Flashcards in The Intelligent Investor Deck (57):
What is the difference between an investor and a speculator?
An investor calculates what a stock is worth, based on the value of its businesses. A speculator gambles that a stock will go up in price because somebody else will pay even more for it.
According to Graham, what is the difference between investors and speculators?
Investors judge the market price by established standards of value, while speculators base (their) standards of value upon the market price.
According to Graham when should you only invest?
Graham urges you to invest only if you would be comfortable owning a stock even if you had no way of knowing its daily share price. Ask yourself: If there was now market for these shares, would I be willing to have an investment in this company on these terms?
What is Graham's definition of investing?
An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.
What three elements does investing consist of according to Graham?
1. You must thoroughly analyze a company, and the soundness of its underlying businesses, before you buy its stock
2. You must deliberately protect yourself against serious losses.
3. You must aspire to "adequate", not extraordinary, performance
What is turnover?
In the investment industry, turnover is defined as the percentage of a portfolio that is sold in a particular month or year. A quick turnover rate generates more commissions for trades placed by a broker.
On what 3 factors does the stock market's performance depend on?
• real growth (the rise of companies’ earnings and dividends)
• inflationary growth (the general rise of prices throughout the economy)
• speculative growth—or decline (any increase or decrease in the investing public’s appetite for stocks)
What is a dividend?
A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, paid to a class of its shareholders. Dividends can be issued as cash payments, as shares of stock, or other property.
What is the dividend yield and how is it calculated?
A financial ratio that indicates how much a company pays out in dividends each year relative to its share price. Dividend yield is represented as a percentage and can be calculated by dividing the dollar value of dividends paid in a given year per share of stock held by the dollar value of one share of stock.
As funds have fat costs and bad behavior, most funds fail to earn their keep. No wonder high returns are nearly as perishable as unregurgitated fish. What's more, as time passes, the drag of their excessive expenses leaves most funds farther and farther behind. What, then, should the intelligent investor do?
First of all, recognize that an index fund - which owns all the stocks in the market. all the time, without any pretense of being able to select the "best" and avoid the "worst" - will beat most funds over the long run. As the years pass, the cost advantage of indexing will keep accruing relentlessly. Hold an index fund for 20 years or more, adding new money every month, and you are all but certain to outperform the cast majority of professional and individual investors alike. Late in his life, Graham praised index funds as the best choice for individual investors, as does Warren Buffet.
What's a good amount of stocks to own in order to fulfill the criterion of diversification?
Graham's guideline o downing between 10 and 30 stocks remains a good starting point for investors who want to pick their own stocks, but you must make sure that you are not overexposed to one industry.
How often should the defensive investor check his portfolio?
If, after you set up such an online autopilot portfolio, you find yourself trading more than twice a year- or spending more than an hour or two per month total, on your investments - then something has gone badly wrong. Do not let the ease and up-to-the-minute feel of the Internet seduce you into becoming a speculator. A defensive investor runs -and wins- the race by sitting still.
What a good way to dollar-cost average into a portfolio?
The ideal way to dollar-cost average is into a portfolio of index funds, which own every stock or bond worth having. That way, you renounce not only the guessing game of where the market is going which sectors of the market - and which particular stocks or bonds within them -will do the best. Let's say you can spare $500 a month. By owning and dollar-cost-averaging into just threee index funds - $300 into one that holds the total U.S. stock market, 100$ into one that holds foreign stocks, and $100 into one that holds U.S. bonds - you can ensure that you own almost every investment on the planet that's worth owning.
Recognize that investing intelligently is about controlling the controllable. You can't control whether stock or funds you buy will outperform the market today, next week, this month, or this year; in the short run, your returns will always be hostage to Mr. Market and his whims. But you can control?
-Brokerage costs, by trading rarely, patently and cheaply
-Ownership costs, by refusing to buy mutual funds with excessive annual expenses
-your expectations. by using realism, not fantasy, to forecast you returns
- your risk, by deciding how much of your total assets to put at hazard in the stock market, by diversifying and by rebalancing
-your tax bills, by holding stocks of at least one year and, whenever possible, for at least five years, to lower your capital-gains liability
-and most of all, your own behavior
What is a useful division between bond-type holdings and equities?
A simple 50-50 division between the two components or a ratio, dependent on your judgement, varying between a minimum of 25% and a maximum of 75% of either.
What is principal?
The most commonly used refers to the original sum of money borrowed in a loan, or put into an investment. Similar to the former, it can also refer to the face value of a bond.
Can you predict the future stock prices by looking at the past.
The intelligent investor must never forecast the futures exclusively by extrapolating the past. Why should the future returns of stocks always be the same as their past returns? When every investor comes to believe that stocks are guaranteed to make money in the long run, won't the market end up being wildly overpriced? And once that happens, how can future returns possibly be high?
What should the rate of return for an investor depend on?
