“Diversify…diversify” is one of the underlying principles of sound investment practices, a prescription often given, but many times followed too late. One only needs to survey recent market drops, where investors and speculators alike were buying-and-selling to bolster, or protect their positions
But, distinctions must be made between those who speculate with their money and the investor. In the former case, money chases price without regard with what Benjamin Graham referred to as intrinsic value, whereby the true value of a security exceeds its market value.
The name, “Graham,” may evoke a quick “Who?” from some, but if in the next breath you mention ‘Warren Buffett,’ the “Oracle of Omaha” and devotee of Graham’s investment principles, therein lies the reason for Buffet’s affinity for doing it right time and again.
Throughout all the major and not-so-brutal market downturns the high-frequency traders with those speed-of-light computers are forever making and losing a buck in microseconds, minutes or hour.
An underlining characteristic of the speculator is their perception that the value of the stock is determined wholly by what others are willing to pay for it. As such, the speculator cares little about the stock’s intrinsic value borne from fundamental analysis of assets, liabilities and earnings, for example.
“…where study and experience indicate that an appreciable chance of loss must be recognized and allowed for, we have a speculative situation.” Benjamin Graham, Security Analysis 1934
When it comes to developing an overall investment portfolio, one that reflects a judicious approach to choosing securities akin to one’s investment horizon (“Ten years from retirement, or twenty?”) and risk tolerance, the process is most suitable to the true investor who is diligent about saving for specific goals like retirement, college savings, emergency funds or that dream vacation on the horizon before retirement.
Regardless, if we turn to our own experience, or that of an investment advisor, for guidance the idea of a successful investorcan be summarized in an overview by investment writer, Daniel Meyers, using the three germane principles for valueinvesting laid out by Graham, and followed by the ‘Oracle of Omaha” today.
#1 Consider a ‘margin of safety.’
Who doesn’t relish the idea of buying at a dollar and selling for five, or what amounts to a big discount to the security’s intrinsic value. Stocks in this category generally show a substantial positives in their fundamental analysis to provide that safety net in turbulent times, thereby adding to the downside protection of the portfolio.
# 2 Profit from ‘volatility.’
If an investor is using a dollar-cost-averaging approach to funding his portfolio, then he’s benefiting by buying equal dollar amounts at set intervals.
The benefit derived from such a straight-forward strategy is buying price dips during normal trading days, as well as during profound corrections. This is hugely different, and beneficial, from putting all of one’s money into the market at what might be considered the “top.”
#3 ‘Know thyself.’
Investors can spend their time sifting through stock charts, and drilling-down on all the fundamentals of a business, or they can turn to an experienced investment advisor to help develop the right portfolio for your goals and objectives.
Furthermore, understanding the emotions of investing, and controlling the ‘fear’ that can overcome our better judgement during market plunges, puts the investor in good stead to reap rewards when others have left the table.
A professional hand at the helm of your financial planning process can help you reach your investment goals and enjoy your life now and in your future retirement. Schedule a chat with an experienced investment advisor today.