DEFENSIVE AND ENTERPRISING INVESTORS

The basic characteristics of an investment portfolio will be determined largely by the position of the individual owner.

• Savings banks, life insurance companies and "legal" trust funds:  High grade bonds and high grade preferred stocks.
• The well to do and experienced businessman, as long as he considers these to be attractive purchases:  Any kind of bond or stock. 

Those who cannot afford to take risks should be content with a low return on their invested funds.





DEFENSIVE AND ENTERPRISING INVESTORS

The general notion is the rate of return which the investor should aim for is more or less proportionate to the degree of risk he is ready to run.

The better view is the rate of return sought should be dependent, rather, on the amount of INTELLIGENT EFFORT the investor is wiling and able to bring to bear on his task.

An intelligent investor is one who is endowed with the capacity for knowledge and understanding.

The minimum return goes to the passive or defensive investor, who wants both safety and freedom from concern.

The maximum return would be realized by the alert and enterprising investor who exercises maximum intelligence and skill.

In many cases, there may be less real risk associated with buying a "bargain issue" offering the chance of a large profit than with a conventional bond purchase yielding under 3 per cent.

The kinds of investments that are suitable for  defensive and enterprising investors

A.  The defensive investor will buy:
1.  US Savings Bonds (and/or tax-exempt securities)
2.  A diversified list of leading common stocks, at prices that seem reasonable in the light of past market experience - or
2a.  Shares of leading investment funds

B.  The enterprising investor will buy:
1, 2, 2a.   As above
3.  Growth stocks, but with caution.
4.  Also, or alternatively, representative common stocks when the general market is historically low
5.  Secondary common stocks, corporate bonds and preferred stocks at bargain levels.
6.  Some exceptional convertible issues, even at full prices.


There are important categories of securities which the intelligent individual investor will not buy.  These are as follows:

1.  Investment-grade corporate bonds and preferred stocks when their current yields are lower or only slightly higher than US Savings bonds or foreign government issues at full prices.
2.  Leading common stocks when the market is at high levels as judged by past experience.
3.  Secondary common stocks, except at tempting low prices.
4.  As a corollary of 3, he will not buy new issues of common stocks, with infrequent exceptions.  (This does not refer to the exercise of subscription rights on leading issues.)


The intelligent investors should not support new security financing except on terms which offer them proportionately as attractive a combination of income and safety as is obtainable by the purchase of US Savings Bonds plus common stocks of leading corporations at normal market prices.


The Intelligent Investor
Benjamin Graham

Are you an intelligent investor? What does intelligent means in investing?

Benjamin Graham

Intelligent investor:  this is an investor "endowed with the capacity for knowledge and understanding."

Intelligent here is not to be taken to mean "smart" or "shrewd" or gifted with unusual foresight or insight.  

The intelligence here presupposed is a trait more of the character than of the brain.



Defensive investor

For example, a widow who must live on the money left her.

Her chief emphasis will be on the avoidance of any serious mistakes or losses, in the sense of conserving capital.

Her second aim will be freedom from effort, annoyance and the need for frequent decisions.

A woman in this position, with substantial funds, will not be satisfied to leave her financial affairs entirely in the hands of others.

She will want to understand - at least in general terms - what is being done with her money and why.

She will probably want to participate to the extent of approving the broad policy of investment, of keeping track of its results and of judging independently whether or not she is being competently advised.

This will be equally true of men who wish to throw the major burden of their investment operations on the shoulders of others.

For all these defensive investors, intelligent action will mean largely the exercise of firmness in the application of relatively simple principles of sound procedure.



Enterprising investor

These are not distinguished from the others by their willingness to take risks - for in that case they should be called speculators.

Their determining trait is rather their willingness to devote time and care to the selection of sound and attractive investments.  

It is not suggested that the enterprising investor must be a fully-trained expert in the field.

He may derive his information and ideas from others, particularly from security analysts.

But the decisions will be his own and in the last reckoning he must rely upon his own understanding and judgment.

The first rule of intelligent action by the enterprising investor must be that he will never embark on a security purchase which he does not fully comprehend and which he cannot justify by reference to the results of his personal study or experience.

