The Intelligent Investor_ The Definitive Book on Value Investing - Benjamin Graham [76]
The last sentence indicates that this principle relates to the ordinary outside investor. Anyone who can control a secondary company, or who is part of a cohesive group with such control, is fully justified in buying the shares on the same basis as if he were investing in a “close corporation” or other private business. The distinction between the position, and consequent investment policy, of insiders and of outsiders becomes more important as the enterprise itself becomes less important. It is a basic characteristic of a primary or leading company that a single detached share is ordinarily worth as much as a share in a controlling block. In secondary companies the average market value of a detached share is substantially less than its worth to a controlling owner. Because of this fact, the matter of shareholder-management relations and of those between inside and outside shareholders tends to be much more important and controversial in the case of secondary than in that of primary companies.
At the end of Chapter 5 we commented on the difficulty of making any hard and fast distinction between primary and secondary companies. The many common stocks in the boundary area may properly exhibit an intermediate price behavior. It would not be illogical for an investor to buy such an issue at a small discount from its indicated or appraisal value, on the theory that it is only a small distance away from a primary classification and that it may acquire such a rating unqualifiedly in the not too distant future.
Thus the distinction between primary and secondary issues need not be made too precise; for, if it were, then a small difference in quality must produce a large differential in justified purchase price. In saying this we are admitting a middle ground in the classification of common stocks, although we counseled against such a middle ground in the classification of investors. Our reason for this apparent inconsistency is as follows: No great harm comes from some uncertainty of viewpoint regarding a single security, because such cases are exceptional and not a great deal is at stake in the matter. But the investor’s choice as between the defensive or the aggressive status is of major consequence to him, and he should not allow himself to be confused or compromised in this basic decision.
Commentary on Chapter 7
It requires a great deal of boldness and a great deal of caution to make a great fortune; and when you have got it, it requires ten times as much wit to keep it.
—Nathan Mayer Rothschild
Timing is Nothing
In an ideal world, the intelligent investor would hold stocks only when they are cheap and sell them when they become overpriced, then duck into the bunker of bonds and cash until stocks again become cheap enough to buy. From 1966 through late 2001, one study claimed, $1 held continuously in stocks would have grown to $11.71. But if you had gotten out of stocks right before the five worst days of each year, your original $1 would have grown to $987.12.1
Like most magical market ideas, this one is based on sleight of hand. How, exactly, would you (or anyone) figure out which days will be the worst days—before they arrive? On January 7, 1973, the New York Times featured an interview with one of the nation’s top financial forecasters, who urged investors to buy stocks without hesitation: “It’s very rare that you can be as unqualifiedly bullish as you can now.” That forecaster was named Alan Greenspan, and it’s very rare that anyone has ever been so unqualifiedly wrong as the future Federal Reserve chairman was that day: 1973