Benjamin Graham, the master of investing, argued in 1965 that "undervalued stocks" have great upside potential and may have less real risk than a bond yielding 4.5%. The centerpiece of his investment strategy is an asset allocation between stocks and bonds.
Benjamin Graham's stock-bond asset allocation strategy varies greatly depending on the characteristics of the investor and their risk tolerance. Graham recommends a fluid mix of stocks and bonds, ranging from 25:75 to 75:25.
This means you have the freedom to change it based on your personal risk tolerance and current market conditions. Here's how to implement this stock-bond asset allocation strategy in practice.
During market prosperity, consider increasing your allocation to stocks. Conversely, during economic downturns, consider increasing your allocation to stable bonds.
An investor's risk tolerance varies greatly depending on many factors, including financial status, investment goals, and investment horizon. For example, an investor who wants stable returns and has a low risk tolerance will prefer stable bonds to riskier stocks. In this case, it is recommended to have a high allocation to bonds.
It's important to adjust your asset allocation based on market conditions. For example, when the market is booming, you may want to favor stocks, while when it's in a recession, you may want to favor stable bonds. To accurately gauge market conditions, it can be helpful to seek professional help or keep an eye on economic indicators.
So what economic indicators should you look at? Check out these indicators below!
Graham emphasized the importance of periodically rebalancing asset allocation to manage investment risk:
Diversification spreads risk across different types of assets:
This asset allocation strategy helps hedge against market volatility and provides a stable return.
Remember, all investments carry risk, so always:
| Type | Features | Yield (As of 1971) |
|---|---|---|
| U.S. Savings Bonds Series E and H | 10-year discount bonds Guaranteed yield of 4.29% in the first year Average annualized return of 5.10% through 10-year maturity Fully guaranteed |
5.10% |
| Treasury Bonds | Stable investment traded on large scale Various interest rates and maturities available Low credit risk and high liquidity |
Long-term: 6.09% Intermediate-term: 6.35% Short-term: 6.03% |
| Municipal Bonds | Yield depends on credit rating and maturity Stable returns and wide range of options available |
AA-rated 20-year bond: 5.78% |
| Corporate Bonds | High yield compared to Treasuries or municipal bonds Risk depends on company's credit standing Check company's credit rating and financial condition before investing |
Highest-rated 25-year bond: 7.19% Lowest-rated long-term bond: 8.23% |
Graham's investment strategy focuses on having the right mix of stocks and bonds for stable returns, and choosing stable bonds. This allows investors to effectively deal with market volatility and earn stable returns.
| Advantages | Explanation |
|---|---|
| Inflation-proof | Bonds tend to depreciate relatively less in value during inflationary conditions due to their fixed interest rate, which may not make up for the loss in purchasing power caused by inflation. On the contrary, stocks reflect the profits of a company. If the company can counter inflation by increasing its prices, the value of the stock may also increase. Therefore, stocks can serve as a defense against inflation. |
| Long-term Returns | According to the "Stocks, Bonds, Bills, and Inflation" (SBBI) study, U.S. stocks have provided an average annual real return of about 7% from 1926 to 2019. In contrast, long-term Treasury bonds yielded an average annual real return of about 2.5% over the same period. This demonstrates that stocks outperform bonds over the long term, as they directly reflect a company's growth and profits. |
According to the "Stocks, Bonds, Bills, and Inflation (SBBI)" study, conducted annually since 1926, the average real annual return (adjusted for inflation) for U.S. stocks from 1926 to 2019 was approximately 7%. On the other hand, during the same period, the average real annual return for long-term government bonds was approximately 2.5%. This indicates that stocks have shown significantly higher returns compared to bonds over the long term, as stocks directly reflect a company's growth and earnings.
Considering the advantages of stock investments, including the potential for higher returns over the long term due to the direct reflection of company growth and earnings, stocks should be included in an investment portfolio.