Most security buyers obtain advice without paying for it specifically. You and your financial advisors..

Most security buyers obtain advice without paying for it specifically.

They should be wary of all persons, whether customers' brokers or security salesmen, who promise spectacular income or profits.

This applies both to the selection of securities and to guidance in the elusive art of trading in the market.



For defensive investors

Defensive investors, as we have defined them, will not ordinarily be equipped to pass independent judgement on the security recommendations made by their advisers.

But they can be explicit - and even repetitiously so - in stating the kind of securities they want to buy.

If they follow our prescription, they will confine themselves to US Savings Bonds and the common stocks of leading corporations purchased at levels that are not high in the light of experience and analysis.

The security analyst of any reputable stock exchange house can make up a suitable list of such common stocks and can certify to the investor whether or not the existing price level is a reasonably conservative one as judged by past experience.



For aggressive investors

The aggressive investor will ordinarily work in active co-operation with his advisers.

He will want their recommendations explained in detail and he will insist on passing his own judgment upon them.

This means that the investor will gear his expectations and the character of his security operations to the development of his own knowledge and experience in the field.  

Only in the exceptional case, where the integrity and competence of the advisers have been thoroughly demonstrated, should the investor act upon the advice of others without understanding and approving the decision made.  

The relationship between the investment banker and the investor

Investment Bankers

The term "investment banker" is applied to a firm which engages to an important extent in originating, underwriting, and selling new issues of stocks and bonds.  (To underwrite means to guarantee to the issuing corporation or other issuer, that the security will be fully sold.)

Much of the theoretical justification for maintaining active stock markets, notwithstanding their frequent speculative excesses, lies in the fact that organized security exchanges facilitate the sale of new issues of bonds and stocks.  

The relationship between the investment banker and the investor is basically that of the salesman to the prospective buyer.



The investment banker and the financial institutions (banks and insurance companies)

For many years the great bulk of the new offerings has consisted of bond issues which were purchased in the main by financial institutions such as banks and insurance companies.  

In this business the security salesmen have been dealing with shrewd and experienced buyers.  

Hence any recommendations made by the investment bankers to these customers has had to pass careful and skeptical scrutiny.

Thus these transactions are almost always effected on a businesslike footing.  



The investment banker and the individual security buyer

But a different situation obtains in the relationship between the individual security buyer and the investment banking firms, including the stockbrokers acting as underwriters.

Here the purchaser is frequently inexperienced and seldom shrewd.

He is easily influenced by what the salesman tells him, especially in the case of common-stock issues, since often his unconfessed desire in buying is chiefly to make a quick profit.  

The effect of all this is that the public investor's protection lies less in his own critical faulty than in the scruples and ethics of the offering houses.  

It is a tribute to the honesty and competence of the underwriting firms that they are able to combine fairly well the discordant roles of adviser and salesman.

But it is imprudent for the buyer to trust himself to the judgment of the seller.

The bad results of this unsound attitude show themselves recurrently in the underwriting field and with notable effect in the sale of new common-stock issues during periods of active speculation.

The intelligent investor will pay attention to the advice and recommendations received from investment banking houses, especially those known to him to have an excellent reputation; but he will be sure to bring sound and independent judgment to bear upon these suggestions - either his own, if he is competent, or that of some other type of adviser.



Benjamin Graham
Intelligent Investor

Broader implications of adopting a sound investment policy

Investment policy, as it has been developed and taught by Benjamin Graham, depends in the first place upon a choice by the investor of either the defensive (passive) or aggressive (enterprising) role.

The aggressive investor must have a considerable knowledge of security values - enough, in fact, to warrant viewing his security operations as equivalent to a business enterprise.  

There is no room in this philosophy for a middle ground, or a series of gradations, between the passive and aggressive status.

Many, perhaps most, investors seek to place themselves in such an intermediate category; in our opinion that is a compromise that is more likely to produce disappointment than achievement.

It follows from this reasoning that the majority of security owners should elect the defensive classification.

