Jose D. Roncal
|If you’ve read our bookThe Big Gamble: Are You Investing or Speculating, you may have made the connection between passages of our book and a recent Forbes.com article entitled, Benjamin Graham: Three Timeless Principles.
Benjamin Graham, the man dubbed “The Father of Value Investing,” wrote the The Intelligent Investor in 1949. In it, he spelled out what he considered the most solid investment/speculating principles of the times — principles that are still sound today.
In our book we give you a complete run down on the differences between investing and speculating and highlight some of Graham’s philosophy. With the economy in such disarray and the Dow kicking off the week nearly 240 points below the 7,000 mark, we thought this might be a good time to review some of the principles mentioned in our book so you’ll be prepared to reenter the market with your eyes wide open.
Speculating is an ancient practice, named after the Roman activity specu-lari, which translates as “to spy out or watch.” Today, the most positive connotation of the term is “seeing ahead in business.” The most successful speculators have the ability to both systematically and subjectively analyze and gauge market probabilities. But most importantly, remain keenly aware of the risks they are taking.
With the market so low and presumably the bottom close at hand, we know there are many enterprising individuals poised to strike while bargains are hot. We thought this would be an opportune time to review three of Graham’s principles.
1.) Always Invest With a Margin of Safety
The Margin of Safety means the difference between a discounted price of a security versus it’s intrinsic value. If you do some research on the underlying fundamentals of corporations, you might be looking at the opportunity of high returns and minimal downside risk. Graham would look for the assets that represented stable earning power or liquid cash value.
This strategy can provide substantial profits once the market eventually re-balances and stocks are once again at fair value.
2.) Expect Volatility and Profit From It
Remember, you are never investing; you are always speculating, and that means being prepared for volatility. Instead of panic sell offs when the market goes into a nosedive, the smart speculator sees it as a chance to seek out new places to put their money.
The only thing predictable about the market is that it’s unpredictable. Never let your emotions dictate your actions when it comes to money. Instead, consider the stock’s value based on a rational investigation of the facts. Then buy when the offering price makes sense and sell when the price becomes too high.
3.) Know What Kind of Investor/Speculator You Are
Graham says there are only two kinds of investors/speculators: “enterprising ” or “defensive.” The first kind makes a serious commitment in time and energy to do the research in order to estimate an expected return. If this doesn’t fit your emotional make up, then you’ll need to make your choices more defensively.
To Graham, it’s important to understand whether you consider yourself an investor or a speculator. As we explain in our book, an investor looks at a stock as part of a business and the stockholder as the owner of the business, while the speculator views himself as playing with expensive pieces of paper with no intrinsic value. For the speculator, value is only determined by what someone will pay for the asset. To paraphrase Graham, there is intelligent speculating as well as intelligent investing–just be sure you understand which you are good at.
To gain a complete understanding of the difference, please pick up a copy of our book,The Big Gamble: Are You Investing or Speculating. With today’s unprecedented economic turmoil, you need all the help you can get to understand what’s happening and how to avoid a financial nightmare. Our book gives the insight and practical advice you need.
If you found this article helpful, visit www.financialspeculation.com to claim your own copy of Jose Roncal’s popular FREE REPORT, “12 Keys to Smart Speculating in Tough Times.” It’s chock full of valuable insight on how to rebuild your nest egg. While you are there, check out “The Big Gamble: Are You Investing or Speculating?” See for yourself why Donald Trump has called it “a great read!”