Sunday, 22 January 2012

Graham separates Intelligent Investors into two camps: Defensive and Enterprising

Graham also goes on to separate intelligent investors into two camps:

  • Defensive Investor: One who wants safety and less involvement
  • Enterprising Investor: One who wants higher returns that he/she is willing to work for

In contrast to the conventional view, an enterprising investor is not one who is more risky or aggressive; instead, it is one who has an interest in investing and is willing to work hard for it. I think it is important for investors to figure out which category they fall into. 

Most people fall into the “defensive investor” category.  Graham provides examples such as::

  •  a widow who cannot afford unnecessary risks, 
  • a physician who cannot devote the time for proper analysis, and 
  • a young man whose small investment will not return enough gain to justify the extra effort. 
The beginning investor should not try to beat the market.

The investor only realizes a loss in value through the sale of the asset or the significant deterioration of the firm’s underlying value.  Careful selection and diversification helps to avoid these risks.  

A more common and difficult problem is overpaying for securities; that is, paying more for a security than its intrinsic value warrants.

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