• They do not have the time, or the determination, or the mental equipment to embark upon investing as a quasi business.   
• They should therefore be satisfied with the reasonably good return obtainable from a defensive portfolio, and they should stoutly resist the recurrent temptation to increase this return by deviating into other paths.

The enterprising investor may properly embark upon any security operation for which his training and judgement are adequate and which appears sufficiently promising when measured by established business standards.


Benjamin Graham
The Intelligent Investor

Benjamin Graham's Intelligent Investor - The Defensive Investor is best served by purchasing common stocks and bonds to protect against inflation.

Inflation

•

•Fixed income investments fare worse during inflationary periods than do common stocks. 

•During inflationary periods, firms can increase prices, profits, and dividends causing their share price to increase and offsetting declines in purchasing power.

•

•In 1970, the most probable average future rate of inflation was 3%. 

•The investor can not count on more than a 10% return above the net tangible assets of the DJIA. 

•This is consistent with the suggestion that the average investor may earn a dividend return of 3.6% on their market value and 4% on reinvested profits. 

•

•There is no underlying connection between inflation and the movement of common stock earnings and prices. 

•Appreciation does not result from inflation, but rather from the re-investment of profits. 

•The only way for inflation to increase common stock values is to raise the rate of earnings on capital investment, which it has not done historically.

•

•

•Economic prosperity usually is accompanied by slight inflation, which does not affect returns. 

•Offsetting factors include rising wage rates that exceed productivity gains and additional capital needs that cause interest rates to increase.  

•The investor has no reason to believe that he can achieve average annual returns better than 8% on DJIA type investments. 

•

•Graham describes alternatives to common stocks as a hedge against inflation. 

•These alternatives range from gold and diamonds to rare paintings, stamps, and coins. 

•

•Gold has performed poorly, far worse than returns from savings in a bank account. 

•The latter categories, such as paying thousands of dollars for a rare coin, can not qualify as an “investment operation.” 

•

•

•Real Estate is still another alternative; however, its value fluctuates widely, and serious errors may be made when purchasing individual locations. 

•Again, the defensive investor is best served by purchasing a portfolio of carefully chosen common stocks and bonds.

•

Benjamin Graham's Intelligent Investor - What stocks to buy for the Defensive Investor

The Defensive Investor and Common Stock

•

•Common Stocks offer protection against inflation and provide a better than average return to investors. 

•This higher return results from a combination of the dividend yield and the reinvestment of earnings (undistributed profits), which increases value. 

•

•However, these benefits are lost when the investor pays too high a price. 

•One should recall that prices did not recover again to their 1929 highs for another 25 years. 

•However, the defensive investor can not do without a common stock component.

•4 Rules for the Defensive Investor Accumulating Common Stock

•4 Rules for the Defensive Investor Accumulating Common Stock:

1.      There should be adequate, although not excessive, diversification; that is, between 10 and thirty stocks.

2.      Each stock should be large, prominent, and conservatively financed.  Conservatively financed means a debt to capital ratio no greater than 30%.  Large and prominent means that the firm, in 1972 dollars, has at least $50 million in assets and annual sales, and it should at least in the top third of its industry group.  Each of the 30 DJIA firms met this criteria in 1972.

3.      Each firm should have a long record of continuous dividend payments.

4.      Each stock should cost no more than 25 times the average of the last 7 years of earnings, and no more than 20 times the last 12 months earnings.

•

•This last rule virtually bans all growth and other “in-favor” stocks. 

•Due to the fact that these issues sell at high price, they necessarily possess a speculative element. 

•A “growth stock” should at least double its earnings per share every 10 years for a minimum compounded rate of return of 7.1%. 

•

•The best of the growth stocks, IBM, lost 50% of its value during the declines of 1961 and 1962. 

•Texas Instruments went from $5 to $256 (a 50x increase) in six years without a dividend payment as its earnings rose from $0.40 to $3.94 (a 10x increase); 2 years later TI’s earnings fell 50% while its stock price fell 80% to $50.

•

•

•The temptations here are great, as growth stocks chosen at the correct prices provide enormous results. 

•However boring, large firms that are unpopular will invariably perform better for the defensive investor.

