For most investors, the best approach to stock ownership is through cheap, widely diversified index funds, dollar averaging, and dividend reinvestment. Several investors (often successful business owners, executives or scientists) prefer to select individual shares, building the brick brick portfolio on the basis of individual business analysis.
For those few do-it-yourself investors, the father of value, Benjamin Graham, identifies five categories of ordinary investment funds that could lead to better than average earnings. For a committed portfolio manager who wants to invest capital, he put those words in his 1949 edition of Intelligent Investor.
1.General Trading: Predict or participate in market movements as a whole, reflected in known “average values”.
2. Selective Trading: Selection of shares that, over a period of years or less, will perform better than the broader market.
3. Buying cheap and selling expensive: entering the market when prices and sentiment are weak and selling when both are at high levels.
4. Long-term Selection: Choosing companies that will have prosperity over the years far more than the ordinary enterprise (often referred to as “growth shares”)
5. Purchases of Drops. Selection of derivatives that are sold at significantly lower than their true value
Who is Benjamin Graham?
In case you are wondering, Benjamin Graham was an investor and author. As I mentioned above, he is considered the father of investment because he is one of the first people to use financial analysis to invest in shares. And he did it successfully. Graham has created many of the standards and principles that many modern investors are still using. In fact, he is also known as Warren Buffett’s mentor.
What does Graham mean?
Graham continues to address the specific difficulties that each active investor will encounter in determining how to manage his portfolio, saying, “Whether the investor should try to buy low and sell high, or should be content to hold on to stable good and bad securities – subject only to a periodic study of their inherent qualities – is one of several choices of policy that the individual has to make for himself, where temperament and personal situation can be determinant factors.
In a nutshell, Graham claims that someone close to the business world may feel comfortable with an active, buy-low, sell-high strategy. But for the rest of us, just taking a long-term vision and investing in funds that monitor the market is a more prudent investment strategy.
Persistence is key
Each approach requires rational, disciplined, systematic implementation. The key is Permanence. I personally deal with the 3rd, 4th and 5th techniques when managing my own portfolios and the portfolios of my business. They fit well in my preferences and values; I like to think long-term about a few great ideas. I do not want to get stuck in my desk and watch what the stock market does every day or a week. In fact, I do not have a say about whether the shares will rise 50% or 50% this time next year, nor will it matter to me.
In this particular area of portfolio management, there is no correct or wrong answer while you act rationally, using facts and data to support your practices, and constantly strive to reduce the risk while preserving liquidity and safety. You need to decide what type of investor you will be.
Trader Aleksandar Kumanov