The Astute Investor, 2nd ed: Moneymaking Stock Market Advice from the Masters

Introduction

Correct investment theories, strategies and methods explain how to make money in the stock market. Beginning and experienced investors, requiring practical knowledge to be successful when investing, find this book informative and convenient to use.

Is the stock market undervalued or overvalued? Is the market in a long- term upward trend or long-term downward trend? What stock should you buy? Monitoring interest rates help you recognize a market top or bottom, what are they? Learn how to answer these questions. This book presents where to find data on the Internet, how to calculate investment models, what the model results signify and how you can best use the information to perform due diligence.

Ask fundamental questions important to stock market investors. Answer them by becoming an astute investor. From beginning investors to financial service professionals, all find the practical ten-step method for investment success instructive.

Data to run the models presented are available using specific website commands, described in detail. Learn technical analysis techniques to assist market timing. The Astute Investor helps individuals feel confident taking control of their investment money to build wealth and a secure future. The essential investment wisdom and moneymaking advice from thirty-seven classic investment books from the masters on investing, ensures that you learn from the best in a short period.

Stock Market Success Is Easy: Once You Know How

Most investors, unfortunately, find out about the stock market the hard way—simply by doing. Learning by doing, common in many workplaces, is expensive when learning investing. By reading this book and applying its lessons, investors avoid many pitfalls that await those who begin investing without this knowledge.

The Astute Investor is distinctive, unique and superior to any other book on investing. Learn about market valuation, trend, interest rate monitoring and calculating intrinsic value, and many more topics. Read this book to understand the following three keys to investment success: 1) using forward-looking data; 2) knowing what the political-economic conditions are; and 3) investment perspective.

U.S. political factors such as fiscal and monetary policies have a major influence on the overall market. Learn to guard against the human weaknesses of vanity, greed and the will to believe. Discover that professional traders in the market look ahead using foresight to discount the news. Contrarians recognize the importance of crowd psychology. Learn the contrarian investment method. Become an expert at performing due diligence when performing the ten-step method for investment success.

Investors learn that correct investing is not a random activity, nor mere chance or luck, but a rigorous undertaking that requires reducing risk as much as possible before the act of investing. Accomplish this by relying on proper strategy, analysis, evaluation and judgment.

The goal is to point readers toward essential investment knowledge and to what that knowledge means, transforming naïve investors into astute investors.

What Is An Astute Investor?

An astute investor has foresight and is critically discerning, shrewd, subtle, sagacious and keenly aware of what information and facts are the most significant in investing. Astute investors plan and know where to find data necessary to run appropriate investment models and how to interpret these models’ results for decision making when investing. Astute investors are seekers of truth. They possess market vision, investment intelligence and practical stock market experience.

How investors implement the information presented here and the effort put forth when investing ultimately establishes how successful you will be when investing in the stock market. Understanding this book and applying it correctly, makes knowledgeable individuals investment winners versus naïve investors. The important questions concerning investing follow.

Questions Asked

Millions of Americans invest in the stock market using common stock, in mutual funds, or through self-directed retirement accounts (401(k), 403(b), IRA, or Roth IRA plans). The Astute Investor helps investors answer the following fundamental investment questions:

PART I

1) What investment principles and strategies are important?

2) What investment theory and practice are fundamental for investors?

3) Is the stock market currently overvalued or undervalued?

4) Is the stock market in a long-term uptrend or a long-term downtrend?

5) Why do human emotions get in the way of intelligent investing?

6) How are intrinsic, true or fair value, market value capitalization, bargain value and margin-of-safety multiple calculated and what do they mean?

7) What interest rates typically indicate a long- term stock market top?

8) Why do stock market prices often respond illogically to the news?

9) Being contrarian sounds simple, why is it so difficult in practice?

10) What is the practical ten-step method for investment success?

PART II

11) How can I double retirement income safely?

12) What new investment theories safeguard investment success?

Each of the chapter topics in The Astute Investor inform investors by helping him or her answer these fundamental investment questions for themselves.

Questions Answered

The following chapter synopses highlight the methods presented, to allow investors to answer essential investment questions, by presenting ten major investment firsts in this book, including easy to understand examples. The goal is to transform novice and experienced investors alike, into astute investors.

PART I

1) Understand investment principles and diversification versus concentration strategies. Learn the importance of investment foresight. Recognize investment pitfalls.

