I began this blog in April 2011 after reading The Intelligent Investor by Benjamin Graham. I just re-read it and realized how far from his teachings I have strayed. This is pretty normal, in fact Graham describes the psychology of the typical investor and I have fallen into some of the bad habits that he prescribed against (e.g., buying gold and speculation, which have both cost me money in recent weeks). It’s time to get back onto the right path and follow Graham’s advice. Accordingly I am recommitting to my original Investment Policy, which was written with Graham’s teachings in mind.
My Investment Policy is:
(1) I am an investor. I buy assets that are well priced based upon their inherent value (e.g., their dividends and prospects for dividend growth, and their earnings and prospects for earnings growth).
(2) I will invest in stocks and bonds of well known companies only (no speculative companies, no real estate, no gold).
(3) I will keep between 25% and 75% of my portfolio’s value in stocks and between 25% and 75% in bonds, depending upon my assessment of the likely return from the stock market versus that from bonds at the time.
(4) I will buy or hold stocks based upon two selection criteria:
Dividend: the company must pay a dividend, the higher the better; and
Return on Investment: the company must be priced such that the likely annual return is above 10%, with a 10% margin of safety (using an IRR calculation).
These two criteria are mandatory, but I may apply additional criteria to screen and select stocks. For example, I will not consider a stock with a PE Ratio above 20 and I generally look for stocks with a PE Ratio of 17 or less. I also look at the PEG Ratio.
(5) I am not a speculator, meaning that I do not buy assets based solely upon recent price advances in the hope that I will find a greater fool to sell them to later.
(6) I will not invest on margin as this is speculation.
But, we remember that Graham said:
“We are thus led to the following logical if disconcerting conclusion: To enjoy a reasonable chance for continued better than average results, the investor must follow policies which are (1) inherently sound and promising, and (2) not popular on Wall Street.”.
So how is my policy different from those on Wall Street? Well, I have never worked on Wall Street, but I know that they have one fatal flaw: impatience. Investment banks and money managers have customers who crave continuous returns. This is especially true of publicly traded investment banks, who are beholden to analysts from other banks and to quarterly reports. Brokerages, who are paid by the trade, are also keen to have investors turn over their portfolios more than is necessary. I feel no such pressures. As another great investor, Warren Buffet, said:
“The stock market is a no-called-strike game. You don’t have to swing at everything – you can wait for your pitch. The problem when you’re a money manager is that your fans keep yelling, ‘Swing, you bum!'”
(7) I will be patient and will hold a good value stock or bond that has not yet paid off.