According to The Intelligent Investor by Benjamin
Graham, an investor makes the very important consideration of choosing the
right stocks (also known as shares,) and other securities such as bonds. The
difficulty of choosing the right portfolio is to balance the stocks with the
bonds in a ratio that is safe and yet not too safe. Fluctuation in an equity
(with the exception being that of bonds, which do not fluctuate like a stock)
indicates uncertainty in the investment community, not that the stock will perform
badly in the long term, and so the trick is to buy a good stock whenever it is
at a “bargain” price and to sell when it is high and right before the
investment community loses interest in it. When the community has stopped
second-guessing itself and the fluctuation stabilizes, usually because of
injected uncertainty due to bad news, or a sudden surprise in earnings due to a
revolutionary product, you can bet the stock’s fluctuation will attenuate to a
more linear function.
To analyze the probability of success of an investment
opportunity, one must look at its history and how investors have reacted to the
negative or positive reports, and from this point, the investor categorizes the
stock into what may have long-term growth, short-term growth, or simply, bad
and good possible outcomes. Analyzing the stock’s price-to-earnings ratio
and this change over time, for instance, gives a clear indication of
market-rational behavior, but does not predict the investment’s outcome.
Analyze NVIDIA, for instance; the reason the price is valued highly by the
investment community relies upon the company’s industry, the alleged supremacy
of that company in the hardware industry catering to gamers and big businesses
reliant on CUDA cores for parallel computing tasks pertinent to new trends in
the computer software industry, e.g.: machine learning, a.i., deep learning,
data analytics, and clustered relational databases requiring immediate
readiness; but ultimately, the success of the stock depends on the faith and
belief of the investment community that it will be successful in the long run.
I don't think NVIDIA nor Advanced Micro Devices and Intel will retain all its
market share in this narrow industry because the company has not invested in
quantum computing as many large companies had, and this new technology will
really hurt the market capitalization of currently popular growth companies
that have not invested in research and development (r.&d.) in quantum
computing, and just like the failure of the blue-chip stocks and the crash of
the highly esteemed technology stocks in the early 2000's, a repeated
correction will occur as soon as these other companies who have invested in
quantum computing make them attainable by the masses, affordably and readily.
If a stock’s price-to-earnings ratio is extremely awful,
which indicates an overvaluing by the community at large although not
necessarily (because some of this is based on what the community thinks the
company’s profits will be in the future,) it is extremely important in this
case to know just how many times more expensive a stock is than its earnings
and how much of it is speculation and how much of it is nearly guaranteed due
to positive news, assuming it is truthful or dependent on
politics. Price-to-earnings ratios can either be high or low, and they can
give an indication as to community’s belief of a stock since if an attractive
stock has a low p.e. ratio, than chances are it is undervalued by the market as
a whole, but to outsmart the market requires an individual who can see things
that are not there, and the investor can gain a kernel of truth by observing
patterns of behavior in people: most importantly, the politics and the average
trend in political thought while keeping a close eye on our representatives who
are more powerful than any of us. Analyzing voting trends might have
a close correlation to how stocks in industries will operate, though not
always. As a counterexample of when this is not the case, and Ben. Graham
does not say this at all: Trump said that violent video games are the cause of
violent shootings and all shooters are liberals. Not only is Trump's
self-integrity inherently worthless so his word has no positive effect on the
community, and his slimy thoughts about gun control are counter to what most
people want for this country--gun control--the fact he is still in power has a
negative effect on gun retailer and manufacturer securities, of which have
soared. And people have bought more guns and thus increased peoples’ risk of
death by guns, though he will claim it is due to him this number is lower, it
is because of the resistance that have shouted out and abhorred violence, quite
the opposite. Now, I predict that guns will eventually be outlawed in this
country, and I’m not saying that we should invest in gun companies of which
would be unethical, but like Ben. Graham, we believe politics matters in the
outcome of securities in either stocks or bonds.
Generally, a stock with a low p.e. ratio is considered safe,
but safety and the ratio does not indicate the stock will grow again due to the
dynamic nature of the investment community, since a security may lose equity
due to the unpredictability of negative news e.g. scandals and fired C.E.O.'s
or the loss of great C.E.O.'s. A leaderless company is as good as the
intelligence of its employees, but the speculative nature of the investment
community always reigns irrationally. The company’s investment in research or
lack thereof, and the currently bad politics that affects it so, like the
solar-panel industry, may not be wanted but it is the case
nonetheless. The fact that an attractive stock is nothing other than what
is in the eye of the beholder and that this is a problem and the investor can
easily become skeptical of a really good bargain-priced stock; things that can
cause this: the stock may be overlooked and this would imply that it is
unpopular, but patience is key in this case because in the long run, people
will generally listen to reason and to logical analysis of a stock’s long-run
success probability when investing. If you have taken those steps in your stock
analysis, then you are guaranteed to win. Generally, it is a good idea to
invest in unpopular stocks (by volatility and p.e.) if you believe that it will
become popular. If you look at a chart of p.e. relative to the value of
the stock, you will see that there is a close correlation. Thus, if you
buy a stock with the attitude that you think the company will make higher than
expected earnings than what other people on wall-street think, then you may be
on the right track assuming you did your research correctly. Also,
Benjamin Graham recommends to relying on your own opinion when faced with the
facts rather than to accept whatever the broker recommends, since often the
broker makes more money from hidden fees.