| Criteria | Description |
|---|---|
| Diversification | It's recommended to invest in 10 to 30 different stocks to diversify investment risk and mitigate the impact of losses on individual stocks on your overall portfolio. |
| Choose Large Companies with Strong Balance Sheets | Companies with strong balance sheets, characterized by a low debt-to-equity ratio, stable cash flow, and consistent profit growth, are more likely to perform well even in challenging economic conditions. |
| Dividend Payment Track Record | Opt for companies with a history of paying dividends for approximately 20 years, indicating stable cash flow and a commitment to returning profits to shareholders. |
| Moderate Price-to-Earnings Ratio | Look for companies with a price-to-earnings ratio of 25 times or less of the average earnings over the past seven years, and 20 times or less of the most recent 12-month earnings. This indicates that the stock is not overvalued and is a sound investment. |
| Growth stocks, characterized by higher-than-average earnings per share (EPS) in the past and expected in the future, offer the potential for high returns but come with high risk. | |
| For example, investors who have held iconic growth stocks like IBM for a long time may have enjoyed great gains, but between 1961 and 1962, the stock price plummeted by 50% in six months, and from 1969 to 1970, the stock price was cut in half. | |
| Growth stocks are highly volatile and can experience pain that the average investor may not be able to withstand. For this reason, Graham recommends that defensive investors buy large-cap stocks that are less popular than growth stocks, but have a decent price-to-earnings ratio (PER). These large-cap stocks provide steady returns and have relatively low stock price volatility, which reduces risk for investors. |
"No formal investment technique has yet been discovered that can be as strongly assured of success regardless of stock price as fixed-income investing." This quote from Lucille Tomlinson emphasizes the power and value of fixed-income investing. This method of investing involves buying the same amount of stock each month, taking advantage of both rising and falling stock prices.
The effectiveness of this method can also be seen in Tomlinson's research. According to her study, when investing in 10-year increments from 1919 to 1952, the average return over the 23 periods was 21.5%, excluding dividends. In addition, profits were generated within a minimum of five years and a maximum of 10 years.
There are several reasons why fixed-income investing is effective:
For these reasons, fixed-income investing is a very effective way to earn a stable return on your stock investments.
If you have $200,000, are a widow with children, or a busy doctor, I recommend a 50/50 mix of government bonds and blue-chip stocks. This approach reduces risk while providing a steady return.
| Asset Type | Description |
|---|---|
| Government Bonds | Bonds issued by governments, such as South Korea's Treasury bills or the US Treasury Board. These bonds are backed by the creditworthiness of the government, offering relatively stable returns. |
| Blue-Chip Stocks | Stocks of large companies with strong financials and stable earnings, like Samsung Electronics or Apple. These companies are less likely to be affected by bad economic times, making them stable investments. |
If you're a young person earning $200 per week, it's recommended to take a conservative approach to investing while saving $1,000 per year. It's important to learn about the value of stocks and invest small amounts of money first, rather than investing large amounts, especially if you're new to investing. This will help reduce the risk of losing money through investments.
| Aspect | Average Person's Understanding | Benjamin Graham's Perspective |
|---|---|---|
| Definition of 'Risk' | Focuses on price fluctuations of stocks. Views a drop in stock price as risky. | Views 'risk' as a situation where a company's financial condition deteriorates and it fails to pay principal or dividends. |
| Perception of Risk | Associated with stock price movements. | Associated with company fundamentals and stability. |
| Key Considerations | Primarily concerned with short-term stock price movements. | Emphasizes analysis of company financials and long-term viability. |
A sound balance sheet is an important indicator of a company's stability and potential for growth. According to Benjamin Graham's criteria:
Based on these criteria, some examples of companies with strong balance sheets today include Samsung Electronics, Apple, and Microsoft. These companies have a large share of revenue in their respective industries and strong balance sheets, making them perceived as stable investments providing long-term value to investors.
Aggressive investors should also avoid buying high-grade preferred stocks, non-investment grade bonds and preferred stocks that are not cheap, foreign sovereign debt, newly issued securities, attractive convertible bonds and preferred stocks, and stocks that have outperformed recently.
