Introduction
Chapter 6 of the intelligent investor talks about the mindset of an Enterprise Investor in investing his money. An investor who is willing to put in extra hours in his research to fetch above average returns.
The Author has put forward two types of investors, the Defensive Investor and the Enterprise Investor.
The Defensive Investor is one who is not directly involved in the stock market. He relies mostly on financial advisors or simply invests his money in index funds for standard returns.
On the other hand, an Enterprise Investor is someone who takes his time to research the stock market and emerges with better alternatives to yield lucrative returns.
The author has put forth some do’s and don’ts to the Enterprise Investor. Let’s first understand the “Don’ts” or simply “Negative Approach”.
Also Read: Chapter 5 Of The Intelligent Investor Explained For Beginners
Chapter 6: Portfolio Policy for the Enterprising Investor – Negative Approach
An Enterprise Investor is a type of investor who is actively involved in the stock markets. He conducts his own research and constantly looks for better opportunities.
As far as the methods of research are conducted, there is no single idea or a blueprint one can follow. This is more of a subjective element, where an Enterprise Investor will look at his interest and prepare methodologies accordingly.
Also, the Enterprise Investor has the choice to choose his investment sectors. For example, an investor who is interested in technology, will be more diligent and interested to study the tech stocks in the markets.
This gives an Enterprise Investor an edge over the Defensive Investor, but not to forget, also this attracts more risk.
Thus, in order to protect the Enterprise Investor to an extent, the Author has laid the guidelines as Do’s and Don’ts.
The Author guides the Enterprise Investor to avoid the following:
- Second Grade Bonds and Stocks
- Foreign Government Bonds
- New Issues
- Common Stocks
Second Grade Bonds and Stocks
When Author mentions “Second Grade” he means Low Grade Bonds / Stocks that an Enterprising Investor thinks would be available at a great discount or high returns.
Investors usually tend to bend towards the expected high returns without keeping an eye on the protection of capital.
These “Second Grade” bonds and stocks could promise a high rate of return at a risk of completely wiping out your capital.
The Author simply states that it is unwise to buy bonds or preferred stocks that lack adequate safety merely because the yield is attractive.
Foreign Government Bonds
The Author is of a belief that foreign bonds, as a whole, have a bad investment history. This could be due to the influence of World Wars which the Author had experienced.
Despite the global conditions have changed from the past, it is preferred to avoid investment in foreign countries, merely due to the reason of political instability and currency fluctuations.
Yet in today’s times when things have globalised and conditions have improvised with technology, it can be evident to state that one can consider to invest in foreign bonds and stock.
Investing a certain portion is more advisable, as the risk exposure still remains valid.
New Issues (like IPOs)
New issues, particularly IPOs are attractive. They are packaged, wrapped and kept for sale to the retail investors. They have the wildest possible range of quality and attractiveness.
Author’s recommendation is that all investors should avoid new issues, and only invest with careful examinations and severe tests.
New issues like IPO are target based products, which means they have salesmen behind them, constantly pressuring you to make a purchase. These individuals earn commissions with your transactions.
They sell / recommend New Issues merely because it is of their interest and not yours. Also, these issues are sold at overpriced valuations, which makes them favourable to the issuers and not the buyers.
Common Stocks
When stating Common Stocks, the Author is trying to talk about popular stocks, which everyone is eyeing on. These stocks are usually overvalued due to the high demand created by the public.
These stocks only attract hype over a short period of time and then once the hype fades, they come down crashing.
The Enterprising Investor needs to focus on the fundamentals of the stock and not merely its popularity.
Conclusion
Before investing in any stocks, an Enterprising Investor should firstly conduct a thorough analysis of the market in order to avoid the bad stocks before selecting the right ones.
Only once this discipline is achieved, one can look at the positive side of stock markets to seek for the right investments.
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