The rate of return sough should be dependent on the amount of the intelligent effort the investor is willing an able to bring to bear on his task. The minimum return goes to our passive investor, who wants both safety and freedom from concern. The maximum return would be realized by the alert and enterprising investor who ecervises maximum intelligence and skill.
What is a sound reason for increasing the percentage in common stocks?
The appearance of the "bargain price" levels created in a protracted bear market. Conversely, sound procedure would call for reducing the common-stock component below 50% when in the judgment of the investor the market level has become dangerously high.
What is yield (Dividende)?
yield is the income return on an investment, such as the interest or dividends received from holding a particular security. The yield is usually expressed as an annual percentage rate based on the investment's cost, current market value or face value.
What are the two ways to be an intelligent investor?
- by continually researching, selecting, and monitoring a dynamic mix of stocks, bonds, or mutual funds
-or by crating a permanent portfolio that runs on autopilot and requires no further effort (but generates very little excitement).
Should age determine how to allocate your assets between stocks and bonds?
According to Graham, no!
How do you get a better feel for how much risk you can take?
Think about the fundamental circumstances o your life, when they will kick in, when they might change, and how they are likely to affect your need for cash. If, after considering these factors, you feel you can take the higher risks inherent in greater ownership of stocks, you belong around Graham's minimum of 25% in bonds or cash. If not, then steer mostly clear of stocks, edging toward Graham's maximum of 75% in bonds or cash. Once you set these target percentages, change them only as your life circumstances change. Do not buy more stocks because the stock market has gone up; do not sell them because it has gone down.
Bond or bond funds?
Since bonds are generally sold in $10,000 lots and you need a bare minimum of 10 bonds to diversify away the risk that any one of them might go bust, buying individual bonds makes no sense unless you have at least $100,000 to invest. Bond funds offer cheap and easy diversification, along with the convenience of monthly income, which you can reinvest right back into the fund at current rates without paying commission. For most investor, bond funds beat individual bonds hands down.
What is the average effective maturity of a bond?
The average length of time before bonds in a fund reach maturity and are repaid is known as the fund's average maturity. The average effective maturity affects a fund's yield as well as the level of risk to investors' principal. In general, the longer the average effective maturity, the more a fund's share price will fluctuate in response to changes in interest rates.
What is considered a short term bond fund?
A fund with an average effective maturity of 1-5 years
What is considered an intermediate-term bond fund?
one with a maturity of 5–10 years
What is considered a long-term bond fund?
and one with a maturity of more than
What does a bond's credit rating reflect?
A bond’s credit rating reflects the independent rating agency’s opinion of the issuer’s ability to pay interest on the bond and, ultimately, to repay the principal at maturity. If payments aren’t made in full and on time, the issuer has defaulted on the bond.
Do bond prices and interest rates move in the same direction?
One of the most important things to know about investing in bonds is that bond prices and interest rates tend to move in opposite directions. When interest rates rise, bond prices fall; when interest rates fall, bond prices rise.
What is the coupon rate in pertaining to bonds?
The coupon rate is the interest rate stated on a bond when it is issued. The coupon is usually paid semiannually. For instance, a $1,000 bond with a 6% coupon will pay $30 in interest twice a year, or a total of $60 a year.
For instance, a $1,000 bond with a 6% coupon will pay?
$30 in interest twice a year, or a total of $60 a year.
What is the yield pertaining to bonds?
A snapshot of a fund’s interest income. The yield, expressed as a percentage of the fund’s net asset value, is based on income earned over the past 30 days and is annualized, or projected forward, for the coming year.
what is the yield to maturity?
The rate of return an investor would receive if the security is held by the investor to its maturity date. A bond’s yield to maturity can be complicated to calculate, but it is the best measure of the bond’s true yield. Periodically, ask your financial advisor to perform yield-to-maturity calculations.
What are the four rules for the selection of common stock?
1- There should be adequate though not excessive diversification. This mightt mean a minimum of ten different issues and a maximum of about thirty
2. Each company selected should be large, prominent, and conservatively financed. Indefinite as the adjectives must be, their general sense is clear.
3, Each company should have a long records of continuous dividend payments ( at least 10years)
4. The investor should impose some limit on the price he will pay for an issue in relation to its average earnings over, say, the past seven year. we suggest that this limit be set at 25 time such average earning, and not more than 10 times those of the last twelve.month period
What is a growth stock?
The term "growth stock" is applied to one which has increased its per-share earnings in the past at well above the rate for common stocks generally and is expected to continue to do so in the future.
When is there a risk of loss?
A bona fide investor does not lose money merely because the market price of his holdings declines; hence the fact that a decline may occur does not mean that he is running a true risk of loss.
When is a corporation conservatively financed?
An industrial company's finances are not conservative unless the common stock (at book value) represents at least half of the total capitalization, including all bank debt. For a railroad or public utility the figure should be at least 30%. (1971)
When is a company considered large and prominent?