| Asset Class | Risks |
|---|---|
| Non-Investment Grade Bonds & Preferred Stocks |
|
| Foreign Government Bonds |
|
| Aspect | Description |
|---|---|
| Newly Issued Securities |
Investors should be cautious about newly issued securities due to:
|
| Rights Issue |
Rights offerings and IPOs carry risks such as:
|
| Non-Investment Grade Bonds & Preferred Stocks |
Investing in these carries high risks:
|
| Foreign Government Bonds |
Investing in foreign government bonds poses significant risks:
|
| Bond Type | Features | Rate of Return | Considerations when Investing | Historical Returns |
|---|---|---|---|---|
| Federal government guaranteed tax-exempt Housing Authority Bonds |
|
Depends on time of investment, bond maturity, housing market conditions |
|
Average yield of about 4% in 2023 |
| Federally guaranteed New Community Bonds |
|
Depends on time of investment, bond maturity, project type, local economic conditions |
|
Average yield of about 3.5% in 2023 |
| Tax-exempt industrial bonds |
|
Depends on timing of investment, bond maturity, corporate credit rating, industry outlook | - | Average return of about 5% in 2023 |
| Strategy | Key Points |
|---|---|
| Buy when the stock index is low, sell when it is high |
Capitalizing on market volatility to make profits. "When stock prices are low, buy out of fear. When stocks are high, beware of greed and sell." - Warren Buffett |
| Buy growth stocks |
Invest in stocks with consistently growing revenues or profits. "When looking for growth stocks, pay attention to the potential of the company and the quality of its management. Invest in companies that will create value over the long term." - Peter Lynch |
| Buy Diversified Dips |
Buy stocks with relatively low share prices to diversify risk. "Look for undervalued stocks. Value investors look for them." - Seth Klarman |
| Buy "special situations" stocks |
Invest in stocks with potential to move significantly due to special circumstances. "Special situations require courage. It requires good judgment and the ability to recognize opportunities." - Carl Icahn |
Growth stock investing refers to investing in stocks that have experienced high growth rates in the past and are expected to continue to experience high growth in the future. While these investments can offer attractive returns, they also carry a number of risks, which is why it's important to understand and carefully analyze growth stock investing.
First, one of the biggest risks of investing in growth stocks is the volatility of the stock. Growth stocks can rise significantly in price based on their growth, but they can also fall sharply if unexpected problems arise. In addition, growth stocks can have high share prices because the company has high growth prospects. This can make investing more expensive, which can result in lower than expected returns. Therefore, investing in growth stocks is a risky way to invest with the potential for high returns.
Investing in growth stocks means investing in stocks with high growth rates, both in the past and in the future. While this offers the potential for high returns, it also comes with high risk. Here, we take a look at what famous investors like Benjamin Graham, Warren Buffett, Frederick Martin, and Peter Lynch have to say about investing in growth stocks.
| Investor | View on Growth Stocks |
|---|---|
| Benjamin Graham | The importance of 'luck' and value investing: Graham emphasizes the importance of a consistent value investing strategy for stable returns. While he acknowledges the role of "luck" in investing, he suggests following a consistent set of principles, even though luck can play a role. |
| Warren Buffett | Higher prices, higher returns: Buffett believes that growth and value are intertwined within value investing. He includes growth stocks like Apple in his portfolio but emphasizes accurately valuing companies and paying the right price for them when investing in growth stocks. |
| Frederick Martin | Investing in growth stocks using Graham's valuation formula: Martin introduces an investment methodology based on Benjamin Graham's valuation formula to accurately value growth companies. He claims this approach can help manage the risk associated with growth stock investing and deliver superior returns over the long term. |
| Peter Lynch | 'Growth stocks are full of opportunities': Lynch has a positive view on investing in growth stocks, emphasizing the opportunities they offer. He advises investors to look at factors like growth rate, competitiveness, and market share when selecting growth stocks for investment. |
According to Benjamin Graham's investment philosophy, buying a stock is akin to buying a company. Graham's view is expressed in the concept of a "margin of safety," which is the difference between the price at which an investor buys a stock and the actual value of that company. This "margin of safety" acts as a shield for investors to minimize the risk of their investment.
Benjamin Graham emphasized a value investing strategy that focuses on the intrinsic value of a company without getting swept up in the volatility of the market. He emphasized the importance of having a margin of safety to reduce the likelihood of investment losses, and selected large-cap stocks using the following criteria:
| Criteria | Description |
|---|---|
| Market Capitalization | Top 100 companies |
| Liquidity | Average trading volume of at least 1 million shares over the last three months |
| Debt Level | Current liabilities must be less than net worth |
| Dividend | 5 consecutive years of dividend payments |
| PER | Market capitalization to net income ratio of 15x or less |
When selecting underserved large-cap stocks, it's crucial to consider the concept of a "margin of safety," which represents the difference between the company's true value and its stock price. This ensures minimizing the risk of investment loss.
