Business Valuations versus Stock-Market Valuations: Summary

1. The most realistic distinction between the investor and the speculator is found in their attitude toward stock-market movements.
2. The speculator's primary interest lies in anticipating and profiting from market fluctuations.
3. The investor's primary interest lies in acquiring and holding suitable securities at suitable prices.
4. Market movements are important to him in a practical sense, because they alternately create low price levels at which he would be wise to buy and high price levels at which he certainly should refrain from buying and probably would be wise to sell.
5. It is far from certain that the typical investor should regularly hold off buying until low market levels appear, because this may involve a long wait, very likely the loss of income, and the possible missing of investment opportunities.
6. On the whole it may be better for the investor to do his stock buying whenever he has money to put in stocks, except when the general market level is much higher than can be justified by well-established standards of value.
7. If he wants to be shrewd he can look for the ever-present bargain opportunities in individual securities.
8. Aside from forecasting the movements of the general market, much effort and ability are directed on Wall Street toward selecting stocks or industrial groups that in matter of price will "do better" than the rest over a fairly short period in the future.
9. Logical as this endeavor may seem, we do not believe it is suited to the needs or temperament of the true investor - particularly since he would be competing with a large number of stock-market traders and first-class financial analysts who are trying to do the same thing.
10. As in all other activities that emphasize price movements first and underlying values second, the work of many intelligent minds constantly engaged in this field tends to be self-neutralizing and self-defeating over the years.
11. The investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances.
12. He should always remember that market quotations are there for his convenience, either to be taken advantage of or to be ignored.
13. He should never buy a stock because it has gone up or sell one because it has gone down.
14. He would not be far wrong if this motto read more simply: "Never buy a stock immediately after a substantial rise or sell one immediately after a substantial drop."

An Added Consideration: Average market prices and managerial competence.

• Something should be said about the significance of average market prices as a measure of managerial competence.
• The shareholder judges whether his own investment has been successful in terms both of dividends received and of the long-range trend of the average market value.
• The same criteria should logically be applied in testing the effectiveness of a company's management and the soundness of its attitude toward the owners of the business.
• This statement may sound like a truism, but it needs to be emphasized. For as yet there is no accepted technique or approach by which management is brought to the bar of market opinion.
• On the contrary, managements have always insisted that they have no responsibility of any kind for what happens to the market value of their shares.
• It is true, of course, that they are not accountable for those fluctuations in price which, as we have been insisting, bear no relationship to underlying conditions and values.
• But it is only the lack of alertness and intelligence among the rank and file of shareholders that permits this immunity to extend to the entire realm of market quotations, including the permanent establishment of a depreciated and unsatisfactory price level.
• Good managements produce a good average market price, and bad managements produce bad market prices.

Ref: Intelligent Investor by Benjamin Graham