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The Intelligent Investor (Ben Graham) Common Stocks and Uncommon Profits (Philip Fisher) . November 2007 Alex Roman www.scorpioncapitalinc.com. What is (Value) Investing?.
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-Benjamin Graham, The Intelligent Investor
- Charles Brandes, Value Investing Today
“Confronted with a like challenge to distill the secret of sound investment into three words, we venture the motto, MARGIN OF SAFETY.” – Graham, The Intelligent Investor
In the early 1600s, the American Indians sold an island, now called Manhattan in New York, for various beads and trinkets worth about $16. Since Manhattan real estate is now some of the most expensive in the world, it would seem at first glance that the American Indians made a terrible deal. Had the American Indians, however, sold their beads and trinkets, invested their $16 and received 8% compounded annual interest, not only would they have enough money to buy back all of Manhattan, they would still have several hundred million dollars left over. That is the power of compound interest over time.
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The investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage…The primary cause of failure is that they [individual investors] pay too much attention to what the stock market is doing currently.
In the short term, the Market is a voting machine, in the long run, it is a weighing machine.
“It is my opinion that in almost any field nothing is worth doing unless it is worth doing right. When it comes to selecting growth stocks, the rewards for proper action are so huge and the penalty for poor judgment is so great that it is hard to see why anyone would want to select a growth stock on the basis of superficial knowledge….”
“Is it either logical or reasonable that anyone could do this with an effort no harder than reading a few simply worded brokers’ free circulars in the comfort of an armchair one evening a week?...
“…fortune-producing growth stocks can be found. However, they cannot be found without hard work and they cannot be found every day.”
Principle #1: Investing requires a significant amount of education, research, and ability – all of which can be developed to some degree. It is unrealistic to expect a good result without making a real effort. However, favor indexing, “bet on the jockey”, or ‘copycat’ strategies if you cannot make this commitment.
Principle #2: Diversification guarantees a poor result. Instead, the enterprising investor should concentrate their holdings into 10 or fewer positions by having a high standard of ownership.
Principle #3: ‘Our investment philosophy is bimodal, either we invest in high returning opportunities or have the money in the bank or under our mattresses’ – Leucadia National CEO
Principle #4: Have the proper mental attitude with respect to the Market. ‘Be greedy when others are fearful and be fearful when others are greedy.’
Principle #5: Instead of excessive focus on cheapness, consider the more qualitative aspects of an investment, such as quality of the business.
Principle #6: Don’t overpay – the lower the purchase price, the higher the margin of safety AND the total return.