The words "large" and "prominent" carry the notion of substantial size combined with a leading position in the industry. Such companies are often referred to as "primary"; all other common stocks are then called "secondary", except that growth stocks are ordinarily placed in a separate class by those who buy them as such. In today's (2003) markets a company should have a total stock value (or "market capitalization") of at least $10 billion. They are offered merely as guides to those who may ask for guidance.
What are activities specially characteristic of the enterprising investor in the common-stock field may be classified under four heads:
1. Buying in low markets and selling in high markets
2. Buying carefully chosen "growth stocks"
3. Buying bargain issues of various types
4. Buying into "special situations"
To obtain better than average investment results over a long pull requires a policy of selection or operation possessing a twofold merit:
(1) It must meet objective or rational tests of underlying soundness; and (2) it must be different from the policy followed by most investors or speculators.
When is an issue considered a bargain?
To be as concrete as possible, let us suggest that an issue is not a true “bargain” unless the indicated value is at least 50% more than the price.
How do you detect a bargain issue?
This relies largely on estimating future earnings and then multiplying these by a fac- tor appropriate to the particular issue. If the resultant value is suffi- ciently above the market price—and if the investor has confidence in the technique employed—he can tag the stock as a bargain. But in the second test more attention is likely to be paid to the realizable value of the assets, with particular emphasis on the net current assets or working capital.
What is the most readily identifiable bargain issue?
The type of bargain issue that can be most readily identified is a common stock that sells for less than the company’s net working capital alone, after deducting all prior obligations.* This would mean that the buyer would pay nothing at all for the fixed assets— buildings, machinery, etc., or any good-will items that might exist.
Can the average investor hope to be better than the general public?
We lack space here to discuss in detail the pros and cons of mar- ket forecasting. A great deal of brain power goes into this field, and undoubtedly some people can make money by being good stock- market analysts. But it is absurd to think that the general public can ever make money out of market forecasts. For who will buy when the general public, at a given signal, rushes to sell out at a profit? If you, the reader, expect to get rich over the years by following some system or leadership in market forecasting, you must be expecting to try to do what countless others are aiming at, and to be able to do it better than your numerous competitors in the market. There is no basis either in logic or in experience for assuming that any typical or average investor can anticipate market movements more successfully than the general public, of which he is himself a part.
What are common characteristics of a bull market high?
Nearly all the bull markets had a number of well-defined char- acteristics in common, such as (1) a historically high price level, (2) high price/earnings ratios, (3) low dividend yields as against bond yields, (4) much speculation on margin, and (5) many offerings of new common-stock issues of poor quality.
By what percentage will a common stock price probably fluctuate over the course of five years?
It is not just possible, but prob- able, that most of the stocks you own will gain at least 50% from their low- est price and lose at least 33% from their highest price—regardless of which stocks you own or whether the market as a whole goes up or down. If you can’t live with that—or you think your portfolio is somehow magically exempt from it—then you are not yet entitled to call yourself an investor. (Graham refers to a 33% decline as the “equivalent one-third” because a 50% gain takes a $10 stock to $15. From $15, a 33% loss [or $5 drop] takes it right back to $10, where it started.)
Do daily and monthly fluctuations make an investor poorer or richer?
A serious investor is not likely to believe that the day-to-day or even month-to-month fluctuations of the stock market make him richer or poorer.
What's the distinction between speculators and investors regarding market price fluctuations?
The most realistic distinction between the investor and the spec- ulator is found in their attitude toward stock-market movements. The speculator’s primary interest lies in anticipating and profiting from market fluctuations. The investor’s primary interest lies in acquiring and holding suitable securities at suitable prices. Market movements are important to him in a practical sense, because they alternately create low price levels at which he would be wise to buy and high price levels at which he certainly should refrain from buying and probably would be wise to sell.
Should an investor hold off buying until low market levels appear?
It is far from certain that the typical investor should regularly hold off buying until low market levels appear, because this may involve a long wait, very likely the loss of income, and the possible missing of investment opportunities. On the whole it may be better for the investor to do his stock buying whenever he has money to put in stocks, except when the general market level is much higher than can be justified by well-established standards of value.
What is a balanced fund?
they have a significant (generally about one-third) component of bonds
What is a stock fund?
their holdings are nearly all common stocks
What are mutual funds or open end funds?
Those that are redeemable on demand by the holder, at net asset value
What are closed end funds?
Those with nonredeemable shares; the number of their shares remains relatively constant.
Which factors determine how much you should be willing to pay for a stock?
Graham feels that five elements are decisive.1 He summarizes them as:
• the company’s “general long-term prospects”
• the quality of its management
• its financial strength and capital structure
• its dividend record
• and its current dividend rate.
What will the defensive investor purchase?
The defensive investor who follows our suggestions will purchase only high-grade bonds plus a diversified list of leading common stocks.He is to make sure that the price at which he bought the latter is not unduly high as judged by applicable standards.