Small and Medium Enterprises (SMEs) can also be attractive for aggressive investors:
In 2020, the COVID-19 pandemic caused the stock prices of many companies to plummet. Despite immediate setbacks, some companies could be considered marginalized stocks for the long term:
| Company | Impact of COVID-19 | Key Strengths | Expectations |
|---|---|---|---|
| The Walt Disney Company | Theme park closures, halted movie production | Strong brand, content, and new business models | Value expected to hold |
| Boeing Co. | Plummeting air travel demand | Strong competitor in aircraft manufacturing | Recovery expected post-pandemic |
| Carnival Corporation | Disrupted cruise travel | World's largest cruise line | Demand expected to pick up post-pandemic |
| Royal Caribbean Cruises | Disrupted cruise travel | One of the largest cruise lines globally | Demand expected to pick up post-pandemic |
| Marriott International | Hit to hotel and travel industry | One of the largest hotel chains globally | Demand expected to pick up post-pandemic |
| Live Nation Entertainment | Cancelled shows and events | Largest live entertainment company globally | Demand expected to pick up post-pandemic |
| Investment | Success Story |
|---|---|
| GEICO | Graham recognized GEICO's potential early on and made a large investment when its value was not fully reflected in the market. His investment grew to over $400 million, making it a classic success story for value investing strategies. |
| Investment | Success Story |
|---|---|
| Coca-Cola | Buffett recognized Coca-Cola's strong brand value and stable profitability during a market downturn and invested heavily, leading to significant profits. |
| Apple | Buffett saw the potential for growth in Apple's services business despite a decline in iPhone sales, leading to a successful investment. |
| Investment | Success Story |
|---|---|
| PepsiCo | Lynch recognized PepsiCo's strong brand value and stable profitability compared to Coca-Cola and made successful investments. |
| Investment | Success Story |
|---|---|
| Japanese stocks | Templeton invested in undervalued Japanese stocks post-World War II, believing in the potential of the Japanese economy, which later paid off handsomely. |
A cheap stock is a stock whose market price is relatively low compared to its intrinsic value. There are two main ways to find these stocks.
| What is intrinsic valuation? |
|---|
| Intrinsic valuation is a way for investors to estimate the future profits of an investment and convert that value into today's money. To do this, they calculate the appropriate capitalization factor, or the appropriate rate of return an investor can expect to earn from an investment. This rate of return is determined by taking into account the riskiness of the investment, the expected return, and more. |
| Method | Description |
|---|---|
| Benjamin Graham's "excess profits" method | Calculates the amount by which a company's average profits exceed its cost of capital and converts this to a present value, assuming it will continue into the future, to arrive at an intrinsic value. |
For example, let's assume that Company A has earnings per share of $1,000 as of December 31, 2020. Let's assume that the company is expected to earn a constant profit of $1,000 for the next 10 years. Let's also assume that investors' required rate of return (the appropriate capitalization factor) is 10% per year.
In this case, we can calculate the current intrinsic value of the company based on the investor's required rate of return. To do this, we discount each year's expected profit ($1,000) by the required rate of return to convert it to a present value.
The total discounted profit over 10 years is about $6,145. This means that an investor would have to pay $6,145 per share to buy Company A's stock today. If Company A's stock price is currently $5,000, it can be considered an undervalued stock because its current market price is lower than its intrinsic value.
In this way, intrinsic valuation is a useful tool for making investment decisions based on a company's financial condition, expected future profits, and investors' required rate of return.
Let's assume:
| Parameter | Value |
|---|---|
| Earnings per share (EPS) | $1,000 |
| Expected constant profit for the next 10 years | $1,000 per year |
| Investors' required rate of return | 10% per year |
To calculate the intrinsic value:
| Year | Expected Profit | Discount Rate | Present Value |
|---|---|---|---|
| 1 | $1,000 | 10% | $909.09 |
| 2 | $1,000 | 10% | $826.45 |
Total discounted profit over 10 years: $6,145.
If the current stock price of Company A is $5,000, it can be considered undervalued because its intrinsic value is higher ($6,145 per share).
Intrinsic valuation is a useful tool for making investment decisions based on a company's financial condition, expected future profits, and investors' required rate of return.
| Company | Scenario |
|---|---|
| American Amcor | Stock price plummeted due to the oil crisis. After analyzing financials and brand value, Buffett concluded that the intrinsic value was higher than the market price. |
| Washington Post | Stock price fell due to the Quantum Headington scandal. Buffett concluded that the intrinsic value was higher than the market value. |
The private company valuation method focuses on a company's net current assets (net working capital). Net current assets are the cash or readily convertible assets (current assets) a company has on hand minus its liabilities. This method is used to calculate a company's liquidation value, which is the amount of money a company would have left after cashing in all of its assets and paying off its liabilities.
