The Intelligent Investor_ The Definitive Book on Value Investing - Benjamin Graham [250]
* Today, the most widely available alternatives to the Dow Jones Industrial Average are the Standard & Poor’s 500-stock index (the “S & P”) and the Wilshire 5000 index. The S & P focuses on 500 large, well-known companies that make up roughly 70% of the total value of the U.S. equity market. The Wilshire 5000 follows the returns of nearly every significant, publicly traded stock in America, roughly 6,700 in all; but, since the largest companies account for most of the total value of the index, the return of the Wilshire 5000 is usually quite similar to that of the S & P 500. Several low-cost mutual funds enable investors to hold the stocks in these indexes as a single, convenient portfolio. (See Chapter 9.)
* See pp. 363–366 and pp. 376–380.
† For greater detail, see Chapter 6.
* For more advice on “well-established investment funds,” see Chapter 9. “Professional administration” by “a recognized investment-counsel firm” is discussed in Chapter 10. “Dollar-cost averaging” is explained in Chapter 5.
* See Chapter 8.
* In “selling short” (or “shorting”) a stock, you make a bet that its share price will go down, not up. Shorting is a three-step process: First, you borrow shares from someone who owns them; then you immediately sell the borrowed shares; finally, you replace them with shares you buy later. If the stock drops, you will be able to buy your replacement shares at a lower price. The difference between the price at which you sold your borrowed shares and the price you paid for the replacement shares is your gross profit (reduced by dividend or interest charges, along with brokerage costs). However, if the stock goes up in price instead of down, your potential loss is unlimited—making short sales unacceptably speculative for most individual investors.
† In the late 1980s, as hostile corporate takeovers and leveraged buyouts multiplied, Wall Street set up institutional arbitrage desks to profit from any errors in pricing these complex deals. They became so good at it that the easy profits disappeared and many of these desks have been closed down. Although Graham does discuss it again (see pp. 174–175), this sort of trading is no longer feasible or appropriate for most people, since only multimillion-dollar trades are large enough to generate worthwhile profits. Wealthy individuals and institutions can utilize this strategy through hedge funds that specialize in merger or “event” arbitrage.
* The Rothschild family, led by Nathan Mayer Rothschild, was the dominant power in European investment banking and brokerage in the nineteenth century. For a brilliant history, see Niall Ferguson, The House of Rothschild: Money’s Prophets, 1798–1848 (Viking, 1998).
1 Graham goes even further, fleshing out each of the key terms in his definition: “thorough analysis” means “the study of the facts in the light of established standards of safety and value” while “safety of principal” signifies “protection against loss under all normal or reasonably likely conditions or variations” and “adequate” (or “satisfactory”) return refers to “any rate or amount of return, however low, which the investor is willing to accept, provided he acts with reasonable intelligence.” (Security Analysis, 1934 ed., pp. 55–56).
2 Security Analysis, 1934 ed., p. 310.
3 As Graham advised in an interview, “Ask yourself: If there was no market for these shares, would I be willing to have an investment in this company on these terms?” (Forbes, January 1, 1972, p. 90.)
4 Source: Steve Galbraith, Sanford C. Bernstein & Co. research report, January 10, 2000. The stocks in this table had an average return of 1196.4% in 1999. They lost an average of 79.1% in 2000, 35.5% in 2001, and 44.5% in 2002—destroying all the gains of 1999, and then some.
5 Instead of stargazing, Streisand should have been channeling Graham. The intelligent investor never dumps a stock purely because