A Proposed Definition of Investment
- An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.
- An investment operation is one that can be justified on both qualitative and quantitative grounds
Qualitative Factors:
-Nature of the Business and Future Prospects- Corrective forces are often set in motion which tend to restore profits where they have disappeared or to reduce them where they are excessive in relation to capital
-The Factor of Management- The most convincing proof of capable management lies in a superior comparative record over a period of time
-Trend of Future Earnings- Security analysis does not assume that a past average will be repeated but only that it supplies a rough index what may be expected of the future.
-Trend Essentially a Qualitative Factor- Consider a trend as a qualitative factor in its practical implications, even though it may be stated in quantitative terms
-Qualitative Factors Resist Even Reasonably Accurate Appraisal- The analyst must take possible future changes into account, but his primary aim is not so much to profit from them as to guard against them
-Inherent Stability of Major Qualitative Factors- A stable record suggests that the business is inherently stable, but this suggestion may be rebutted by other considerations
Selection Based on Margin of Safety Principle
If the analyst is convinced that a stock is worth more than he pays for it, and if he is reasonably optimistic as to the company’s future he would regard the issue as a suitable component of a group investment in common stocks
- Buy at times when the general market is low measure by quantitative standards of value
- Discover undervalued individual common stocks which presumably are available even when the general market is not particularly low
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