Holding individual stocks has its risks and benefits. A while ago, I bought FedEx shares. They were down in the dumps as they were restructuring the company and going through some changes in their relationship with Amazon. The stock took a nosedive after I bought it, and I added to the position. Since that time, the stock has doubled in a matter of months.
In looking to restructure my portfolio, it was one of the stocks I sold. This morning, the stock’s pre-market is up 6%.
There are a couple of points to note here. First, these things happen. At the same time, I sold my position in Microsoft, which subsequently took an epic dump in share price. You win some, you lose some.
More importantly, what I have gotten into is speculating, not investing. Buying individual stocks can get you there pretty easily. For about a 10-year period, I was disciplined enough not to play this game. But as the market continued to climb, I got into it. It can be exhausting. But more importantly, you end up taking your eye off the ball. You lose sight of your overall investment objectives and start trading your book if you are like me.
Benjamin Graham defined investing as an operation based on thorough analysis, promising safety of principal and an adequate return, while all other operations are speculative. Investors focus on intrinsic business value, whereas speculators bet on price movements driven by market sentiment.
Key Principles from The Intelligent Investor:
Definition: Investment relies on analysis; speculation relies on hope and market timing.
Attitude: The investor acts as a business owner; the speculator acts as a player trying to outguess market fluctuations.
Risk: Speculation becomes dangerous when it is treated as investing. Graham advised limiting speculative, or “mad,” money to a small percentage of a portfolio (e.g., 10%).
The Goal: Investing prioritizes protecting capital, while speculation prioritizes quick gains.
Key Takeaways:
Know the difference: Graham argued that both can be “intelligent” only if one understands which role they are playing.
Avoid “Unintelligent” Speculation: This includes speculating when you think you are investing, treating it as a serious business when lacking skills, and risking more than you can afford.
Market Sentiment: The intelligent investor is a realist who sells to optimists and buys from pessimists.
Good advice in the face of the madness we are seeing now. Every time you click on CNBC or another website, remember this. When you look at your individual stocks and want to trade them, remember this. Be prudent, take profits. Keep your eyes open as to what is going on around you. Develop your investment policy statement and stay focused.
