Definition of Investing by Benjamin Graham.

Definition of Investing by Benjamin Graham.

Elaboration of Section 20

This section serves as a crucial philosophical anchor, returning to the absolute bedrock principle from which all intelligent investing flows. It reposts Benjamin Graham's precise, formal definition of an investment operation to remind the reader of the standard against which all potential investments must be measured.

The definition is broken down into its three non-negotiable components:

1. Upon THOROUGH ANALYSIS
This is the foundation. An investment cannot be based on a tip, a rumor, a gut feeling, or a chart pattern. It demands:

• A Detailed Study: Scrutinizing the company's financial statements, competitive position, industry trends, and management.

• Established Standards: Using reasoned, established standards of safety and value to evaluate the facts.

• Eliminating Speculation: This requirement automatically disqualifies most of what is passed off as "investing" in the public discourse.

2. Promises SAFETY OF PRINCIPAL
This is the primary goal. The number one job of an investor is not to make money, but to avoid losing money.

• Protection Against Loss: Graham clarifies that "safety" does not mean absolute guarantee. It means "protection against loss under all normal or reasonably likely conditions."

• A Safe Investment: Is one where, after thorough analysis, the prospect of losing the money you paid is quite unlikely, barring a disaster.

• Buffett's Rule #1: This is the direct source of Warren Buffett's famous two rules: "Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1."

3. Promises a SATISFACTORY RETURN
The return must be reasonable and relative to the goal of safety.

• "Satisfactory" is Subjective: It can be a low return, as long as it meets the investor's personal objectives and is achieved with "reasonable intelligence."

• Includes Income and Profit: The return can come from dividends, interest, or capital appreciation.

• Not "Maximum" Return: The focus on a "satisfactory" return is key. Chasing the highest possible return almost always involves sacrificing the first two criteria (thorough analysis and safety).

The Critical Corollary: The Cynic's Definition
Graham acknowledges a cynical but insightful view: "An investment is a successful speculation and a speculation is an unsuccessful investment."
This highlights the fine line between the two and how outcomes can blur definitions. However, the intelligent investor does not rely on luck. They rely on a process that maximizes the probability of success by adhering to the three pillars.

The Consequence of Confusion
The section ends with a grave warning: the failure to distinguish between investment and speculation was a primary cause of major market bubbles and crashes (like the 1929 crash). This confusion continues to lead would-be investors into speculative behaviors that jeopardize their capital.

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Summary of Section 20

Section 20 reiterates Benjamin Graham's foundational definition of an investment operation, establishing the three essential pillars that separate true investing from speculation.

• An INVESTMENT OPERATION is one which, upon:

  1. THOROUGH ANALYSIS, promises...

  2. SAFETY OF PRINCIPAL, and...

  3. A SATISFACTORY RETURN.

• Any activity that fails to meet all three of these requirements is, by definition, SPECULATION.

In essence, this section is a call to discipline and intellectual honesty. It forces the investor to constantly ask: "Have I done the work? Is my capital safe? Are my return expectations reasonable?" By returning to this definition, the section ensures that the complex strategies and stock analysis discussed in previous sections are always grounded in the core philosophy of intelligent, business-like, and safe investing.