2) Study current stock market theory and practice of for perspective on intrinsic, true and fair value of individual companies in the marketplace. The stock market taxonomy categorizes the stock market for better communication.

3) Presenting, in chapter 3, a step-by-step discounting approach, to calculate the forward price-to-earnings (P/E) ratio and the Standard & Poor’s (S&P) 500 Index Expected Fair Valuation (EFV) Model. Use S&P 500 website data to help determine whether the stock market is either overvalued or undervalued.

4) The S&P 500 Index Nine-Month Moving Average (MA) Trend Line gives perspective and confirming indicators check on stage 1 through stage

4 market cycles. Know if the stock market is in either a long-term upward trend or a long-term downward trend. Discover a helpful charting website. Use the perspective of monthly S&P 500 Index trend lines, with specific confirming indicators, to validate long-term stock market trends.

5) Basic human nature and the human mind are unchanging. Learn about symbols, herd mentality and how investors’ rational, non-rational and irrational thinking and conduct undermine and even subvert the most intelligent investors’ thoughts and actions.

6) The Graham-Dodd-Buffett margin-of-safety approach to value investing for all companies requires looking for and recognizing corporate bargains. Learn how to calculate intrinsic, true or fair value. Study a step-by-step real-life example of intrinsic, true or fair value using free cash flow, market value capitalization, bargain value and margin-of-safety multiple.

7) Yield curves and comparing 3-month U.S. Treasury bill interest rates with 30-year Treasury bond interest rates integrate political and economic conditions and help indicate market tops and bottoms. The spread between the Federal Reserve federal funds interest rate and the 30-year U.S. Treasury bond (T-bond) interest rate normally discounts an eventual U.S. economic recession and identifies a long-term stock market peak. Learn how to accomplish this.

8) Interpreting the news requires understanding the expected news discounting process. Learn to be skeptical of market pundits and conventional wisdom by avoiding stock tips. Avoid paying attention to news headlines. Understand why investors find the discounted news theory (DNT) important. The discounted news theory is the correct premise to explain the sophisticated methods of professional traders in the stock market and as the basis for the discounted market hypothesis (DMH).

9) Being contrarian is easy in theory but difficult to implement, and challenges the witty saying, In theory, practice is simple. Recognize the incorrect self-selected market adviser’s strategy of being contrarian is just another form of taking stock tips. Opposing the market and pride of opinion are costly if practiced by investors. Learn the correct approach to being contrarian.

10) The practical ten-step method for investment success brings together all the previously discussed points in chapters 1 through 9. And forms for the astute investor a systematic approach to evaluating the stock market and individual companies. Study real examples using S&P 500 Index data, interest rates and eBay Inc. annual report information.

PART II

11) Learn about retirement planning, using asset allocation over the super long-term and a dollar-cost-averaging buy-and-hold strategy for core investing in the S&P 500 Index versus corporate bonds. What investors learn in this chapter should double their income during retirement. Use and understand volatility tolerance for asset allocation determination in retirement planning.

12) The first time in a book on investing, learn about the discounted market hypothesis (DMH). In addition, the discounted news theory follows the expected news discounting process and supports the DMH. The new theories explain the look-ahead ability of the S&P 500 Index to predict coming political-economic conditions and long-term stock market cycles. The DMH, supported by The Life And Happiness Model, gives the theoretical foundation for why the ten-step method for investment success works in practice.

Who Should Purchase This Book

Reading, understanding and acting according to The Astute Investor transforms all investors into astute investors. Individuals requiring this book include:

1) Investors who want to understand a perplexing stock market, desire learning essential investment knowledge, including information from the thirty-seven classic books on investing.

2) Investors who demand more than just theory, but practical examples from real life, important website addresses and how to find data on the Internet to run these investment models.

3) Those with self-directed retirement accounts (e.g., 401(k) plans), who want to ensure a better retirement for their family

4) Financial services professionals who want to better answer client questions.

Knowing stock market results in advance is impossible. However, put probabilities in your favor by purchasing, reading and implementing the material in The Astute Investor.

Website Commands

Market data are essential for investors to run investment models for themselves. Therefore, bold letters identify websites with defined commands necessary to find specific current data and information. First, the website logon address. Then, as explained in the brackets, find where to look on the computer screen or where to click. Or as sometimes necessary what to type. An example follows.

