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The Intelligent Investor

Portfolio policy For The Enterprising Investor – To Avoid

The main difference between a defensive and an enterprising investor is that an enterprising investor is willing to put in more time, research, and effort to invest more aggressively. Both the aggressive and the defensive investor should start from the same place, i.e., a division of their stocks between high-grade common stocks and bonds.


Graham discusses a list of things an investor shouldn’t do:


  • Graham advises investors to avoid lower-rated bonds and preferred stock unless there is very high upside potential in the price of the securities. Lower rated securities have a tendency to fall in adverse markets as we saw in the 2007-08 crisis. The author discusses secondary-grade bonds and says that for the return they offer, they are not worth it. And even if they are available at a cheap/discounted price, secondary grade bonds are generally very illiquid and are not easily sellable.
  • The small additional annual income we receive from lower-rated securities is just not worth the risk unless there is a possibility of huge capital gains. In other words, we should not buy lower-rated issues at a price close to Par of 100. A bond selling at 100 has no capital gains, compared to a bond purchased at 66 has the potential of 50% capital gains.
  • The author also thought it was unwise to buy new issues, however, there are exceptions to this rule. Generally, new issues are brought to market by a company when it’s favourable for them, with great hype and sales promotion; and therefore, it is unlikely for an investor to have a bargain price.
  • Graham also didn’t seem very fond of foreign government bonds, i.e., bonds that are sold by a government other than the country you live in. He believed that if an adverse situation occurs in the country we purchased our bonds from, we don't have a chance to claim the money back, whereas in a local bond, the government has the power to print the money and give it back which makes it safer.
  • New issues should also be carefully examined before making a purchase.

There are two reasons with new issues:

  1. The first reason is that new issues generally have a sales team who sells the shares in exchange for a commission, the higher price they can get for an issue, the more their commission.
  2. The second reason is that the company generally sells new issues when the market conditions are in their favour and not vice-versa.

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Units 7/19