Below are my reflections and answers to the discussion questions posted at Modern Graham for chapter 6 – Portfolio Policy for the Enterprising Investor: Negative Approach – of the Intelligent Investor written by Benjamin Graham.
1. What quote from this chapter do you think best summarizes the point Graham is making?
“The most useful generalizations for the enterprising investor are of a negative sort. Let him leave high-grade preferred stocks to corporate buyers. Let him also avoid inferior types of bonds and preferred stocks unless they can be bought at bargain levels—which means ordinarily at prices at least 30% under par for high-coupon issues, and much less for the lower coupons. He will let someone else buy foreign-government bond issues, even though the yield may be attractive. He will also be wary of all kinds of new issues, including convertible bonds and preferreds that seem quite tempting and common stocks with excellent earnings confined to the recent past.”
2. What do you think of Graham’s suggestions that Enterprising Investors avoid these types of investments?
I think it’s reasonable due to the risks inherent in these types of investments.
3. Have you invested in any such opportunities?
No, I have not.
4. How can we balance avoiding the risk inherent in these opportunities with the potential return they present?
Buy a basket of them and buy all of them at a great discount to intrinsic value. If this cannot be done, I think it’s best to stay away from all of them.
5. What other types of investments do you think should be added to the “Do not touch” list?
Stocks that are priced much too optimistic with expectations set too high compared to a reasonable and conservatively calculated intrinsic value. Except for this I’m not really sure I have anything to add, but clearly all kinds of investments that somebody tries to sell you where the incentives are not aligned with your own should be avoided. All businessmen promoting and selling investments that will make you rich should be kindly but definitely dismissed.
6. What did you think of the chapter overall?
Enjoyed the chapter and all the wisdom that is discussed by Graham in the text.