Ultimate human happiness is not found in the few pieces of good fortune that are rare, but in the little opportunities that we get every day.- Benjamin Franklin
The best defense is a good offense
.jpeg "The best defense is a good offense")
After the bloodbath in the stock market over the last few years, why would any defensive investor invest even a penny in stocks?First, be cautious. Graham emphasizes that how strategic you are depends not on your risk tolerance but on how much time and energy you devote to your portfolio. And if you do it right, investing in stocks is as easy as buying bonds or keeping your money in cash. (As we'll see in Chapter 9, you can buy a stock-balancing index fund as easily as getting ready in the morning.)If you suffered losses during the bear market that began in 2000, you were understandably exhausted. In turn, you may have decided to never buy stocks again. As the old Turkish proverb goes, "One who has been burnt by milk blows on buttermilk before drinking it." The 2000-2002 crash was so bad that many investors now view stocks as a huge risk. But the paradox is that the crash has largely eliminated the risk in the stock market. Earlier it was warm milk, but now it is room temperature buttermilk.Logically, the decision of whether to buy stocks today or not has nothing to do with how much you lost by owning them a few decades ago. When stocks are bought at such a fair price that their price will rise in the future, you should buy them, even if you lost money on them in the past. This is even more true when the bond price is low, which will also reduce the future returns on income-producing investments.
As we saw in Chapter 3, stocks (as of early 2003) are only slightly overpriced on historical scales. Meanwhile, bonds at current prices offer such a low yield that an investor buying them as a potential security is a smoker who thinks he is protecting himself from lung cancer by smoking low-tar cigarettes. No matter how conservative an investor you are—low-cost in Graham's sense, and low-risk in general terms—today's prices mean you should put at least some of your money into stocks as well.Fortunately for the defensive investor, buying stocks has never been easier. A permanent automated portfolio puts a small amount of your money into predefined investments each month without much effort. This saves you a large chunk of your life that you spend picking stocks.
Should we buy only those whom we know?
.jpeg "Should we buy only those whom we know?")
But first, he looks at what defensive investors always want to protect against: the assumption that you can pick stocks without any preparation. From the 1980s to the early 1990s, the most popular slogan in investing was "buy what you know." Peter Lynch, who built Fidelity Mag ellan from 1977 to 1990 to build the best track record of any mutual fund, was one of the most eloquent propagandists of this idea. Lynch argued that novice investors have an advantage that professional investors have forgotten to use: the power of common sense. If you find a great new restaurant, car, toothpaste or jeans, or if you notice that the parking lot at the nearest store is always full, or that company employees work until Jay Leno finishes singing at headquarters, you have a personal sense that no professional expert or portfolio manager can ever have. As Lynch said, 'If you buy cars or cameras long enough, you develop an instinct about what's good and what's bad, what sells and what doesn't ... and the best part is you know it before Ball Street does.Licht's rule is "You can outperform the experts if you invest in companies or industries that you already understand." This is not entirely foolproof, and losing investors have used it to their advantage over the years.
But Lynch's rule only works if you follow it to the end: "Finding a promising company is only the first step. The next step is to look." Lynch is also respected for insisting that you never invest in a company, no matter how good its product or how full its parking lot is, until you've studied its financial statements and estimated its business's mortality.Unfortunately most stock buyers have overlooked this part.Day-trading star Barna Streiland is a living example of how people misuse Lynch's teachings. "We go to Starbucks every day, so I bought Starbucks stock," he grumbled in 1999. But the funny star forgot that no matter how much you like their 'Tall Skinny Latte', you still need to analyze Starbucks' financial statements and make sure its stock isn't significantly overpriced. Countless stock buyers make the same mistake: they buy https://www.studyiq52.blog shares just because they like the website or eTrade shavers just because they're their online broker.The 'experts' also lend credence to the idea. From First and Funds portfolio manager Kevin Lands in an interview aired on CNN in late 1999Asked ruefully, "How do you do that? Why can't I, Kevin?" (From 1995 to 1999, the Firsthand Technology Value Fund produced a stunning 58.2% average annual return). "You can do that too," Ladis said. "All you have to do is stay focused on what you know, and stay close to the industry, and talk to the people who work here every day.The most painful distortion of Licht's rule comes in the corporate retirement community. If you "buy what you know," what better way to invest in your 401(k) than by purchasing your own company's stock? After all, you're working here.