Logon: http://finance.lycos.com

Where: [Where to look on the computer screen (e.g., on the top heading, along the left column, or in the main body) and the name of what to look for]

Click: [What specifically to click on the computer screen to find the next screen or the necessary data]

Type: [Sometimes necessary to type in information]

Many steps may be necessary, consequently, many Where, Click and Type instructions may be mandatory.

Do Not Use Bull Or Bear

Many investors know that a bull market is a stock market that is trading higher, by approximately twenty percent and bear markets trade lower, by approximately twenty percent. Wall Street and the financial media often use the terms, bull market and bear market.

Constant strings of connected mental images describe our thought process. The terms bull or bear fixates the investor’s mind on either a powerful charging bull or a roaring provoked bear. Unfortunately, neither image is easy to forget. Investor emotions, discussed in chapter 5, can cloud proper action in the stock market. Because the terms bull and bear are emotionally charged words, they create in the investor’s mind a mental block that works against proper analysis.

Investment poise is essential for success. Erasing emotionally charged images is beneficial. Therefore, do not use the term bull or bear to describe the stock market. Instead, describe the stock market is as being either in a long-term upward trend or in a long-term downward trend. Investors should now feel flexible in recognizing the stock market’s state and their best response to it.

The S&P 500 Index As A Proxy

The Standard & Poor’s (S&P) 500 Index is the recommended average and proxy for the overall stock market in The Astute Investor. Other averages, such as the Dow Jones Industrial Average (DJIA), the NASDAQ Composite, the NASDAQ-100 (NDX), the Russell 2000, or the Wilshire 5000 do not work or not nearly as well as the S&P 500 Index.

The Wilshire 5000 includes all equities on the NYSE Euronext [Deutsche Boerse merges with the NYSE in February 2011, the new company is yet unnamed], NASDAQ and the NYSE Amex Equities exchanges. Nevertheless, it does not work as well as the S&P 500 Index in this book’s approach. Perhaps because the Wilshire 5000 includes smaller more volatile companies in its average than the S&P 500 Index.

Technical Analysis

Use technical analysis on the overall stock market, as represented by the S&P 500 Index. For example, look at S&P 500 Index double tops and bottoms, head and shoulders tops and bottoms and outside reversal days to help when identifying changes in long-term stock market trends. In addition, learn about the S&P 500 Index Nine-Month Moving Average (MA) Trend Line and confirming indicators such as the S&P 500 Index Two-Month MA Trend Line, the Moving Average Convergence Divergence (MACD), higher-highs and higher-lows, in chapter 4.

Technical analysis for an astute investor is recommended for the S&P 500 Index using monthly data. Please do not use any other stock market average or on any individual corporate stock. Do not assume other technical analysis techniques work for the S&P 500 Index method, such as flags, pennants or price gaps. Also, do not use technical analysis for an industry index, such as the semiconductor index (SOX).

Bibliography

The Astute Investor incorporates the essential investment wisdom and moneymaking advice from thirty-seven classic investment books from the masters on investing, presented in the bibliography section. Individuals study from the best and save considerable time learning how to invest. The glossary contains a financial dictionary of investment words. Investment principles and strategies are next, in Part I – chapter 1.

Part I

Chapter 1: Investment Principles And Strategies

Introduction

Investing defined. Seven investment principles give investors a better appreciation of what it means to have a sound approach to the field of investing. Certainty in the stock market is impossible. Learn instead, a probabilistic approach to determine when to be in the market. Understand the goal of investing and stock diversification versus concentration as a strategic decision. Study investment foresight, indispensable for successful investing. Learn the difference between investing and pure gambling. Avoid existing investment pitfalls.

Investing Defined

You may invest in many items—common stock, bonds, plant and equipment, rare coins, art, real estate, education, etc. The goal is the owner’s invested excess funds produce current income or for a future financial benefit to the investor. Earn money using the following three methods.

1) Employment, exchanging time for money.

2) Lending money, expecting its return on time and with interest.

3) Risking money—as in the equity markets—with the expectation that a larger payout compensates for the expected higher risk.

The Astute Investor explores and discusses the last two investment methods to earn money in common stock and bonds.

Investing requires the most advantageous strategies and analysis leading to proper evaluation and judgment for purchasing or selling common stock or fixed-income securities (bonds) for either capital appreciation and/or predictable income over a long planning horizon. A discussion of a safe or pure investment follows.