•

•Dollar Cost Averaging (“DCA”) often is popular during rising markets. 

•If DCA is adhered to over many years, then this formula should work. 

•The difficulty is that few people are so situated that they can invest the same amount each year. 

•

•

•

•Economic downturns often constrain one’s ability to invest just when stocks are trading at their lowest valuations. 

•Furthermore, when prosperity for the average investor returns, so too do high valuations.

•

•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 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.

•

•

Benjamin Graham's Intelligent Investor: The investments the Defensive Investor's should buy and should avoid.

The Defensive Investor’s Portfolio Policy

•

•Those who can not afford to take risks should be content with a relatively low return.  

•The rate of return is dependent upon the amount of effort put forth by an investor. 

•

•As previously stated, the defensive investor’s portfolio should consist of no less than 25% high grade bonds and no less than 25% large stocks.

•

•Yet these maxims are difficult to follow, because like the herd of Wall Street, when the market has been advancing, the temptation is strong to bet heavily on stocks.

•This is the same facet of human nature that produces bear markets.  

•

•The time to invest in the stock market is after it has suffered a large loss.

•

•

•A 50% ratio of stocks and bonds was a prudent choice except during periods of excessive increases or decreases in stock value. 

•This simple formula guards against the mistakes caused by human nature even if it does not provide for the best returns. 

•Again, Safety of Principal is Graham’s chief concern.

•

•

•Bonds  

•The decision between purchasing taxable and tax-free bonds depends mainly on the difference in income to the investor after taxes. 

•Those in a higher bracket have a greater incentive to closely examine this issue. 

•For example, in 1972, an investor may have lost 30% of his income from investing in municipal issues (“munis”) as opposed to taxable issues. 

          

•

•Bonds come in many types, a description of which follows.

•

• US Savings Bonds are a great choice.  In 1972, they came in two series:  E and H.  The Series H Bond paid semi-annual interest.  Series E Bonds did not pay interest, but rather sold at a discount to their coupon rate.  In 1972, Series E bonds provided the right to defer income tax payments until the bond was redeemed, which in some cases increased the value by as much as one-third.  Both E and H Series Bonds are redeemable at any time providing bondholders protection from shrinkage of principal during periods of rising interest rates (or rather, the ability to benefit from rising rates).  Both series paid in or around 5% in 1972.  Federal, but not state, income tax was payable on both series.  Graham recommends US Bonds due to their assurance of transferability, coupon rate, and security. 

•

•

•Other US Bonds come in many varieties. 

•Federal taxes, but not state taxes, are charged on other US Bonds.  Some of these issues are discounted heavily. 

•Others bonds are guaranteed, but not issued, by the US government.  As of 1972, the US government had fully honored its commitments under all guarantee obligations.  Federal guarantees, in essence, permit additional spending by various federal agencies outside of their formal budgets.

•

•State and Municipal Bonds are exempt from federal and state tax in the State of their issue. 

•However, not all of these bonds possess sufficient protection to be considered worthy of investment.  

•To be worthy of investment, a bond should possess a minimum rating of “A”.   

•

•Corporate Bonds are taxable and offer higher yields than all types of government issues bonds. 

•

•Junk Bonds are those that are less than investment grade.  Their title is aptly given.  The investor should steer clear of these issues.  The additional yield that junk bonds provide is rarely worth their risk.

•

•

•Savings and Money Market Accounts are a viable substitute for US Bonds.  They usually pay interest rates close to rates paid on short-term USbonds. 

•

•Preferred Stocks should be avoided. 

•Not only does the preferred holder lack the legal claim of a bondholder (as a creditor), but also he lacks the profit possibilities of the common stock holder (as a partner).  

•The only time to purchase preferred stock, if ever, is when its price is unduly depressed during times of temporary adversity.

•

•Early redemption of bonds by issuers was commonplace before 1970, and resulted in an unfair advantage for the issuer by not allowing the investor to participate in significant upside values if interest rates fell. 

•However, this practice largely stopped.  

•The investor should sacrifice a small amount of yield to ensure that his bonds are not callable.