Let's say a company has:
| Assets | Amount (in million USD) |
|---|---|
| Cash and Cash Equivalents | $500 |
| Inventory | $300 |
And liabilities:
| Liabilities | Amount (in million USD) |
|---|---|
| Debts | $200 |
Net Current Assets can be calculated as:
\[ Net\ Current\ Assets = Cash + Cash\ Equivalents + Inventory - Liabilities \]If the market value of this company is $400 million, it can be considered a cheap stock because its net current assets are higher than its market value.
In 1962, Buffett invested in a small textile company called Berkshire Hathaway. At the time, Berkshire Hathaway was in bad shape, and its stock price had fallen below its liquidation value, which is what Graham calls a "salt-of-the-earth" stock, meaning that the stock price was lower than the actual value of the company.
Buffett took advantage of this opportunity to buy a large number of shares, making him a major shareholder in Berkshire Hathaway. He eventually took full control of the company, which he used to acquire and invest in a variety of companies. In doing so, Buffett transformed Berkshire Hathaway into a successful investment firm.
From this example, we can see how the private company valuation method can be utilized in real-world investing. By considering a company's net current assets and liquidation value, investors can find instances where the market price does not reflect the true value of a company. And by capitalizing on these opportunities, investors can make great returns.
The term "stale stocks" refers to a phenomenon commonly found in the stock market. Various reasons contribute to this, including:
| Reasons for Stale Stocks |
|---|
|
In particular, stale stocks appear when:
| Scenario | Description |
|---|---|
| The stock price is significantly lower than the actual value of the company | Market overreaction results in an unreasonable drop in the stock price |
An example of this occurred during the financial crisis of 2008:
| Situation | Description |
|---|---|
| Financial Crisis of 2008 | Excessive selling pressure and deteriorating economic conditions led to sharp declines in stock prices, despite minimal changes in company value |
In summary, if market conditions or specific events cause a stock's price to significantly deviate from the actual value of the company, it may be classified as a stale stock.
Benjamin Graham's concept of "margin of safety" is a new approach to how investors minimize investment risk. He emphasized that when an investor buys a stock, the market value of the stock should be less than the actual value of the company. This difference, the difference between the market value of the stock and its actual value, is the "margin of safety".
Cheap stocks can be thought of as stocks that provide this "margin of safety" concept. When an investor buys one of these stocks, he can do so with the confidence that the actual value of the company is higher than its market value.
This reduces the risk of the investment while also providing the opportunity to earn a return on the investment as the true value of the company is reflected in the market over time. In this way, buying cheap stocks can be seen as an effective way to apply Graham's "margin of safety" concept to real-world investing.
First, if we look at the Great Depression of 1931-1932, many people lost interest in blue-chip stocks during this period. Because times were tough economically, people tended to look for stable investments. This made blue-chip stocks undervalued compared to their blue-chip counterparts.
Although small-cap stocks are small in size, they can be sizable in some industries. They are often attractive to value investors because of their potential value: they can be purchased at a low price relative to their asset value, they often offer high dividend yields, and their gains are compounded when the stock price rises.
For example, companies that are less competitive in certain industries, or that are financially struggling, may be categorized as non-blue-chip stocks. However, if these companies overcome their problems and capitalize on the value of their assets, their stocks can provide great returns.
So, while investing in non-dominant stocks can be a bold decision, with careful analysis and judgment, there is potential for great returns. However, it is important to keep in mind that this will depend on your individual investment strategy and risk tolerance.
There are many reasons why non-premier stocks, or stocks that are overpriced, can go under. Let's break down the reasons and give some real-world examples.
| Reasons | Examples |
|---|---|
| 1. Economic downturn: During tough economic times, investors tend to look for stable investments. | For example, during the 2008 financial crisis, many companies' stock prices plummeted, and investors focused their investments on relatively stable blue-chip stocks. |
| 2. Management issues: When a company's management makes poor decisions or engages in unethical behavior, it reduces the company's credibility and negatively affects its stock price. | In this situation, the company's stock may be categorized as a non-blue-chip stock. For example, Volkswagen's emissions cheating scandal in 2015 greatly reduced the company's credibility and caused its stock price to drop significantly. |
| 3. Lack of competitiveness within the industry: If a company becomes uncompetitive within its industry, its stock is likely to become a non-premium stock. | For example, smaller smartphone makers that are losing out to Apple and Samsung in the smartphone market lose their competitive edge, and their stock is often categorized as a non-premium stock. |
A combination of these factors can lead to the creation of a non-premium stock. Investing in blue-chip stocks can be risky, but it can also be rewarding, so it's important to gather and analyze enough information before investing.