A Safe Or Pure Investment

A safe investment is loaning money, backed up by sufficient collateral. Take legal action, against the borrower, if payment of interest and repayment of principal on time is not forthcoming, and then attach the collateral for eventual sale by the new owner. Perform due diligence to protect principal and to expect a satisfactory return, then sign the contract.

A pure investment is acquiring securities based exclusively upon the safety of the principal and the security of income. The investor buys securities based on an assessment of safety and timely repayment of principal and income compensation.

For safe or pure investments, expect to receive interest and dividends are over the duration of the investment. Consequently, hold the securities with composure. The owner expects the return of the principal and contracted interest payments will be on time. Investors consider United States Treasury bills, notes and bonds safe or pure riskless investments.

Time

Time is critical when investing. Funds are committed expecting repayment on time. Moreover, the money earned will cover any inflation risk, return risk and the period the funds are not available to the lender.

Investment is primarily an attempt to secure a rental from the borrowers of funds for a conditional use of the owner’s money. Lenders attempt to stockpile, for their forthcoming claim, current surplus spending capacity, expecting a larger total amount of funds when needed in the future. Investing assumes a pragmatic assessment of income from dividends, interest payments, or rental fees with any capital appreciation over the term of the investment.

The owner normally estimates the periods for investments to match the required return of the funds for any future use. The need for high predictability of timely replacement of the principal and earnings income over the longer-term separates investing from the more risky and normally shorter-term business of speculating. Investing only on the long side of the market is appropriate and is next.

Investing On The Long Side Of The Market

Astute investors will always invest in equities (common stock) on the long side of the market, or in other words, always expecting that stock prices will increase in value. Select an individual corporate stock based on its projected outperforming of other stock in its industry, sector, or the market taken as a whole.

An investor may go to a neutral position, into cash or a money market fund, when the long-term prospects of the stock market are poor and pointing downward.

Shorting stock, i.e., going short of the stock market and selling securities one does not own, is too speculative a position and is not an appropriate option for an astute investor looking for investments. Please see The Astute Speculator for information on shorting stock, risk management, futures and options trading and other speculative topics. The following investment principles help prospective investors participate in investing with the proper understanding and attitude about investing.

Seven Principles Of Investing

Astute investors should approach investing in an intelligent and businesslike manner. Unfortunately, beginners often enter the investment field with almost a total indifference of what it takes to be a success.

The typical business or professional person may spend perhaps a decade learning and practicing his or her vocation to save money to invest in the stock market. Yet these successful individuals think the same study and knowledge is not required when entering a security investment venture. Running a business or being a doctor, lawyer, engineer, or educator is unlike being an expert on Wall Street.

The following seven investment principles give prospective investors an understanding of what it means to have a sensible approach to the field of investing.

1) Individuals should first understand the nature of investing. Do not assume outsized profits from securities, be they common stock or bonds. If investors put forth extensive study and know security valuations then factor that knowledge into the equation, but only then.

Study the stock market or individual companies. Take a significant amount of time. Investing requires intellectual exertion that is much different from pure gambling, which is blind luck. To be a consistent winner in the stock market, investors should not simply rely on the kindness of strangers or chance. But, they should assess the risk and try to reduce it.

2) View purchasing securities as having an interest in or having a claim, alongside others, in the expected earnings of a corporation. When an individual decides to invest in securities, he or she is beginning a commercial undertaking. Treat it like any other monetary transaction, with caution and with one’s eyes wide open. Expected earnings are a key variable. Think of corporations without a history of solid earnings as speculative and therefore not appropriate for investing.

3) It is always best for investors to have the correct knowledge and to feel confident in making investment decisions. Learning, by reading and understanding this book and having the confidence to make one’s investment decisions are the investor’s goals. Barring that, investors may invest with those they have confidence in and who have demonstrated superior results and the highest integrity in investing. This book gives investors the capacity to understand and oversee their investment manager’s performance.

4) Analysis and calculation is the cornerstone of successful investing. Do not decide to invest after listening to a market adviser give seemingly well-argued reasons the market is either undervalued or overvalued. Do not base investment actions simply on the proclamations of charismatic individuals who use his or her exceptional intellect to offer plausible explanations of what the market may do. Be skeptical of all free advice, especially from advisers on television.

