Benjamin Graham defines investing as “an investment operation in which, upon thorough analysis, promises safety of principal and an adequate return.”
Note that investing, according to Graham, consists equally of three elements:
- You must thoroughly analyze a company and the soundness of its underlying businesses before you buy a stock;
- You must deliberately protect yourself against serious losses; and
- You must aspire “adequate”, not extraordinary, performance.
Graham goes even further, fleshing out each of the key terms in his definition of:
- Thorough analysis – the study of the facts in light of the established standards of safety and value;
- Safety of the principal – signifies protection against loss under all normal or reasonably likely conditions or variations;
- Adequate (or satisfactory) – return refers to any rate or amount of return, however low, which the investor is willing to accept, provided he acts with reasonable intelligence.
An investor calculates what a stock is worth based on the value of its businesses. A speculator gambles that a stock will go up in price because somebody else will pay even more for it.
For an investor, the incessant stream of stock quotes is like oxygen, cut it off and he may not survive. Graham urges you to invest only if you would be comfortable owning a stock even if you had no way of knowing its daily share price.
As Graham advised in an interview, “Ask yourself: If there was no market for these shares, would I be willing to have an investment in this company on these terms?” (Forbes, January 1, 1972)
Excerpt from The Intelligent Investor by Benjamin Graham
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