Let us repeat what we said at the outset: If you want to speculate do so with your eyes open, knowing that you will probably lose money in the end; be sure to limit the amount at risk and to separate it completely from your investment program.
Profiting from Price Swings
A less ambitious form of pricing is the simple effort to make sure that when you buy do not pay too much for you stocks. This may suffice for the defensive investor, whose emphasis is on long-pull holding; but as such it represents an essential minimum of attention to market levels.
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 part.
Timing is of great psychological importance to the speculator because he wants to make his profit in a hurry. The idea of waiting a year before his stock moves up is repugnant to him. But a waiting period, as such, is of no consequence to the investor. What advantage is there to him in having his money univested until he receives some (presumably) trustworthy signal that the time has come to buy?
We are convinced that the average investor cannot deal successfully with price movements by endeavoring to forecast them. Can he benefit from them after they have taken place—i.e., by buying after each major decline and selling out after each major advance?
The bear, then bull, market pattern has not repeated itself over time. The most notable departure was in the late 1920's bull market. The last 20 yrs (time of writting of this book), has done the opposite. Buy-low-sell-high is considered an old, fairly regular pattern.
It seems unrealistic to us for the investor to endeavor to base present policy on the classic formula—i.e., to wait for demonstrable bear-market levels before buying any common stocks. Our recommended policy has, however, made provision for changes in the proportion of common stocks to bonds in the portfolio.
The investor does some selling when the market advances substantially.
a very large rise in the market level would result in the sale of all common-stock.
This approach had te double appeal of sounding logical (and conservative) and of showing excellenct results when applied retrospectively to the stock market over many years in the past.
The moral seems to be that any approach to moneymaking in the stock market which can be easily described and followed by a lot of people is by its terms too simple and too easy to last. Spinoza's concluding remark applies to Wall Street as well as to philosophy: "All things excellent are as difficult as they are rare."
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. But what about the long-term and wider changes?
even the intelligent investor is likely to need considerable will power to keep from following the crowd.
for these reasons of human nature, even more than by calculation of financial gain or loss, that we favor some kind of mechanical method for varying the proportion of bonds to stocks in the investor's portfolio. The chief advantage, perhaps, is that such a formula will give him something to do.
Consider an investor's situation from the standpoint of a stockholder. The stock holder shares a kind of double status. And with it, the privilege of taking advantage of either at his choice.
This is a factor of prime importance in present-day investing...The whole structure of stock-market quotations contains a built-in contradiction.
Thus we reach the final paradox, the more successful the company, the greater likelihood of fluctuations in the price of its shares. This really means, the better the quality of a common stock, the more speculative it is likely to be.
Purchases made at or below 1/3 above tangible-asset value, may with logic be regarded as related to the company's balance sheet, and as having justification or support independent of fluctuating market prices. Safe zone: tether buys to no more than 1/3 above tangible-asset value irrespective of market price.
A stock does not become a sound investment merely because it can be bought at close to its asset value. The investor also needs:
The investor with such book values behind it can take a much more independent and detached view of stock-market fluctuations than those who have paid high mulitpliers of both earning and tangible assets.
As long as the earning power of his holdings remains satisfactory, he can give as little attention as he pleases to the vagaries of the stock market. More than that, at times he can use these vagaries to play the master game of buying low and selling high.
The true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book.
This liquidity really means is:
Thus the existence of a quoted market gives the investor certain options that he does not have if the security is unquoted. But it does not impose the current quotation on an investor who prefers to take his idea of value from some other source.
Speculator
Investor
As in all other activities that emphasize price movements first and underlying values second, the work of many intelligent minds constantly engaged in this field tends to be self-neutralizing and self-defeating over the years.
The investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances. He should always remember that market quotations are there for his convenience, either to be taken advantage of or to be ingnored. He should never buy a stock becuase it has gone up or sell one because it has gone down. He would not be far wrong if this motto read more simply: "Never buy a stock immediately after a substantial rise or sell one immediatley after a substantial drop".