The Intelligent Investor – Chapter 5 – The defensive investor and common stocks Link to the book: The Intelligent Investor
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We all like common stocks but in this part of the economic cycle we should also be defensive and therefore it is a perfect time to discuss Chapter 5 of Benjamin Graham’s book The Intelligent Investor – The defensive investor and common stocks. The topics discussed are: – Four rules to follow when buying stocks – Growth stocks – Dollar cost averaging – Investor’s personal situation The defensive investor and common stocks Graham discusses how in 1949 stocks were considered highly speculative but how towards the end of the 1960s, stocks were considered a must have.
The situation isn’t much different now, stocks are considered the best investment out there while in 1982 stocks were considered risky, highly speculative and not something to own. This is typical for how humans go about stocks, don’t forget that in your life there will be at least two such market cycles. The main point is that stocks are sometimes extremely cheap and sometimes extremely expensive and the key is to properly allocate your portfolio funds in relation to the risk and reward.
So, yes, stocks have and will probably deliver inflation protection and higher returns over the long term but these benefits, to quote Graham: “could be lost by the stock buyer if he pays too high a price for his shares”. This was the case from 1929 when it took 25 years for stocks to regain lost territory and let’s hope it will not be another historical case from 2018 even if valuations and debt looks similar. Of course, reinvesting dividend changes things but now there isn’t much to reinvest. Graham had no enthusiasm for common stocks in late 1971 due to the high valuations.
