Investing discussion

Graham discusses the opportunities of a general portfolio policy by a defensive investor. He highlights the old principle that “those who cannot afford to take risks” should be content with a lower return. This presented the idea that an investor’s expected returns would be depended on the level of risk taken.

Contradicting this principle, Graham’s perspective is the level of return on invested funds is dependent on the level of intellectual effort and skill an investor is willing to apply to the investment process. The passive investor is willing to apply the minimum amount of effort for safety and freedom from concern and the enterprising investor is willing to apply the maximum effort for maximum return.

Understanding a passive investor philosophy, Graham suggested a general policy for stock-bond allocation. “We have suggested that as a fundamental guiding rule that the investor should never have less than 25% or more than 75% of this funds in common stocks, with a consequent inverse range of between 75% and 25% in bonds.” Developing this idea, Graham suggests a 50-50 stock-bond balanced portfolio is recommended for the defensive investor. When the stock market rises, the defensive investor may sell stock to rebalance the portfolio down to 50%. When the stock market falls, sell bonds to buy stocks to raise the stock allocation back up to 50%. While there are more considerations for bonds, Graham’s thoughts were “a truly conservative investor will be satisfied with the gains shown on half his portfolio in a rising market, while in a severe decline he may derive much solace from reflecting how much better off he is than many of his more venturesome friends.”

What practices do you employ when investing?