Do you think you know more about the company than any outsider? Sadly, the employees of Enron, Global Crossing, and WorldCom who invested their entire retirement assets in company shares were deceived when they discovered that even insiders knew only imperfect information, not the real truth.A group of psychologists led by Baruch Fischhoff of Carnegie Mellon University reported a disturbing fact: becoming more familiar with a subject does not reduce people's tendency to overestimate how much they actually know about it. This is why it can be so dangerous to "invest in what you know." The more you know inside out, the less likely you are to predict a stock's weakness. This deadly form of overconfidence is called "home bias," or the habit of sticking to what you know:
1. A single investor owns three times as many shares of his local phone company as all the other companies combined.
2. Traditional mutual funds only buy stocks that are headquartered within a 115-mile radius of their fund's headquarters, compared to the average U.S. company.
3. 401(k) investors invest 25% to 30% of their retirement funds in their own company's stocks.
In short, familiarity breeds complacency. In TV news, isn't it always the perpetrator's neighbor or close friend or relative who says in a surprised voice, "He was a nice guy?" That's because when we're too close to someone or something, we tend to accept our familiarity rather than question it when we discover something unfamiliar.
The more familiar the stock, the more likely it is that the trading director will be casual about it and not do his homework. Don't let this happen to you.
Can you make the list yourself?
Fortunately, for the defensive investor who is willing to do the homework to build a stock portfolio, this is a golden opportunity. Never in financial history has it been this cheap and easy to buy stocks.Do it yourself Some specialized online brokerages, such as an https://www.studyiq52.blog/2025/08/chapter-5-defensive-investors-and.html, and www.buystulhald.com, allow you to automatically buy stocks, even if you are short on funds. These websites charge only a small amount to buy one of the thousands of UM stocks they have available. You can invest every week or every month, reinvest dividends, and see your investment gradually grow by electronic withdrawal directly into your bank account or by check. Share builders charge more for selling than for buying. Just like a newspaper pressed against your nose, they remind you again that selling too soon is not acceptable for things not done as instructed, Buds FM also offers great tax tracking tools.Unlike traditional proxies or mutual fund vendors that won't let you in the door without paying $3000, these online operations have no minimum balance and are flexible for beginning investors who want to automate their portfolio as they become more experienced. Indeed, a $4 transaction fee is a lot to take away from a 4% investment on a 30% investment, but if you're willing to invest that much, micro investing sites are the only way to build a diversified portfolio.You can also buy single shares directly from the companies that issue them. In 1994, the US Securities and Exchange Commission passed a law that allowed the public to sell shares in a single share, allowing investors to buy shares without a broker through Internet-based programs.
Some helpful online sources for information on buying shares directly include https://www.studyiq52.blog/2025/08/chapter-5-defensive-investors-and.html, https://www.studyiq52.blog/2025/08/chapter-5-defensive-investors-and.html (affiliated with ShareBuilder), and https://www.studyiq52.blog/2025/08/comment-on-chapter-4.html. You may often have to pay a number of inconvenient fees, which can exceed $25 per year. Even so, direct-share purchase programs are often cheaper than stockbrokers.However, we caution that buying stocks with small gains can lead to big tax headaches years later. If you cannot keep a permanent and highly detailed record of your purchases, don't buy them. Finally, don't invest in just one stock or a handful of stocks. If you don't want to spread your bets, you shouldn't bet. Graham's advice to buy between 10 and 30 stocks is a good starting point for an investor who wants to pick stocks for himself, but make sure they are not all from one industry. (See Chapters 11, 14 and 15 for more information on how to choose stocks to build your portfolio).And once you have created such an online automated portfolio, and you trade manually more than twice a year or devote an hour or two per month to your investments, something is very wrong. Don't let this easy, pay-per-minute facility provided by the Internet turn you into a speculator. A defensive investor is one who runs and wins. The race even while sitting.Get help. The defensive investor can also buy stocks through a discount broker, financial planner, or full-service stock broker. At a discount brokerage, you will have to do most of the stock picking yourself. Graham's guidance can help you build a basic portfolio that requires minimal management and maximizes stable returns. On the other hand, if you don't have the time or interest to do it yourself, there is no shame in letting someone pick stocks or mutual funds for you, but there is a responsibility you must take. You, and only you, must make sure (before you entrust them with your money) that your adviser is credible and charges reasonable fees. (See Chapter 10 for other tips.)
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