•

•

What is Investing?

Graham, Chapter 1: 

Graham lays out his definition of investing right from the start of this chapter. His description is "an investment operation is one which, upon thorough analysis promises safety of principal and an adequate return" (p. 18). He labels anything not meeting these standards as speculation. 

Graham then describes two different approaches to investing: defensive and aggressive. 

Obviously, safety is a big concern for the defensive investor, and that shows in his example of putting half of your money in stocks and half in bonds. He lists other approaches of defensive investing, like investing only in well established companies, and dollar-cost averaging. 

Graham's take on aggressive investing isn't as kind. The three types of the aggressive approach (trading the market, short-term selectivity, and long-term selectivity) are all considered to have less profitability. This is explained by the possibility of the aggressive investor being wrong on his or her market timing.

The Intelligent Investor by Benjamin Graham

Related:

Investment, speculation and gambling

The Intelligent Investor: The Defensive Investor and Common Stocks

The Intelligent Investor: General Portfolio Policy for the Defensive Investor

The Intelligent Investor: The Positive Side to Portfolio Policy for the Enterprising Investor

The Intelligent Investor: A Negative Approach to Portfolio Policy for the Enterprising Investor

Investment Policies (Based on Benjamin Graham)

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.

Stock bargains: 5 tips to protect against falling knives

Written by Reuters
Saturday, 10 September 2011 21:45


For bargain-hunters, identifying stocks in this struggling market might seem like an easy layup. Some prominent companies are languishing in the 99-cent bin, trading at seemingly laughable price-earnings ratios.

Consider Hewlett-Packard, on offer for a current P/E of 5.7. Then there’s BP at 5.9, Capital One at 5.8, Gannett (GCI) at 4.95 and Hartford Financial at five.

In normal times, it would be a no-brainer to load up your shopping cart. But these are hardly normal times, and there can be very good reasons why companies might be trading at such low valuations. As any Bear Stearns or AIG shareholder can tell you, it’s a tricky proposition to – as the investing saying goes – “catch a falling knife”.

That’s what has investors like Michael Gleason paralyzed. Gleason, an American TV producer who lives in London, would like to put more money to work – but the panicked gyrations of the markets don’t give him any confidence. “I’ve gone on hold lately, because volatility has gotten a bit worrying,” says Gleason, 57. “Maybe it’s better to stay out then to get out.”

And there’s the dilemma of every deep-value investor: How to decide when to take that risk, and make potentially the best pick of your investing lifetime instead of the worst. Sometimes it’s a very fine line. Could embattled Societe Generale bounce back smartly, for instance, or could it go down in flames like Lehman Brothers?

“Three years ago investors started catching falling knives, and got badly bloodied,” recalls Hank Smith, chief investment officer of equities at Radnor, Pennsylvania-based Haverford Investments, which has $6.5 billion under management. “Even though they were doing all the things they were supposed to be doing, like buying on dips. But there are a few ways to avoid the falling knife, both on a macro and a stock-by-stock basis.”

The trick is to separate those stocks that are merely beaten up, from those that may be down for the count. A few key criteria to keep in mind:

Look for yield support
NEW YORK: A stock will be less likely to crash and burn if it has some appeal to dividend-hungry investors. That’s why Jim Barrow, who manages Vanguard funds like Windsor II and Selected Value, has snapped up names like AT&T, Johnson & Johnson, and Texas utility CenterPoint Energy. “If you have a strong company with a five or six percent yield, how much lower can it really go?” asks Barrow. “That’s one of the key things we look at.”

Stay away from Europe for now
Real gamblers might be attracted to the rock-bottom valuations of European firms, but it’s just too much of a risk, says Barrow. With the prospect of sovereign defaults cropping up from multiple locations like Greece, Portugal and Ireland, we haven’t witnessed the Eurozone endgame yet. In the meantime, there’s no sense putting yourself in harm’s way. “I wouldn’t go out on a limb,” says Barrow. “We still don’t know how low Europe can go.”

