The Intelligent Investor – 6 – Portfolio Policy for the Enterprising Investor: Negative Approach

We have seen the defensive investors in the last article of the same series. Now, Mr. Graham has explained what not to do for the defensive as well as aggressive investors.

Mr. Graham has explained what not to do for aggressive investors such as –

Aggressive investors also have to start with deciding an allocation between common stocks and bonds. Also, they have to be ready with more analytical work compared to defensive investors. When second-grade bonds are available at the substantial discount to the principal value and also, having a prospect then it will be more attractive compared to high-grade bonds. Aggressive investors have to compare a discount available to the high-grade bonds and the second-grade bonds. We need not forget the rule of the safety of principal while investing in the bonds. We need to check the adequate cover to the interest charge on pre-tax earnings. If such cover is not available then we should avoid bonds though they having a higher yield.

Mr. Graham has mentioned regarding foreign bonds that we do not properly know the future of foreign bonds. If any troublesome times come then we do not have a legal means of enforcing claims. So, we should avoid such opportunities though we get interested rate benefits.

Day trading – Mr. Graham has mentioned that day trading is a weapon invented for committing financial suicide. Buying and selling a stock for a few hours also bringing down your profit. The more we trade; we keep less with us which also affects our long-term profitability. Luck can provide us a benefit for a few times, but for getting consistent benefits from trading, we require great attention. Someone who can’t hold on to stocks for more than a few months at a time is doomed to end up not as a victor but as a victim.

New issues – we need to be very careful before purchasing a new issue because the majority of the times new issues comes during favorable market conditions for the seller of the new issues which means not purely favorable to the buyers of the new issues.  Majority of the time, prices of new issues get collapsed. We have seen very few winners which have given a good return by investing in the IPOs such as Infosys, Wipro, Eicher Motors, etc. but there is a huge list of losers also.

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So that does not jump to the IPOs at higher valuations, lets company to work for justifying such a higher valuation.

Disclosure – Companies mentioned in the article is just for an example & educational purpose. It is not a buy/sell/ hold recommendation. 

Read for more detail: The Intelligent Investor by Benjamin Graham, Jason Zweig

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