Investment Philosophy I

Right down here, my intention is not to point out everyway by which money can be made in the financial markets. Rather it is to point out the best way in my opinion. By the best way meant the greatest total profit for the least risk. It is undeniably true that the really big fortunes from common stocks have been garnered by those who have a substantial commitment in the early years of the company in whose future they have had great confidence in. These people held their original shares unwaveringly whilst they increased 100-fold or more in value.

The big fortunes from these investments are almost always realized by persons who have a close relationship with the particular company- through employment, family connection. etc.- which justifies them in placing a huge part of their resources in one medium and holding on to this commitment through all vicissitudes, despite numerous temptations to sell out at apparently high prices along the way.

An investor without such personal contact will constantly be faced with the question whether too large a portio of his wealth are in one medium. Each decline, however temporary it proves in the sequel will accentuate his problem. Internal and external forces are likely to pressure him to take what seems to be a goodly profit but one far less than the ultimate bonaza.

However, this method made far more money and took far less risk. Finding truly outstanding companies and staying them through all fluctuations of a gyrating market proved far more profitable to far more people than did the more colorful practice of trying to buy them cheap and sell them dear. These opportunities did not require purchasing on a particular day at a bottom of a great panic. The shares of these companies where available for fairly long periods that were to make this kind of profits possible, What was required was the ability to distinguish these relatively few companies with outstanding investment possibilities from the much greater number whose future vary all the way from the remotely successful to the complete failure.

Intellectually, there is nothing wrong with this idea, except that it was almost impossible not to carry them too far. Optimism and price level, each justifies the other. With encouragement from the past and rosy prospect in the future, buyers subscribing to such a policy run an extremely high risk of losing their sense of proportion and to pay excessive prices. For there is no clear-cut arithmetic which sets the limit to the present value of the company.

Therefore, it is of paramount importance to dispel the illusion that outstanding common stocks can be bought at any time and at any price, with the assurance not only of ultimate profit but also that any intervening losses would soon be recouped by a renewed advance of the market to new high levels. This was too good to be true. This method encompasses buying outstanding companies, but not at all times and all prices. It is inevitable that all abnormal growth will revert back to normal just because of competition but outstanding companies would take a longer time to do so than otherwise.

The type of accounting and statistical activity that the general public seems to visualize as the heart of succesful investing will, if enough effort to be given will turn up some real bargains. Some of these bargains may be real. In the case of others, there may be such acute business troubles that are lying ahead, not yet discernable from a purely statistical study, that instead of being bargains are actually selling at prices which in a few years will have proven very high.

Therefore, it is proposed that an investment operation is one that must be justified on both qualitative and quantitative grounds. Operations not meeting both requirements should be deemed as speculative.