Steer clear of banks
Financials may have made some strides in cleaning up their balance sheets since the meltdown of 2008. But they’re not there yet, says Smith. Many are still loaded down with assets that are difficult to value and trade, which could lead to the same mark-to-market problems with banks and insurance companies we saw before. That means cautious investors should give them a pass.

Opt for growth
A tech giant like a Hewlett-Packard might seem like a steal, lurching near its 52-week lows. But as it looks to shed many of its business lines, and focus on the software-and-services niche that still only generates a small slice of its revenue, Hank Smith is glad he sold his firm’s position months ago. Instead, look for companies with encouraging growth strategies, along with healthy cash flow, exposure to emerging economies, and low levels of debt.

Defense wins championships
If it’s downside risk you’re most worried about, then simply stick to traditional defensive sectors like utilities, telecom, consumer staples and pharmaceuticals. Stocks like Diageo or Philip Morris, which Barrow owns, aren’t going anywhere anytime soon. “Demand for those things doesn’t change,” he says. “Even if things get real bad.”

Chris Taylor is an award-winning freelance writer in New York City. A former senior writer with SmartMoney, the Wall Street Journal's personal-finance magazine, he has been published in the Financial Times, Bloomberg BusinessWeek, CNBC.com, Fortune, Money, and more. He has won journalism awards from the National Press Club, the Deadline Club, and the National Association of Real Estate Editors. The opinions expressed are his own.

Investor Risk Profile

Are You an Intelligent Investor?

Graham believed someone could be an intelligent investor in two ways:

ACTIVE OR ENTERPRISING INVESTORS -  These types of investors have a lot of time to spend on building and managing their portfolios and also have a high risk tolerance.  They must continually research, select, and monitor a dynamic mix of stocks, bonds, or mutual funds.

PASSIVE OR DEFENSIVE INVESTORS - These types of investors don't have a lot of time to spend on a portfolio or can't tolerate much risk.  They must create a permanent portfolio that runs on autopilot and requires no further effort.  This type of passive portfolio won't be very exciting, but it will get you steady returns over your lifetime.

Five Stock Sectors To Hold If The Market Crashes

Personal Finance
Five Stock Sectors To Hold If The Market Crashes
 
Tim Begany, 09.13.10, 8:00 PM ET

Let's face it, it wouldn't take much right now to put stocks into a major tailspin. Things like an escalation of hostilities on the Korean peninsula, another surprise uptick in unemployment and unexpected earnings disappointments could send the market plunging 10-20% or more.

It's hard to resist the urge to dump equities when the market goes south. But there are always stocks worth holding through a calamity because they're likely to persevere, reward you over the long haul, and maybe even provide a smoother ride in terms of price volatility. At current prices, these companies are already attractive values and would become virtually irresistible if the market crashed. Here are some examples in various sectors.

Consumer Services/Retail
This area is always very iffy in a weak economy, but fans of consumer-oriented stocks shouldn't let a correction cow them into ditching the higher-quality names such as Home Depot, Lowe's and Costco. That's because companies like these are considered "defensive," meaning they're large enough and sturdy enough to hold up well in tough times. Home Depot, Lowe's and Costco all survived the recent recession in fine shape and are positioned for profitable long-term expansion.

Industrials
Industrial stocks usually do particularly well early in a recovery, which is where we are now, so it's not a good idea to sell them when they're plodding through a recession or during a panic. You probably would have regretted dumping diesel engine maker Cummins the last time the market crashed and the economy receded. Analysts foresee an increase in Cummins' earnings to around $8 per share by 2014 from the current level of $3.84 a share.

Consumer Discretionary
You don't want to panic and sell good stocks in this sector for the same reason you'd keep a worthy industrial stock during a downturn. When the economy starts to recover, it's going to come back. And if it sells something people really seem to want, a crash and recession might not slow it up much at all. Take McDonald's, for example. The company has consistently made money for investors through good times and bad with nearly half the volatility of the overall stock market, as indicated by a beta of 0.55.