Do not base proper investing on hopefulness the market or stock prices will behave a certain way. But, only on studying the uncompromising facts, data and making the appropriate mathematical calculations. Only when calculations or technical data indicate a good possibility of securing an acceptable profit, should one undertake an investment.

An investor’s most powerful advantage over all others participating in the stock market, be they the company’s employees or stock market floor traders, is the power to just say no. Just say no to any scheme with little to earn and the possibility of much to lose. The astute investor’s goal is realistic returns, while having compelling proof that one’s investment capital is not in jeopardy.

5) Investors should have the courage of their convictions. Following one’s judgment is the goal. When investors have the knowledge, perform the calculations, review the appropriate technical data, form a conclusion based on these data and mathematical calculations, and determine their judgment is reliable. Investors now require courage to act on their convictions.

Astute investors should not vacillate simply because others do not share their resolve. Whether a few or a crowd agree with one’s judgment is immaterial. It does not verify if you are right or wrong. Determine correctness solely on using the right technical data, running appropriate mathematical models and maintaining sound judgment.

In investment virtues, first come proper knowledge, then sound judgment and finally the courage to act. Acquire confidence with investing experience in the stock market. Expect that after investors comprehend the contents of The Astute Investor, they will gain necessary stock market experience only by putting this valuable knowledge into action.

6) Limit one’s investment ambitions and reach to one’s area of competence. If investors do not feel comfortable or proficient in a particular area of investing, stay out. Satisfactory returns are the goal. Superior returns may initially look attainable in an unfamiliar field, but are often more difficult to achieve than first projected.

Do not feel pressured to jump into the latest hot industry merely because it is receiving large amounts of press or one’s neighbor recently did well in it. Staying focused on what the investor knows is paramount.

7) Accomplish successful investing not simply by relying on clear-cut facts or a rote mathematical formula, the key is investment judgment. Mark Twain (1835-1910) says, Intelligence is another word for judgment. Comprehend what the facts and mathematical formula results mean, and the affect this information will have on the stock market and its participants are important. Facts, technical data, mathematical models, knowledge, proper decisions and the willingness to apply this understanding and act on one’s convictions separate successful investors from the mediocre.

Investors may discover something significant about a corporation, but the inexperienced cannot capitalize on this information. A long-standing truth is, Possessing critical relevant facts, even if most investors are unaware of them, does not guarantee stock market success. The power of these facts to the investor rests solely with an understanding of what the market will do with the data and then to act correctly that gives investors the ability to make money from information. Achieve sound judgment for decisions by careful study of the facts in combination with extensive practical experience.

With the proper principles, investing requires a probabilistic approach, foresight and the most beneficial strategies and analysis leading to proper evaluation and judgment for purchasing or selling common stock or fixed-income securities for either capital appreciation and/or predictable income over a long planning horizon. Consequently, accept a probabilistic approach when investing in the stock market, next.

Probabilistic Approach To Investing

A foolproof scientific method for flawless execution in the stock market is not available, nor will it ever be. This book offers knowledge of what is important to observe in the market, what it means and gaining the practical experience to recognize and take advantage of market signals.

Possessing certain solutions is impossible when investing. Expecting to participate in the stock market, judging by an exact standard, is absurd and dangerous to an individual’s finances.

A strategy to evaluate and predict the future course of the stock market will never be a mathematical certainty. Instead, probabilities put prospects in the investor’s favor. Reducing risk as much as possible and having the probability of making money being on the side of the investor are the objectives.

Stressing answers when learning about the stock market is often shortsighted. Investors find it more instructive to study asking the correct questions rather than to know only a momentary correct answer, such as in a market newsletter. The right answers are only for specific times and places, while the correct questions and solution methods transcend both.

Investors quickly learn the stock market is always changing and that success comes only by balancing market probabilities and not by attaching oneself to one correct answer for all-time. Finding certain universal answers to the stock market is impossible, so it is better to rely on probabilities.

The successful approach offered here is an evaluation method based on correct premises and observations of past associations that will likely be to the astute investor’s advantage over a long planning horizon. Knowledge and the experience of working with real situations are vital for success when investing in the stock market. The following section emphasizes how important foresight is for investment success.

Investment Foresight

Investors with foresight envision or imagine what will happen in the future based on all the necessary information available to them and then adequately prepare and properly position themselves for the expected consequences. Investment foresight requires proper concepts, accurate information, and then looking ahead and making a reasoned inference that predicts the future.