Regarding what Graham calls, “dollar-cost-averaging,” this
is simply the exercise of depositing funds into your brokerage account every
month or at some specific interval to invest into stocks. Putting this
money into your portfolio is a very thought intensive task since so many
possibilities arise. To this, Ben. Graham suggests the avoidance of making
formulas since a formula for success has historically only worked in hindsight,
he does provide principles in investment regarding the constant paradigms of
security investing: like balancing a portfolio on the bullish or bearish nature
of a market in bonds or stocks more so one way or another, subject to change of
course. Bonds are particularly safer because of their history in yielding
better results during market crashes, but Ben. Graham writes that a bond-only
portfolio would not have yielded as good of results than an index-fund
portfolio of the D.J.I.A. during some decades. Ideally, you want to invest in
security right before it has hit its high and to sell it before it has hit its
low—determining this ideal difference since markets fluctuate by nature will
reduce self-doubt and requires patience. Graham considers the ideal
bond-to-stock ratio to be purely dependent on market trends; I regard the
investment in bonds unreachable, for me, so I invest in market funds (a mutual
fund of various bonds that can be traded like a stock,) since bond investment
requires a large personal capital to begin with, typically above $2.5k. For
an individual of a low-income investor such as myself, investing in bonds may
still be achieved by investing in mutual funds of the money market sort (funds
with bonds) or a mixture fund of both stocks and bonds. Typically, bonds should
have at least 25% of the portfolio pie, according to Benjamin Graham, and the
rest in stocks according to Benjamin Graham who was recommended by Buffet as a
highly influential and excellent author in financial investing. When the
market is at a low—stocks have the greatest potential for ROI, and this is when
you should have 75% of your portfolio in stocks and 25% in bonds. To take
the contrapositive logically: if one were to allocate one’s funds to bonds,
then an ideally desirable ratio is 25% to stocks. Of course, an in-between
area from within this spectrum is entirely up to you. Remember to think
about the market and to think about trends in industries and trends in people.
What are people buying? What are they most worried about? And, most
importantly, what do they believe is a worthwhile investment?
Benjamin Graham categorizes investors into various “types:”
a defensive investor whom does not have time to check his or her portfolio
every day, and the aggressive investor who can invest daily and manage his or
her portfolio; typically these investors are wealthier or simply have more
money and time to play with, and they refuse to speculate and are open to
conducting meaningful research about a company or a fund; though this notion
that most investors share this wisdom should not be deduced by his advice,
according to Ben. Graham, since he says investors continue to speculate and it
is safe to assume that speculation will never cease. The defensive
investor, on the other hand, invests in large cap. stocks, and the choices are
picked typically by a broker after some dialogue, whom asks about your risk
tolerance, always. One who invests in stocks with low p.e. ratios, small cap.
stocks, and in the chosen preferred industry by meaningful research by the
intelligent investor should be categorized as the aggressive investor,
according to Ben. Graham. Growth stocks in already well-established though
currently notorious companies which have a huge potential for a turnaround
should be worth considering, as well. Ben. Graham categorizes this type of
company, in the 70's mind you "willy nilly," by the market
capitalization of it of which is in the billions of dollars. The intelligent
investor, regardless of other types of entrepreneurial investors (who fail at
escaping risky speculation,) he or she spends time analyzing companies as a
“quasi-business.” He or she invests in small businesses that will do well,
objectively and without bias. This type of investor looks at small,
unpopular, or large businesses “that are going through a time of trouble” in a
prophetic way. This prophetic way is a lot like how NVIDIA stagnated and
then grew considerably due to demand by gamers. The primary product of NVIDIA,
their graphics cards, had not been considered to have more applications to
machine learning, a.i., and other parallel computing tasks beyond what most
people imagined--and this is what I call investment potential.
The intelligent investor is a lot like an inside trader when
compared to the speculators, but without illegal data in company finances or
necessarily an esoteric knowledge of how to make these products; to invest in
computing, you do not need to be a computer scientist. As an intelligent
investor, investing required intelligent guesswork and extrapolation of trends
in a market but most importantly the rational, objective analysis of a security
based on readily available research. The decision to buy a security may
feel like it is a mere hunch, but that is all that is required before buying a
stock, like NVIDIA (which I bought,) and holding on to it without selling too
early, since it had two-for-one split and skyrocketed to around $300 at its
all-time high; my parents bought shares of it while for me while I was high
school, a stock I chose luckily. Do not sell early, even if you need to buy
a car and have no means of transportation; If I held those stocks, I’d have
hundreds of thousands of dollars (I sold them to pay for tuition at a
university.)