Consumer Staples
These stocks are important to own because consumer staples are products people need even if the market tanks or a recession is on. Although the latest recession hurt Procter & Gamble, the company is rebounding nicely because most people can't do without things like shampoo, laundry detergent and toilet paper. With new management leading the way, P&G is expected to deliver earnings growth of nearly 10% per year, on average, for some time. Investors can also take comfort in the fact that, like McDonald's, P&G has a very low beta (0.53).

Technology
Not only are tech giants Intel and Cisco Systems already at roughly a 20-25% discount from their 52-week highs, they're both positioned to grow their earnings by about 11% annually going forward. Notably, their betas--1.13 and 1.24, respectively--show that both tend to be somewhat more volatile than the market as a whole. That's OK, though, because the added diversification you get with tech stocks will help to protect your overall portfolio over time, even in a recession.

Where to Be Extra Cautious
While stock picking is risky in general, certain sectors are especially hazardous now. The most obvious are health care and financial services because of sweeping reforms, which are apt to be a drag on those industries although exactly who will be affected most is hard to say. Picking stocks is tough enough, but amidst worries of a double-dip recession, be especially vigilant in what sectors you play.

http://www.forbes.com/2010/09/13/market-collapse-personal-finance-economy-stocks.html?boxes=Homepagemostpopular

Defensive Portfolios

http://www.teensguidetomoney.com/Investing/stock-labels-mostly-unofficial-stock-classifications/

Are you investing or speculating? Have a look at the investment policies of Benjamin Graham.

Investment Policies (Based on Benjamin Graham)

Summary of Investment Policies

A. INVESTMENT FOR FIXED INCOME:
US Savings Bonds (FDs or Amanah Sahams for Malaysians)

B. INVESTMENT FOR INCOME, MODERATE LONG-TERM APPRECIATION AND PROTECTION AGAINST INFLATION:
(1) INVESTMENT FUNDS bought at reasonable price.
(2) Diversified list of primary common stocks (BLUE CHIPS) bought at reasonable price. 

C. INVESTMENT CHIEFLY FOR PROFIT:
5 approaches are opened to both the small and the large investors:
(1) Representative common stocks bought when the MARKET level is clearly LOW.
(2) GROWTH STOCKS, when these can be obtained at reasonable prices in relation to actual accomplishment – GROWTH INVESTING.
(3) Purchase of securities selling well BELOW INTRINSIC VALUE – VALUE INVESTING.
(4) Purchase of WELL-SECURED PRIVILEGED SENIOR ISSUES (bonds and preferred shares).
(5) SPECIAL SITUATIONS: Mergers, arbitrages, cash pay-outs.


D. SPECULATION:
(1) Buying stock in new or virtually new ventures (IPOs) .
(2) TRADING in the market.
(3) Purchase of "GROWTH STOCKS" at GENEROUS PRICES.

.... brought to you by Bullbear :-)

Graham's time-tested strategy for defensive investors beat the market again this year.

8 Graham Stocks for 2010

Graham's time-tested strategy for defensive investors beat the market again this year. But that shouldn't come as a big surprise because it's bested the market, often by a wide margin, in eight of the last nine years.

You can check out the yearly performance of the Graham stocks, the S&P500 (as tracked by the SPY exchange-traded fund), and the percentage point difference between the two in Table 1. If you had bought equal dollar amounts of each year's Graham stocks in your RRSP and then replaced them with the new crop of stocks in each subsequent year, you would have gained 480% (or 22% annually) over the full period. On the other hand, the unfortunate index investor who bought and held the S&P500 ETF (NYSE:SPY) would have lost 11% over the same time. That even includes quarterly dividends reinvested annually. As you might imagine, I've been very pleased with the performance of my take on Graham's defensive strategy.

