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offers a maximum payout of 35 to 1. What if you bet $1 on every number? Since only one slot can be the one into which the ball drops, you would win $35 on that slot, but lose $1 on each of your other 37 slots, for a net loss of $2. That $2 difference (or a 5.26% spread on your total $38 bet) is the casino’s “house advantage,” ensuring that, on average, roulette players will always lose more than they win. Just as it is in the roulette player’s interest to bet as seldom as possible, it is in the casino’s interest to keep the roulette wheel spinning. Likewise, the intelligent investor should seek to maximize the number of holdings that offer “a better chance for profit than for loss.” For most investors, diversification is the simplest and cheapest way to widen your margin of safety.

* Graham is saying that there is no such thing as a good or bad stock; there are only cheap stocks and expensive stocks. Even the best company becomes a “sell” when its stock price goes too high, while the worst company is worth buying if its stock goes low enough.

† The very people who considered technology and telecommunications stocks a “sure thing” in late 1999 and early 2000, when they were hellishly overpriced, shunned them as “too risky” in 2002—even though, in Graham’s exact words from an earlier period, “the price depreciation of about 90% made many of these securities exceedingly attractive and reasonably safe.” Similarly, Wall Street’s analysts have always tended to call a stock a “strong buy” when its price is high, and to label it a “sell” after its price has fallen—the exact opposite of what Graham (and simple common sense) would dictate. As he does throughout the book, Graham is distinguishing speculation—or buying on the hope that a stock’s price will keep going up—from investing, or buying on the basis of what the underlying business is worth.

* Graham uses “common-stock option warrant” as a synonym for “warrant,” a security issued directly by a corporation giving the holder a right to purchase the company’s stock at a predetermined price. Warrants have been almost entirely superseded by stock options. Graham quips that he intends the example as a “shocker” because, even in his day, warrants were regarded as one of the market’s seediest backwaters. (See the commentary on Chapter 16.)

1 As recounted by investment consultant Charles Ellis in Jason Zweig, “Wall Street’s Wisest Man,” Money, June, 2001, pp. 49–52.

2 JDS Uniphase’s share price has been adjusted for later splits.

3 No one who diligently researched the answer to this question, and honestly accepted the results, would ever have day traded or bought IPOs.

4 Paul Slovic, “Informing and Educating the Public about Risk,” Risk Analysis, vol. 6, no. 4 (1986), p. 412.

5 “The Wager,” in Blaise Pascal, Pensées (Penguin Books, London and New York, 1995), pp. 122–125; Peter L. Bernstein, Against the Gods (John Wiley & Sons, New York, 1996), pp. 68–70; Peter L. Bernstein, “Decision Theory in Iambic Pentameter,” Economics & Portfolio Strategy, January 1, 2003, p. 2.

* The study, in its final form, was Lawrence Fisher and James H. Lorie, “Rates of Return on Investments in Common Stock: the Year-by-Year Record, 1926–65,” The Journal of Business, vol. XLI, no. 3 (July, 1968), pp. 291–316. For a summary of the study’s wide influence, see http:// library.dfaus.com/reprints/work_of_art/.

* See pp. 50–52.

† The “price/earnings ratio” of a stock, or of a market average like the S & P 500-stock index, is a simple tool for taking the market’s temperature. If, for instance, a company earned $1 per share of net income over the past year, and its stock is selling at $8.93 per share, its price/earnings ratio would be 8.93; if, however, the stock is selling at $69.70, then the price/earnings ratio would be 69.7. In general, a price/earnings ratio (or “P/E” ratio) below 10 is considered low, between 10 and 20 is considered moderate, and greater than 20 is considered expensive. (For more on P/E ratios, see p. 168.)

1 If dividends are not included, stocks fell 47.8% in those two years.