Are you an investor or a speculator? If an investor, are you a passive or an active one? Do you analyze companies’ financial statements and calculate stock and bond intrinsic value before making a purchase?
These questions have once been answered by Benjamin Graham, the father of value investing, in his books Security Analysis and The Intelligent Investor. These are considered the basis and fundamental for investors.
The main1930s revolutionary suggestions of his book which seem quite common and wide-spread now are to:
1. Purchase undervalued assets compared to their intrinsic value. B. Graham even provided guidance in his books on how to evaluate a company’s financial state. For example, calculate NCAV(net current assets per share) and compare it with the stock price. If the latter is below NCAV, stocks are undervalued and it is a good deal.
2. Invest in big and diversified companies as they are least likely to default
3. Seek out companies paying dividends as they are the sign of the company’s sound state
4. Opt for stable companies whose current assets exceed current and long-term liabilities. Such companies are financially healthier than heavily-indebted ones.
5. Study multiplies carefully. Pay attention to P/E ratio, price/book value, EPS, book value per share, etc.
Following his own rules, B.Graham is considered to earn about 15% annually. His student and follower Warren Buffett is known as one of the most successful investors and ranks the 5th in Forbes list.
B. Graham’s rules represent a scientifically approved approach to investments and a safe path. Financial analysis is time and knowledge-consuming, of course. However, there is always a chance to refer to the professionals of ISEC Wealth Management and to rely on their analysis and financial advice.
Risk Warning: The information in this article is presented for general information and shall be treated as a marketing communication only. This analysis is not a recommendation to sell or buy any instrument. Investing in financial instruments involves a high degree of risk and may not be suitable for all investors. Trading in financial instruments can result in both an increase and a decrease in capital. Please refer to our Risk Disclosure available on our web site for further information.
People often compare and contrast investment and speculation and a person is often expected to make a choice in favor of one or another. I think that one should learn to speculate and invest.