TABLE 1: PERFORMANCE OF PAST GRAHAM STOCKS
Year	Graham	S&P500	+/-
2000 - 2001	20.4%	-22.2%	42.6
2001 - 2002	28.2%	-15.1%	43.3
2002 - 2003	56.8%	16.5%	40.3
2003 - 2004	32.2%	9.4%	22.8
2004 - 2005	46.6%	12.8%	33.8
2005 - 2006	-3.8%	10.7%	-14.5
2006 - 2007	34.4%	16.1%	18.3
2007 - 2008	-6.5%	-22.1%	15.6
2008 - 2009	2.2%	-6.2%	8.4
Total Gain	479.5%	-10.8%	490.3
Annualized	22.0%	-1.3%	23.3

Graham first described his method for defensive investors in The Intelligent Investor. Graham, the dean of value investing, passed away in 1976 but an updated edition of The Intelligent Investor (ISBN 0060555661), with new commentary from veteran columnist Jason Zweig, was published in 2003. The original text is presented in its entirety and Zweig's commentary is thoughtfully separated into copious footnotes at the end of each chapter. If you don't already have a copy of The Intelligent Investor then this is the version to get. Serious Graham buffs will also want to check out the sixth edition of Securities Analysis (ISBN 0071592539) which includes commentary from some of today's famous value investors. But, clocking in at 700 pages, it's not for dilettantes.

Because Graham's rules for defensive investors are extraordinarily strict, I use a more moderate version. My Graham-inspired rules are shown in Table 2. For example, I require some dividend growth over the last five years whereas Graham demanded a twenty-year record of uninterrupted dividend payments. Similarly, I focus on five years worth of earnings growth instead of ten years largely because the five-year figures are provided by many free internet stock screeners.

TABLE 2: GRAHAM-INSPIRED RULES

1. P/E Ratio less than 15 2. P/Book Ratio less than 1.5 3. Book Value more than 0.01 4. Current Ratio more than 2 5. Annual EPS Growth (5-Yr Avg) more than 3% 6. 5-Year Dividend Growth more than 0% 7. 5-Year P/E Low more than 0.01 8. 1-Year Revenue more than $400 Million

Even with my less-stringent version of Graham's rules, very few U.S. stocks usually pass the test. Indeed, the list peaked at 10 stocks in 2002, bottomed out at 2 stocks in 2003, and contained only 4 candidates last year. This year, the list is back up near its highs and contains 8 stocks. While that's a relatively high number of stocks, the list is tiny compared to the thousands of stocks which trade each day. As a result, even my version of Graham's approach remains quite strict.

The current crop of Graham stocks is shown in Table 3. Before diving in, you should always examine any stock in great detail and remember that ten stocks can not be said to form a well-diversified portfolio. Do your own due diligence and be on the look out for problems that might not be reflected in a company's latest numbers. Study news stories, press releases, and regulatory filings.

If you'd like more information on Graham stocks, I publish the Graham Value Stocks letter which covers several Graham-inspired strategies and highlights value stocks in both the U.S. and Canada. Just send me an email, and I'll be happy to provide an online sample.

Remember that value stocks can be psychologically difficult to hold and some stocks will disappoint. While Graham's Defensive method has avoided running into any serious trouble so far, it can't be expected to outperform all of the time. Indeed, significant periods of underperformance are likely. I'm particularly concerned that you might dive right in based on past performance alone. Don't. Be sure to focus at least as much on what can go wrong as on what might go right.

Table 3: U.S. stocks that pass Graham-inspired rules
Company	Price	P/E	P/B	EPS Growth	Current Ratio	D/E	Revenue ($M)	Dividend Growth
A.D.M. (ADM)	$29.72	11.2	1.41	28.1%	2.2	0.61	69,207	14.9%
Baldor (BEZ)	$28.55	14.9	1.47	32.0%	2.7	1.36	1,767	5.1%
Cash America (CSH)	$31.83	12.7	1.49	29.8%	5.1	0.69	1,052	16.6%
Overseas Shipholding (OSG)	$41.33	5.9	0.59	21.2%	4.1	0.72	1,473	18.2%
Reliance Steel (RS)	$41.97	13.4	1.26	70.0%	3.5	0.52	7,517	27.2%
Skywest (SKYW)	$17.16	11.7	0.73	11.1%	3.0	1.39	3,049	10.2%
Spartan Motors (SPAR)	$5.47	6.1	0.99	57.3%	2.8	0.15	624	2.4%
Tidewater (TDW)	$46.11	6.5	1.05	57.7%	3.1	0.13	1,377	10.8%
Source: msn.com, October 8, 2009

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