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As an investor you cannot soundly become “half a businessman,” expecting thereby to achieve half the normal rate of business profits on your funds.

It follows from this reasoning that the majority of security owners should elect the defensive classification. They do not have the time, or the determination, or the mental equipment to embark upon investing as a quasi-business. They should therefore be satisfied with the excellent return now obtainable from a defensive portfolio (and with even less), and they should stoutly resist the recurrent temptation to increase this return by deviating into other paths.

The enterprising investor may properly embark upon any security operation for which his training and judgment are adequate and which appears sufficiently promising when measured by established business standards.

In our recommendations and caveats for this group of investors we have attempted to apply such business standards. In those for the defensive investor we have been guided largely by the three requirements of underlying safety, simplicity of choice, and promise of satisfactory results, in terms of psychology as well as arithmetic. The use of these criteria has led us to exclude from the field of recommended investment a number of security classes that are normally regarded as suitable for various kinds of investors. These prohibitions were listed in our first chapter on p. 30.

Let us consider a little more fully than before what is implied in these exclusions. We have advised against the purchase at “full prices” of three important categories of securities: (1) foreign bonds, (2) ordinary preferred stocks, and (3) secondary common stocks, including, of course, original offerings of such issues. By “full prices” we mean prices close to par for bonds or preferred stocks, and prices that represent about the fair business value of the enterprise in the case of common stocks. The greater number of defensive investors are to avoid these categories regardless of price; the enterprising investor is to buy them only when obtainable at bargain prices—which we define as prices not more than two-thirds of the appraisal value of the securities.

What would happen if all investors were guided by our advice in these matters? That question was considered in regard to foreign bonds, on p. 138, and we have nothing to add at this point. Investment-grade preferred stocks would be bought solely by corporations, such as insurance companies, which would benefit from the special income-tax status of stock issues owned by them.

The most troublesome consequence of our policy of exclusion is in the field of secondary common stocks. If the majority of investors, being in the defensive class, are not to buy them at all, the field of possible buyers becomes seriously restricted. Furthermore, if aggressive investors are to buy them only at bargain levels, then these issues would be doomed to sell for less than their fair value, except to the extent that they were purchased unintelligently.

This may sound severe and even vaguely unethical. Yet in truth we are merely recognizing what has actually happened in this area for the greater part of the past 40 years. Secondary issues, for the most part, do fluctuate about a central level which is well below their fair value. They reach and even surpass that value at times; but this occurs in the upper reaches of bull markets, when the lessons of practical experience would argue against the soundness of paying the prevailing prices for common stocks.

Thus we are suggesting only that the aggressive investor recognize the facts of life as it is lived by secondary issues and that they accept the central market levels that are normal for that class as their guide in fixing their own levels for purchase.

There is a paradox here, nevertheless. The average well-selected secondary company may be fully as promising as the average industrial leader. What the smaller concern lacks in inherent stability