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Chapter 5: Investment Policy

Classes of security buyers

1.    Defensive investors are those who should place their chief emphasis upon the avoidance of any serious mistakes or losses and their second emphasis upon freedom from effort, annoyance, and the necessity of making frequent investment decisions. The great majority of security holders belong in the defensive category.

§  Defensive investors should divide his funds into two parts. The first part should be in US savings bonds. The second part should be placed in a diversified list of leading common stocks, purchased at a reasonable price level. The relative proportions should normally fall between 75-25 to 25-75.

§  The chief requirement of all defensive investors is that they exercise firmness in the application of the simple principles of sound procedure outlined above. The main hazards they face are of three kinds (1) stock market speculation (2) buying second rate issues (3) buying good common stocks at excessive prices.

2.    Enterprising investors are willing and able to devote time and care to the selection of sound and attractive investments.

§  The first rule of intelligent action must be that he will never embark upon a security operation which he does not fully comprehend and which he cannot justify by reference to the results of his own study and experience. The endeavor to make money in securities is a business undertaking, and it must be conducted in accordance with business principles.

§  An enterprising investor may follow the simple two-part policy of the defensive investor with respect to some portion of his funds, and employ the remainder in more aggressive operations. He may endeavor to buy in low markets and sell in high markets. He may try to select companies that have unusual prospects for long term growth, making sure he is not paying too much in advance for these favorable possibilities. Or, he may place his prime emphasis upon the purchase of bargain issues which are selling considerably below their true value.

·         The old rule for ordinary investor was that he should buy sound securities when he had funds available. Much of this view retains its validity. However, the time when the investor should clearly not buy common stocks is during the upper ranges of a bull market. For most issues this is tantamount to saying that he should not buy them at prices higher than can be justified by conservative analysis.

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