WALL STREET SMARTS, THE BLOG, IS NOW WALL STREET SMARTS, THE BOOK. FULLY EDITED AND REVISED WITH NEW MATERIAL ON AMAZON
In his classic, The Art of Speculation, Mr. Carret listed his twelve precepts for fundamental "value" investing. We will look at the first six of them in this blog. They are as follows:
1. Never hold fewer than ten different securities covering five different fields of business.
This provides a minimum amount of diversification; the old rule against keeping all of your eggs in one basket.
2. At least once in six months reappraise every security held.
Mr. Carret suggests that you look at each stock in your portfolio and ask whether you would buy the same stock for the same price it is selling at today. The price you paid for the stock is irrelevant in this exercise. You are looking at the investment anew. If your answer would be no, then he recommends selling it and reinvesting the proceeds. The time period is long enough to prevent the investor from falling into the trap of over trading, a guaranteed road to losses.
3. Keep at least half the total fund in income-producing securities.
At the time Mr. Carret wrote this, income-producing securities, corporate or government bonds paying interest, were considered a higher grade of investments than common stocks that did not pay any dividend. The risk of loss was considered significantly smaller. The investment quality of the bonds was the attraction, not the income itself. In down markets, bonds retained more of their value than stocks. However, bonds can lose value as a result of interest rate changes in the market.
4. Consider yield the least important factor in analyzing any stock.
Mr. Carret explains that the speculative investor is mainly interested in an increase in the market value of the stock he or she purchases. The dividend income is not the goal. If the investor needs income from the funds, Mr. Carret considered that a sign the investor could not afford to speculate in the first place. I agree with this rule, but I feel it may not necessarily apply to an investor in retirement. At that point, the investor is presumably looking for some income as well as appreciation.
5. Be quick to take losses, reluctant to take profits.
The underlying assumption for his statement is that the investor is looking for a long term increase in the value of his or her investment portfolio, not quick trading profits. You will hear the old adage, "You'll never go broke taking profits," from your broker who, of course, makes a living on the commissions earned from your frequent buying and selling. The other beneficiary of frequent trading profits is the tax man, who will expect his "commission" to be paid as well.
6. Never put more than 25% of a given fund into securities about which detailed information is not readily and regularly available.
In the 1920's before there were federal securities regulations, there were few if any requirements that public companies provide financial information about their business to the public. Only the large shareholders, directors and officers knew what was really going on. The individual investor back then had to work hard to learn much of anything about the state of affairs of the companies in which he or she had invested. Such is not the case today. US and many other countries' securities laws require companies to file periodic reports about the results of operations with the Securities & Exchange Commission (SEC) in the USA or the equivalent in other countries. These reports, at least in the US, are available to investors at little or no charge. The reporting requirements are usually not as stringent for smaller public companies, so this advice still holds true today. If you can't easily and readily learn about a company's business operations and results on a regular basis, you probably should not invest in its stock.
We will learn the other six rules next Monday.
As always, your comments are welcome.
No comments:
Post a Comment