The majority of investors are the regular guy and his 401K. This person adds money to his selection of mutual funds month after month, regardless of the price. As you may already be aware, this is referred to as dollar cost averaging. While nowhere near the most lucrative form of investing, it is the best option for those who are not interested or do not have the time to spend researching and learning about the stock market. Others, choose to buy individual stocks. These are more likely successful business owners, executives or academic types. Their portfolio is built upon analysis of each firm in their portfolio. Benjamin Graham, renowned investor, devised five categories for these individual investors. Each of these investing types is likely to return returns better than the 401K guy. He wrote about each in his 1949 book,The Intelligent Investor. They are as follows:
In this form of trading, the investor anticipates market movements. They buy if they think its going up and sell if they think its going down. This is referring to the broad market, not necessarily an individual stock.
Investing this way means picking stocks that one expects to outperform the market over one year or less. Clearly, this is a relatively short-term strategy.
Buying Cheap and Selling Dear
These investors buy when the market is in ruins and sell when it is doing great. Many of these people bought in 2008-2009.
Similar to Selective Trading, this method requires choosing stocks that one expects to outperform the market over many years. The term for these companies is growth stocks.
My favorite, buying bargains means finding companies that are essentially worth more than their current value, at the moment. The expectation is that in the future, they will regain their former glory and thus stock price.
And Who Is Benjamin Graham?
As I mentioned previously, Benjamin Graham was an author and investor. He is often knownto as the Father of Investing. Move over Warren Buffett! Part of the reason he garnered so much fame is that he is one of the first to utilize financial analysis in investing. Not only that, he was good at it too. Many of the current tools and techniques for investing were introduced by him. In fact, that’s where Warren Buffett learned to be such a great investor. Benjamin Graham was his mentor.
Benjamin Graham Addressing the Active Investor
So, if you are an active investor, tracking the market on a daily basis, what is best for you? How about if you check your 401K once a year and that’s it? You are content to let the market do its thing and make you money over the long haul. This is what Benjamin Graham had to say:
“Whether the investor should attempt to buy low and sell high, or whether he should be content to hold sound securities through thick and thin—subject only to periodic examination of their intrinsic merits—is one of the several choices of policy which the individual must make for himself. Here temperament and the personal situation may well be the determining factors.”
Basically, he is saying that those close to the business and investing world will probably benefit most from active trading. The rest of us are best to stick with dollar cost averaging. For those that are active, holding for the long-term will likely mean missing a lot of opportunities. The inactive type, will most assuredly make poor decisions in the short-term given their lack of knowledge.
Be Consistent to Win the Investment Game
No matter what investment strategy you use, be consistent. Every approach requires the investor to make rational, disciplined and systematic decisions. The method that I teach in this website is Bargain Purchases, but all the techniques can be effective. Bargains are my favorite largely because I believe that cutting my losses is most profitable using this strategy.
The most effective part of this strategy, and any for that matter, is sticking to your rationale. Bargain investing is not for the faint of heart as often a single investment may seem to be a mistake after some time. But you have to keep with it and cut your losses when possible. Nine times out of 10, the stock will come back with a bullish fervor that you will rarely see with other strategies, although it may take much longer.
The Conclusions of Benjamin Graham
There is no best strategy for the active investor. All of them can work, although I do prefer Bargain investing obviously and I do believe that it has the greatest potential. However, I do make decisions using every one of the five strategies. You can still make great returns with any of the five Graham strategies as long as you are consistent and utilize rationality and facts, not emotion, to make your decisions.