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and experience. If you have formed a conclusion from the facts and if you know your judgment is sound, act on it—even though others may hesitate or differ.” (You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.) Similarly, in the world of securities, courage becomes the supreme virtue after adequate knowledge and a tested judgment are at hand.

Fortunately for the typical investor, it is by no means necessary for his success that he bring these qualities to bear upon his program—provided he limits his ambition to his capacity and confines his activities within the safe and narrow path of standard, defensive investment. To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.

Commentary on Chapter 20

If we fail to anticipate the unforeseen or expect the unexpected in a universe of infinite possibilities, we may find ourselves at the mercy of anyone or anything that cannot be programmed, categorized, or easily referenced.

—Agent Fox Mulder, The X-Files

First, Don’t Lose

What is risk?

You’ll get different answers depending on whom, and when, you ask. In 1999, risk didn’t mean losing money; it meant making less money than someone else. What many people feared was bumping into somebody at a barbecue who was getting even richer even quicker by day trading dot-com stocks than they were. Then, quite suddenly, by 2003 risk had come to mean that the stock market might keep dropping until it wiped out whatever traces of wealth you still had left.

While its meaning may seem nearly as fickle and fluctuating as the financial markets themselves, risk has some profound and permanent attributes. The people who take the biggest gambles and make the biggest gains in a bull market are almost always the ones who get hurt the worst in the bear market that inevitably follows. (Being “right” makes speculators even more eager to take extra risk, as their confidence catches fire.) And once you lose big money, you then have to gamble even harder just to get back to where you were, like a racetrack or casino gambler who desperately doubles up after every bad bet. Unless you are phenomenally lucky, that’s a recipe for disaster. No wonder, when he was asked to sum up everything he had learned in his long career about how to get rich, the legendary financier J. K. Klingenstein of Wertheim & Co. answered simply: “Don’t lose.”1 This graph shows what he meant:

FIGURE 20-1

The Cost of Loss

Imagine that you find a stock that you think can grow at 10% a year even if the market only grows 5% annually. Unfortunately, you are so enthusiastic that you pay too high a price, and the stock loses 50% of its value the first year. Even if the stock then generates double the market’s return, it will take you more than 16 years to overtake the market—simply because you paid too much, and lost too much, at the outset.

Losing some money is an inevitable part of investing, and there’s nothing you can do to prevent it. But, to be an intelligent investor, you must take responsibility for ensuring that you never lose most or all of your money. The Hindu goddess of wealth, Lakshmi, is often portrayed standing on tiptoe, ready to dart away in the blink of an eye. To keep her symbolically in place, some of Lakshmi’s devotees will lash her statue down with strips of fabric or nail its feet to the floor. For the intelligent investor, Graham’s “margin of safety” performs the same function: By refusing to pay too much for an investment, you minimize the chances that your wealth will ever disappear or suddenly be destroyed.

Consider this: Over the four quarters ending in December 1999, JDS Uniphase Corp., the fiber-optics company, generated $673 million in net sales, on which it lost $313 million. Its tangible assets totaled $1.5 billion. Yet, on March 7, 2000, JDS Uniphase’s stock hit $153 a share, giving the company a total market value of roughly $143 billion.2 And then, like most “New Era” stocks, it crashed.