Investing ꟷ Portfolio of an Investor

  The fundamental principles of sound investment should not vary from decade to decade, but the relevance of these principles must be adapted to major changes in the monetary mechanisms and environment.

Portfolio Strategy for the Innovative Investor: Negative Approach (i.e. the Don’ts)

A. The aggressive investor starts from the same base as the defensive investor:

  1. Division of funds between high grade bonds and common stocks bought at reasonable prices.

B. Junk bonds:

  1. Graham, from “The Intelligent Investor”, gave them a big thumb down.
  2. Today however there are funds that offer diversification that concerned Graham, and have much lower cost.
  3. However most junk bond funds have higher costs and do not do a good job of preserving principal.

C. The more you trade, the less you keep.

Portfolio Policy for the Enterprising Investor: The Positive Side (i.e. the Dos)

A. The enterprising Investor does all the work he does to obtain a slightly better investment result:

  1. Many would think that you just buy when the market is down and sell when it is up. But thorough analysis shows that attempts to do this just don’t work.
  2. The best way for dealing with ups and downs in the market is through provision of stock and bond investment proportions. The general provision suggested for defensive investor applies here:

                 a) 50-5 0 is best for most.

                 b) Wide leeway to go 7 5 /25 or 25/75.

                 c) Rebalance.

B. Growth Stock approach:

  1. Every investor would like to select the stocks of companies that will do better than the average over a period of years.
  2. A growth stock may be defined as one that has done this in the past and is expected to do so in the future.
  3. It is just a statistical chore to identify companies that have outperformed the averages in the past.
  4. There are 2 problems with just picking some of these stocks that have outperformed in the past:

  a) Stocks with good records and apparently good prospects in the future sell at correspondingly high prices ꟷ so you could be right about the good future prospects but might not do well with the              investment because you overpaid.

  b) Judgment about future performance may prove wrong; rapid growth cannot continue forever and  at some point it will flatten out.

C. A recommended approach for Enterprising Investors:

  1. To obtain better than average investment results over a long pull requires a policy of selection or operation possessing a twofold merit:

a) It must meet objective or rational tests of underlying soundness.

b) It must be different from the policy followed by most investors or speculators.

  1. This leads to recommendation of 3 approaches which include the “relatively unpopular large company”.

a) The market tends to over value good companies and undervalues those out of favour because of unsatisfactory developments of a temporary nature.

b) Key is to concentrate on larger companies going through a temporary unpopularity.

c) Large companies are good:

i) Have capital and brainpower to get through adversity and back to satisfactory earnings.

         ii) The market is likely to respond with reasonable speed to any improvement.

d) Companies with widely varying earnings tend to sell at comparatively high prices and low  multipliers in their good years and at low prices and high multipliers in bad years.

General Portfolio Policy: The Defensive Investor

A. Reminder: The defensive investor is one who does not want much risk and does not want to work very hard, make a lot of decisions, etc.

B. Minimum 25% bonds, maximum 75% stocks … and minimum 25% stocks and 75% bonds.

C. Once you set your proportions change, change them only as your circumstances change.

D. Re-balance to your set proportions every six months and pick dates that are easy to remember when re-balancing like New Years or October 1st.

E. Bond funds bring easy diversification. Investment is most intelligent when it is most businesslike. The wise investor who doesn’t want to lose too much money in his investment has his own set “Margin of Safety” before buying any stock or bond.

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