Sunday, August 3, 2008

Chapter 5: Investment Policy

I have dedicated myself to a year-long study of Benjamin Graham's book Security Analysis.  Currently, I'm studying:

Part 1: Survey and Approach
Chapter 5: Investment Policy

(page 47) ...investment policy...means the allocation of the available funds among the various types of securities, including variations in such proportions under changing conditions, and decisions to hold cash for future commitments.

(page 47) Security owners are conveniently divided into two main groups -- institutions and individuals.

Subgroup 1.  Investment choice subject to comprehension controls

• Life insurance companies
• Mutual savings banks
• "Restricted" trust funds
• Commercial banks (including trust companies)

Subgroup 2.  Investment choice subject to partial controls

• Fire and casualty insurance companies

Subgroup 3.  Investment choice not controlled

• "Unrestricted" trust funds, including "commingled trusts"
• (Most) philanthropic and educational institutions
• Regulated investment companies ("investment funds," "mutual funds," "investment trusts")

Investment Policy for Individuals

(page 50) It is accepted doctrine that the investment needs and the appropriate policies of individuals will vary with their particular circumstances, resulting in a kind of parallelism between classes of individuals and classes of institutions.  Widows and orphans need safety above all else; their capital should, therefore, be placed in the most conservative securities, in the same way as the funds of life-insurance companies.

(page 51) The average security buyer makes up his policy as his funds become available.  He is likely to be speculation-minded in rising markets and a penitent conservative after a drastic fall.

(page 51) Two Classes of Security Buyers.  ...Defensive investors are those who should place their chief emphasis upon the avoidance of any serious mistakes or losses and their second emphasis upon freedom from effort, annoyance, and the necessity for making frequent investment decisions.

(page 51) The great majority of security holders belong in the defensive category.

(page 51-2) The chief requirement for all defensive investors is that they exercise firmness in the application of simple principles of sound procedure outlined below.

(page 52) The main hazards they face are of three kinds, viz., being tempted into (1) stock-market speculation, (2) buying second-rate issues, (3) buying good common stocks at excessive prices.

(page 52) The distinguishing feature of [enterprising investors] … is their willingness and ability to devote time and care to the selection of sound and attractive investments.  Their chief objective should be to use their training and intelligence to take advantage of the numerous opportunities to buy securities for considerably less than they are worth.

(page 52) The first rule of intelligent action by the enterprising investor must be that he will never embark upon a security operation which he does not fully comprehend and which he cannot justify by reference to the results of his own study and experience.  The endeavor to make money in securities is a business undertaking, and it must be conducted in accordance with business principles. (emphasis added)

(page 55) Timing Considerations in Investment Policy.  …If he waited for lower prices he would be losing interest on his money; he might "miss his market," even if prices declined; in any case, he was turning himself into a stock trader or speculator.  Much of this view retains its validity.  However, the time when the investor should clearly not buy common stocks is during the upper ranges of a bull market.

(page 55)…the major consideration for the investor is not when he buys or sells, but at what prices.
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