individual investors.
