Building Blocks

Building Blocks of Investing

Investing Versus Speculating

Investing Defined

"An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.” Graham & Dodd - Security Analysis (1934)

this is the definition we will use in the club.

The Stock Market Is There To Serve You

Common stock prices fluctuate greatly in value from year to year; price swings of 25 to 50% are not uncommon. You need to be prepared for this both financially and psychologically.

The stock market often gets the price wrong. An alert and courageous investor can take advantage of these errors.

“Price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply in to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.” B Graham p. 205 of The Intelligent Investor

Who is Mr. Market? click here to find out more

A stock you own may experience a big price decline. It is advisable to review the situation to ensure you are not missing something. If your analysis confirms your logic is sound you may want to take advantage of the low price and buy more.

Earnings power of the business is what really matters. As long as this remains satisfactory the price movements of the stock can be used to ones advantage by buying low and selling high.

Market timing: do not attempt to time the market and try to anticipate the price action of the stock market. This is what Wall Street and the financial industry will educate and encourage you to do. Financial companies get paid when you buy and they get paid again when you sell a security. They are highly incentivised to get you to churn your portfolio as much as possible.

Greater Fool Theory

The belief that you can make money by speculating on higher future prices, because there will always be someone (the "greater fool”) who will be willing to pay even more than what you paid. Even if you paid too much.

Exercise:

For your favourite stock look at its current price and it compare to its 52 week high and 52 week low.

how much did it change?
what caused the large swings in price?
did the earnings prospects or business fundamentals change to warrant such a large price swing?