The Enterprising Investor has the time and experience (or proper guidance) in investing to expand the possible universe of opportunities beyond conservative investments. It is an active approach that requires constant attention and monitoring.
...If every investor did their research and only bought stocks with a margin of safety below the intrinsic value of the company, the market would be efficient and fairly stable. But we know that this isn’t true. The market swings wildly from day to day and takes large swings in valuation over periods of euphoria and pessimism.
Graham used a parable with an imaginary investor named Mr. Market to illustrate how an intelligent investor should take advantage of market fluctuations. This is a parable about greed and fear, price and value, and how the intelligent investor will react.
...The most important objective of the advisor may be to save you from your own worst enemy, YOU. A good advisor will help you keep your emotions in control, especially at important moments. Instead of panic selling, are you going to be prepared to buy when prices have fallen? Instead of following the crowd, who might be buying at prices far above intrinsic value, are you going to look elsewhere for better values?
...In investment selection, it is most accurate to be able to make judgments based on past performance. The greater the amount of assumptions that have to be made about the future, the greater the possibility of misjudgment or error. Graham is adamant about not putting any importance in short term earnings. The more an analyst relies on short term results, the greater the risk, and the more due diligence that is required.
...Graham urged shareholders to take an active role in being owners of the company. He thought management with good results should be rewarded, and management with poor results should be questioned and challenged.
He was particularly adamant about shareholders demanding a fair portion of their earnings returned in dividends. This is because much of the time companies squander past earnings. Just because management does a good job with current operations doesn’t mean they know the best use of excess company capital.
...The margin of safety for an investment is the difference between the real or fundamental value and the price you pay. The goal of the value investor is pay less (hopefully, much less) than the real value. Ben Graham called margin of safety “the secret of sound investment” and “the central concept of investment”. He also devoted a whole chapter to the concept and, I am confident, placed it last because it is the most important.
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As founder of the Arbor Investment Planner my passion is to educate and empower the individual investors to manage their own investment portfolio.
The Arbor Investment Planner is a value investment portfolio management guide for those individual investors who choose to manage their own money. I focus on ideas and concepts important to the self directed investor; but put special emphasis on risk management, value investing strategies, and proper asset allocation and diversification.
- Ken Faulkenberry
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