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 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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