|
"Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to give way to speculate or gamble — to give way to hope, greed and fear." Benjamin Graham
Benjamin Graham was an influential economist and professional investor who felt that there is a fundamental difference between investment and speculation. We have all witnessed examples of human emotion taking control of investment decisions.
- You purchase shares and subsequently those shares begin to fall in value. Without analysis of
the reason for the decline in value, you continue to hold the shares in anticipation they will
break even again — HOPE
- You sell your shares in solid companies because the market is selling off today and the next
day you watch as the stock you no longer own goes back up in value — FEAR
- You purchase shares in a company you know nothing about, but they are increasing rapidly in
value and you are certain you will double your money by year end — GREED
Proper investing is no different than proper navigation. You can’t do it based on a feeling, you need a plan, you need a process.
By using an investment model, you eliminate human emotion and invest only in statistically significant companies. Companies that meet the model’s target stay in the portfolio. Companies that fail to meet targets are removed. This provides a discipline for managing assets with a detailed buy and sell framework including a weighted rebalancing approach to take advantage of share price volatility.
|