For the aggressive as well as the defensive investor, what you don't do is as important to your success as what you do. Here is Graham's "don'ts" list for aggressive investors.
- High-yield bonds. Graham calls high-yield bonds as "second-grade" or "lower grade" bonds and today are called as "junk bonds" - get a brisk thumbs-down from Graham. In his day, it was too costly and cumbersome for an individual investor to diversify away the risks of default.
Since 1978, an annual average of 4.4% of the junk-bond market has gone into default-but, even after those defaults, junk bonds have still produced and annualized return of 10.5%, versus 8.6% for 10-year U.S. Treasury bonds.
Unfortunately, most junk-bond funds charge high fees and do a poor job of preserving the original principal amount of your investment. A junk fund could be appropriate if you are retired, are looking for extra monthly income to suppliment your pension, and can tolerate temporary tumbles in value. if you work at a bank or other financial company, a sharp rise in interest rates could limit your raise or even threaten your job security.So a junk fund, which tends to outperform most other bond funds when interest rate rise, might make sense as a counterweight in your retirement saving plan. A junk-bond fund, though, is only a minor option-not an obligation for the intelligent investor. - Foreign bonds. Graham considered foreign bonds no better a bet than junk bonds. Today, however, one variety of foreign bond may have some appeal for investors who can withstand plenty of risk.
Roughly a dozen mutual funds specialize in bonds issued in emerging-market nations(or what used to be called "Third World countries") like Brazil, Mexico, Nigeria, Russia, and Venezuela. No sane investor would put more than 10% of a total bond portfolio in spicy holdings like these.
But emerging markets bond funds seldom move in synch with the U.S. stock market, so they are one of rare investments that are unlikely to drop merely because the Dow is down. That can give you a small corner of comfort in your portfolio just when you may need it most.
- Day trading-holding stocks for a few hours at a time is one of the best weapons ever invented for committing financial suicide.
Some of your trades might make money, most of your trades will lose money, but your broker will always make money. And your own eagerness to buy or sell a stock can lower your return. Thousands of people have tried, and the evidence is clear: The more you trade, the less you keep.
A long-term investor is the only kind of investor there is. Someone who can't hold on to stocks for more that a few months at a time is doomed to end up not as a victor but as a victim.
- Buying IPOs. It's a bad idea because it flagrantly violates of of Graham's most fundamental rules: No matter how many other people want to buy a stock, you should buy only if the stock is a cheap way to own a desirable business.
The Legend of VA Linux show why it matters. After going up like a bottle rocket on that first day of trading, was at $239.50, VA Linux came down like a buttered brick. By Decemble 9, 2002, three years to the day after the stock was at $239.50, VA Linux closed at $1.19 per share.
Weighing the evidence objectively, the intelligent investor should conclude that IPO does not stand only for "initial public offering." More accurately, it is also shorthand for:
It's Probably Overpriced, Imaginary Profit Only, Insiders' Private Opportunity, or Idioctic, Preposterous and Outrageous.
- The Intelligent Investor, Benjamin Graham
