Benjamin Graham. “Every day do something foolish, something creative, and something generous.” - Ben Graham. A stock is ownership in an actual business with an underlying value that does not depend on its share price.. The market is a pendulum that forever swings between unsustainable optimism and unjustified pessimism. The intelligent investor is a realist who sells to optimists and buys from pessimists.. The future value of every investment is a function of its present price. The higher the price you pay, the lower your return will be. No matter how careful you are, the one risk no investor can ever eliminate is the risk of being wrong. Only by insisting on the margin of safety—never overpaying, no matter how exciting an investment seems to be—can you minimize your odds of error.. The secret to your financial success is inside yourself. If you become a critical thinker, invest with patient confidence, you can take steady advantage of even the worst bear markets. By developing your discipline and courage, you can refuse to let other people’s mood swings govern your financial destiny. In the end, how your investments behave is much less important than how you behave.. “Those who do not remember the past are condemned to repeat it.” - Santayana. The defensive (or passive) investor will place his chief emphasis on the avoidance of serious mistakes or losses. His second aim will be freedom from effort, annoyance, and the need for making frequent decisions.. The determining trait of the enterprising (or active, or aggressive) investor is his willingness to devote time and care to the selection of securities that are both sound and more attractive than the average.. Obvious prospects for physical growth in a business do not translate into obvious profits for investors.. The investor’s chief problem is likely to be himself.. We have seen much more money made and kept by “ordinary people” who were well tempered well suited for the investment process than by those who lacked this quality, even though they had an extensive knowledge of finance, accounting, and stock-market lore.. Intelligence means being patient, disciplined, and eager to learn; you must also be able to harness your emotions and think for yourself. This kind of intelligence “is a trait more of the character than of the brain.”. If you’ve failed at investing so far, it’s not because you’re stupid. It’s because, you haven’t developed the emotional discipline that successful investing requires.. By the time everyone decides that a given industry is “obviously” the best one to invest in, the prices of its stocks have been bid up so high that its future returns have nowhere to go but down.. The intelligent investor realizes that stocks become more risky, not less, as their prices rise—and less risky, not more, as their prices fall. The intelligent investor dreads a bull market, since it makes stocks more costly to buy. And conversely, you should welcome a bear market, since it puts stocks back on sale.. The death of the bull market is not the bad news everyone believes it to be. Thanks to the decline in stock prices, now is a considerably safer—and saner—time to be building wealth.. You should never succumb to the “certainty” that any industry will outperform all others in the future.. A simple portfolio policy: purchase high-grade bonds plus a diversified list of leading common stocks.. The portion of your investments held in bonds should never be less than 25% and never more than 75%.. The defensive investor must confine himself to shares of important companies with a long record of profitable operations and in strong financial condition.. “All human unhappiness comes from one single thing: not knowing how to remain at rest in a room.” - Blaise Pascal. Just because of the uncertainties of the future the investor can not afford to put all of his funds into one basket.. Avoid investing in gold directly, instead, seek out a well diversified mutual fund specializing in the stocks of precious metal companies and charging below 1% in annual expenses. Limit your stake to 2% of your total financial assets.. Real Estate Investment Trusts, or REITs, are companies that own and collect rent from commercial and residential properties, and do a decent job of combating inflation.. Treasury Inflation-Protected Securities, or TIPS, are U.S. government bonds that automatically go up in value when inflation rises. They are safe from the risk of default. They insure you against financial loss and the loss of purchasing power caused by inflation. Allocate at least 10% of your retirement assets to TIPS.. If the investor is in doubt as to which course to pursue he should choose the path of caution.. The intelligent investor must never forecast the future exclusively by extrapolating the past.. Anyone who claims that the long term record proves that stocks are guaranteed to outperform bonds or cash is an ignoramus.. The stock markets performance depends on three factors: real growth (the rise of companies earnings and dividends), inflationary growth (the general rise of prices throughout the economy), and speculative growth—or decline (any increase or decrease in the investing public’s appetite for stocks).. The only thing you can be confident of while forecasting future stock returns is that you will probably be wrong.. The only indisputable truth that the past teaches us is that the future will always surprise us—always.. In the financial markets, the worse the future looks, the better it usually turns out to be.. U.S. savings bonds are safe and a great option for individual investors. There is no other investment that combines absolute assurance of principal and interest payments, the right to demand full money back at any time, and guarantee of at least a 5% interest rate for at least ten years.. Preferred stock holders lack both the legal claim of the bond holder and the profit possibilities of a common shareholder.. Age should not effect your investment strategies.. Rebalance your stocks and bonds every six months.. Unless you’re in the lowest tax bracket, you should buy only tax-free (municipal) bonds outside your retirement accounts.. “Human happiness is produced not so much by great pieces of good fortune that seldom happen, as by little advantages that occur every day.” - Benjamin Franklin. How defensive you should be depends less on your tolerance for risk than on your willingness to put time and energy into your portfolio.. When stocks are priced reasonably enough to give you future growth, then you should own them, regardless of losses they may have cost you in the past.. Whenever we get too close to someone or something, we take our beliefs for granted, instead of questioning them as we do when we confront something more remote.. A defensive investor runs—and wins—the race by sitting still.. Index funds are a defensive investors dream come true.. Bull market periods are usually characterized by the transformation of a large number of privately owned businesses into companies with quoted shares.. An elementary requirement for the intelligent investor is an ability to resist the blandishments of salesmen offering new common stock issues during bull markets.. The more you trade, the less you keep.. No outstanding rewards came from diversified investment in growth companies as compared with that in common stocks generally.. Never buy into a lawsuit.. Putting up to a third of your stock money in mutual funds that hold foreign stocks helps insure against the risk that our own backyard may not always be the best place in the world to invest.. The investors primary interest lies in acquiring and holding suitable securities at suitable prices. Market movements are important to him in a practical sense, because they alternately create low price levels at which he would be wise to buy and high price levels at which he certainty should refrain from buying and probably would be wise to sell.. Never buy a stock immediately after a substantial rise or sell one immediately after a substantial drop.. “The happiness of those who want to be popular depends on others; the happiness of those who seek pleasure fluctuates with moods outside their control; but the happiness of the wise grows out of their free acts.” - Marcus Aurelius. Don’t take a single years earnings seriously.. A low cost index fund is the best tool ever created for low maintenance stock investing.. Limit yourself to stocks whose current price is no more than 15 times average earnings over the past 3 years.. Losing some money is an inevitable part of investing, and there’s nothing you can do to prevent it.