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The Intelligent Investor

A Century Of Stock Market History

Graham here tries to look 2 years ahead and foresees the bear market of 1973-74, in which U.S stocks actually lost 37% of their value. He argues that an investor must never forecast the future by just looking into the past itself. 

 

Forecasters had started arguing that stocks had given an annual return more than the expected after inflation from 1802 and therefore they concluded that investors should expect the same outcome in future also.

 

But In the 1990s, the market crashed, investors lost huge amounts of money, and everyone who had come to this belief finally understood that stocks do not provide guarantees, while bonds provide a 100% guarantee against inflation.

 

The author says the value of an investment is simply the price we pay for it but that doesn’t mean that we should pay any price for a stock. As companies can earn limited returns, an investor should also pay a limited price for a stock.

 

Graham's advice on this chapter is simple. Every investor should buy when the price is low and sell when the price is high but investors generally do the opposite. Investors who can stay invested in the market in the long run, the more certain they can be about their investments.

 

If an investor is unable to decide how he or she goes about buying a stock, the following course of actions is to be avoided.

  1. Don’t take loans to buy or hold securities.
  2. Do not increase the proportion of funds held in common stocks and bonds. Reduce the total proportion if it is necessary to bring the portfolio to a 50-50 level, i.e., 50 % common stocks, 50 % bonds.

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