Introduction
This book is intended to provide laymen with guidance in investing. Relatively little will be said about the technique of analyzing securities - it will focus chiefly on investment principles and the attitude of investors. Some comparison will be done of specific securities, as a method of illustrating the elements involved in choosing common stocks, but much of the space will be devoted to historical patterns in financial markets. To invest intelligently in securities, one must have knowledge of the various types of stocks and bonds and how they behave under varying conditions.
There is an important distinction to be made between an investor and a speculator that is often forgotten. The desire to make riches on Wall Street periodically draws individuals to invest unwisely, and subscribe to the ludicrous notion that a great amount of money can be made with little in a short amount of time.
Neither is this book about technical analysis, the various statistical methods of predicting the future behavior of a stock based on its historical price and trading patterns. In over fifty years, there has not been a single individual who consistently made money by using such approaches.
Since its original publication, this book has been revised at roughly five-year intervals - much has changed about the market, with companies and entire industries rising and falling. While these cases merit some attention, the underlying principles of sound investment have not altered from decade to decade, though their application must be adapted to significant changes in the financial climate. Ultimately, the core theory has remained unchanged since its initial publication.
In the past, greater attention was given to the distinction between the defensive investor, who seeks to reduce risk and accept a lower level of steady profit, and the aggressive investor who seeks out investments that have greater returns but entail a higher level of risk. Both approaches remain in effect, and over many decades it has been found that the aggressive approach yields a better return than that which is realized by passive investment - though over shorter spans of time, one may seem to outperform the other in specific economic conditions.
Another common theory is that successful investing requires first in identifying those industries that are most likely to grow in future, then in selecting the most promising companies within such industries. In retrospect, this seems entirely sensible, but it is not so easy in practice. For example, it was considered that air traffic would continue to grow over the years, and the stocks of airlines became a favorite of many investment funds - but even though this prediction proved true, and airlines grew at a rate that outpaced even the computer industry, a combination of technical problems and poor management was ruinous to the profits of investors.
The record shows that even the "experts" of investment firms can be complete wrong about the future of major industries. Even obvious prospects for growth do not translate into secure profits for investors, and even those with considerable experience do not have reliable ways to select the most promising companies in the mist promising industries. As such, one of the objectives of this book is to warn the reader against the areas of potential substantial errors.
The author will also have quite a bit to say about the psychology of investors - as the investor's chief problem and worse enemy is likely to be himself. Especially during growth periods in the market, even conservative investors are overcome with enthusiasm. More money has been made and kept by "ordinary people" who are temperamentally suited to the investment process than by experts who have extensive knowledge, but lack persistence, consistency, and self-discipline.
An article in a women's magazine once advised readers to buy their stocks as they buy their groceries, and not as they buy their perfume - that is, considering price and quality rather than the fashion of the day.
The author also hopes to help the reader to measure and quantify: for virtually all stocks, there is some price at which they are cheap enough to by and another at which they are dear enough to be sold. The ability top tell the difference is critical.
As a general principle, the author discourages investors fro purchasing stocks that sell far above their tangible asset values. While there are many good growth companies who trade for several times their net assets, buyers of such firms face volatility, as the value of shares are based on the "vagaries and fluctuations" of the market. The closer to the asset value, the more the performance of the issue is driven by the performance of the company, rather than the speculation of the marketplace.
Anyone can obtain the performance of market averages, so it would seem comparatively simple to outperform the average by bringing just a little knowledge - but the proportion of "smart people" who attempt to do so and fail is "surprisingly large." The best analysis of brokerage houses has over time proven to be "less reliable than the simple tossing of a coin." In writing this book, the author has attempted to keep this basic pitfall of investment in mind.
The approach in this book emphasizes the virtue of a simple portfolio - high-grade bonds plus a diversified list of the leading stocks - which any investor can manage without expert assistance. A sober approach to investment, firmly based on the margin-of-safety principle, can yield respectable returns.
One last note: this book does not consider the overall financial policy of individual investors, but only that portion of their total funds that are invested in marketable securities - specifically, bonds and stocks. Savings accounts, insurance, annuities, real estate, and other vehicles, which may constitute a portion of an investor's total portfolio, are not discussed or considered.