- the form of long-term appreciation of a portfolio held relatively unchanged through successive rises and declines, or,
- in the possibilities of buying near bear-market lows and selling not too far below bull-market highs.
Since common stocks, even of investment grade, are subject to recurrent and wide fluctuations in their prices, the intelligent investor should be interested in the possibilities of profiting from these pendulum swings.
There are two possible ways by which he may try to do this:
- the way of timing and
- the way of pricing.
By pricing, we mean the endeavor to buy stocks when they are quoted below their fair value and to sell them when they rise above such value.
A less ambitious form of pricing is the simple effort to make sure that when you buy you do not pay too much for your stocks. This may suffice for the defensive investor, whose emphasis is on long-pull holding; but as such it represents an essential minimum of attention to market levels.
We are convinced that the intelligent investor can derive satisfactory results from pricing of either type.
We are equally sure that if he places his emphasis on timing, in the sense of forecasting, he will end up as a speculator and with a speculator's financial results.
This distinction may seem rather tenuous to the layman, and it is not commonly accepted on Wall Street.
As a matter of business practice, or perhaps of thoroughgoing conviction, the stock brokers and the investment services seem wedded to the principle that both investors and speculators in common stocks should devote careful attention to market forecasts.
Pretensions of stock-market forecasting or timing.
The investor can scarcely take seriously the innumerable predictions which appear almost daily and are his for the asking. Yet in many cases he pays attention to them and even acts upon them. Why?
Because he has been persuaded that it is important for him to form some opinion of the future course of the stock market, and because he feels that the brokerage or service forecast is at least more dependable than this own.
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A great deal of brain power goes into this field and undoubtedly some people can make money by being good stock market analysts.
But it is absurd to think that the general public can ever make money out of market forecasts.
For who will buy when the general public, at a given signal, rushes to sell out at a profit?
If you, the reader, expect to get rich over the yers by following some system or leadership in market forecasting, you must be expecting to try to do what countless others are aiming at, and to be able to do it better than your numerous competitors in the market.
There is no basis either in logic or in experience for assuming that any typical or average investor can anticipate market movements more successfully than the general public, of which he is himself a part.
Timing is of Psychological importance to the speculator
There is one aspect of the "timing" philosophy which seems to have escaped everyone's notice.
Timing is of great psychological importance to the speculators because he wants to make his profit in a hurry. The idea of waiting a year before his stock moves up is repugnant to him.
But a waiting period, as such, is of no consequence to the investor.
What advantage is there to him in having his money uninveted until he receives some (presumably) trustworthy signal that the time has come to buy?
He enjoys an advantage only if by waiting he succeeds in buying later at a sufficiently lower price to offset his loss of dividend income.
What this means is that timing is of no real value to the investor unless it coincides with pricing - that is, unless it enables him to repurchase his shares at substantially under his previous selling price.
Ref: Intelligent Investor by Benjamin Graham
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