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The Defensive Investor And Common Stocks
“The best defense is a good offense”
The author mentions that common stocks are more advantageous than bonds because they provide protection against inflation and provide a better return than bonds in the long-run. But these advantages remain only if the investor doesn’t overpay for the stock.
How defensive we should be in the stock market doesn't depend on our risk tolerance levels but instead depends on the time and energy we are ready to give for our investments.
It also shouldn't matter what age bracket you are from and if you have lost money previously in the market. Just like we do a thorough research when we buy an electronic item, say a phone, we should also invest the same amount of time and energy when picking up stocks.
Graham suggests some rules:
- Diversification in the stocks you're investing in. The minimum stocks should be 10 and a maximum of 30 stocks.
- The dividend should have been paid to shareholders at least for the last 20 years.
- Stick to only the large companies that are conservatively financed.
- The price shouldn’t be more than 20 times of earnings of the past year and 25 times of the last 7 years.
Growth Stocks and Defensive Investor:
The term “Growth stock” means a stock whose earnings per share have increased in the past and are expected to rise in the future also and price shouldn’t be very high.In general, growth stocks are considered to be very risky because their P/E ratios are generally very high.
The author explains that starting our investments early can be advantageous because then, an investor can stay invested for more than 2-3 decades without worrying too much about losses. Even if a young investor makes a mistake in the market, they can always learn something while they are young and re-enter.
Power of Compounding:
Assuming an investor retires at age 60, and their investment amount stays constant over the period. From the above table, it is clear that the earlier we start, the better.