The 1963 "salad oil scandal" is a great example of Warren Buffett's value investing strategy. It involved businessman Anthony "Tino" De Angelis using American Express' warehouse securities to profit from the sale of non-existent oil. As a result, American Express lost millions of dollars and the company's stock price plummeted.
However, Warren Buffett saw the fundamental value of the company and its potential for long-term growth. He recognized that American Express had a strong brand and high profitability, and that this incident would not hinder the company's long-term growth. He took this opportunity to buy a large amount of American Express stock, a decision that proved to be very successful. Within a few years of the incident, American Express' stock price recovered, and Buffett's investment paid off handsomely.
| Successful Investment Process |
|---|
| 1. Investing in an understandable business: Warren Buffett understood American Express' business model. He knew how the company made money and what competition it was exposed to. American Express was active in many areas, including credit cards, consumer finance, and business finance, and had strong brand power. |
| 2. Focus on long-term value: When the "salad oil scandal" occurred, the stock price of American Express dropped significantly. However, Buffett believed that this was only a temporary problem and would not affect the long-term value of the company. He recognized that American Express had strong brand value and high profitability. |
| 3. Favoring companies with strong management: Buffett had faith in American Express' management team to overcome this crisis and grow the company again. He knew that the company's management team had overcome many challenges before. |
| 4. Price and value: When the "salad oil scandal" caused American Express' stock price to drop, Buffett saw it as an opportunity and bought a large amount of shares because he believed the company's stock price was lower than its intrinsic value. |
What this example shows is that even in the face of major crises, companies with fundamental value are resilient over the long term. It's also a good example of how investing in stocks that are undervalued by the market can yield great returns.
Investment principles serve as guidelines for investors to determine their investment approach and strategy. Investment principles generally include two approaches: aggressive investing and defensive investing.
Aggressive investors are those who take on high risk in pursuit of high returns. They must have a deep understanding and rich knowledge of securities, sometimes as deep and rich as the company's management. They tend to invest in the safest companies in sectors they know well. Buying non-blue-chip stocks at zero or overvalued prices can be the biggest source of failure for aggressive investors. Because of the lack of safety and growth potential of non-capitalization stocks, they should only be bought when they are undervalued in order to earn great returns.
One of Warren Buffett's most iconic investments was his massive purchase of Coca-Cola stock in 1988. At the time, Coca-Cola stock was undervalued, and Buffett recognized this and went on a massive buying spree. As a result, Coca-Cola stock grew steadily over the next several years, making Buffett's investment a huge success.
| Warren Buffett's Decision to Invest in Coca-Cola |
|---|
| Warren Buffett's decision to invest in Coca-Cola was based on his deep understanding of the company. He saw several important elements in the company's business model that other investors might miss: |
| - Customer loyalty: Coca-Cola created products that people consumed on a daily basis, which helped to build customer loyalty, an important factor in ensuring long-term profitability. |
| - Brand protection strategy: Coca-Cola worked tirelessly to protect and maintain its brand. This helped to ensure the quality and consistency of its products and maintain an edge over competitors. |
| - Strategic distribution network: Coca-Cola built a worldwide distribution network, which allowed it to deliver its products to the market very effectively. |
| - Innovative marketing: Coca-Cola has developed innovative marketing strategies to increase the value of its brand. This has helped to increase consumer awareness and drive demand for its products. |
| This led Warren Buffett to deeply understand Coca-Cola and see the hidden value in the company. This led him to invest in the company, which should be seen as part of his successful investment strategy. |
Here are some real-life examples of people who bought non-blue-chip stocks at high prices and suffered huge losses.
In the late 1990s, the stock market experienced a bubble phenomenon called the tech bubble due to the rapid emergence of Internet-based companies. During this period, many investors bought non-blue-chip stocks at high prices.
In particular, dot-com companies were typical of this, and their stocks skyrocketed even though these companies didn't actually have any revenue or profits. Investors believed that these companies had the potential for future growth, so they bought them at high prices.
However, when the tech bubble burst in 2000, the stocks of these dot-com companies plummeted, and many investors lost a lot of money. This example illustrates the risks of buying non-prime stocks at high prices.
Most investors are better off being defensive investors rather than aggressive investors. Defensive investors are concerned with preserving the principal of their investments and seek stable returns. This is a more suitable way of investing for the average investor who doesn't have deep knowledge of investing.