Financial analysis is probabilistic in nature and not definite and of course not like making the many more certain calculations in the physical sciences. However, performing financial analysis is imperative for a systemic investigation of whether to invest in the stock market or in an individual stock. Augmenting financial analysis, use foresight to make a projection or estimation of how good business and political conditions will be in the future. Furthermore, determining management’s competence, honesty and energy are mandatory for informed investment judgment.

Financial analysis, business prospects, political conditions and talented management all govern the ability to earn an adequate return on an investment. The return of one’s principal depends on investment foresight to make a correct judgment. Foreseeing the future is the stock market’s function. Investors with foresight and vision participate in this process, next.

Investment Vision

Vision requires astute investors to see what others around them do not see. Investors may watch the same things. The difference being their comprehension is not the same. To foresee requires imagining in advance, ordering or prioritizing images and considering them beforehand. Foresight and order gives priority to observations. After reading this book with comprehension, the currently non-seeing unaware investor will be able to understand political-economic and stock market conditions and know how best to respond to them.

Looking ahead, vision and foresight are not easy. This book helps investors prioritize their focus to improve their foresight capabilities. The ultimate discovery that most investors make in the stock market is they must examine and interpret political-economic conditions to help them foresee investment probabilities.

The stock market richly rewards investors with truthful and accurate vision, images and foresight. Foresight and vision for investors require them to imagine what will happen in the future, based on all the information available to them, and to use reasoned inference, next.

Reasoned Inference

Foresight in investing requires comprehending past facts and conditions combined with correct premises, concepts and reasoning, developed over time, to understand how the future should probably appear. This is justification for thinking, called reasoned inference (please see chapter 12 for additional use). Reasoned inference is, Deriving logical conclusions from factual knowledge or evidence based on premises known or assumed to be true. Investment foresight, concerning the expected market condition before its occurrence, is the key factor in intelligent investing.

Investors with acute foresight achieve stock market success. Find a practical example of using investment foresight in chapter 3 for a better understanding of this fundamental investment trait. Those with foresight acquire a preference for looking beyond today to see the probable route that future proceedings are likely to take.

In the short run, stock prices use the exploring-compensating condition to search for the intrinsic, true or fair value in the marketplace and experience many short-term dips and bulges. Discussed in chapter 4, is how these short-term dips and bulges normally move around intrinsic, true or fair value. Astute investors should be looking ahead and striving to understand the truth of the marketplace, regardless of short-term dips and bulges.

Working on developing foresight is indispensable for a successful investor. The individual with the most practiced and attuned investment foresight may proceed with confidence. Without foresight, investors are simply hoping this time their chance in the market will work out. Moving away from merely gambling and taking chances to the more secure position that investment foresight affords best secures investment success.

Investors Must Not Be Delusional Dreamers

Investors must not be delusional dreamers. Recognize affairs as they are. Do not hope for the impossible. Hope is a belief in desires. Do not base investing simply on one’s hopes or desires. Decide using proper concepts, the appropriate knowledge, facts, analysis and sound judgment.

Avoid being like the knight-errant Don Quixote, on a delusional quest with Sancho Panza to find Dulcinea del Toboso, riding Rocinante to enforce an archaic chivalric code by attacking windmills.

The stock market balances investors’ opinions and weighs them on the scale of the market. Over the long term, however, investors’ opinions are an infinitesimal consequence in the face of facts, truth and the cold hard reality of market cycles associated with political-economic conditions that ultimately determine stock prices.

The political-economic conditions, over the long term, are stronger than any single person or organization trading in the stock market and consequently eventually overwhelm wrong opinions. Eventually, the market goes where it wants to go.

Human beings, generally, are superstitious. An investment error often follows from one’s desire to hold an erroneous belief. In addition, an investor may try to will their belief to be true—often with disastrous results. Human beings are by nature proud, which is why when investment belief and investment reality collide, often we maintain the belief while ignoring reality. This is cognitive dissonance at work.

At stock market long-term bottoms, when reality becomes too painful for hopeful optimists, investors often sell their investments at the wrong time. Over and again, investment delusional dreamers try to cover up their mistakes by selling during panics so they do not have to continue to acknowledge large paper losses. Feeling uncomfortable tension becomes unbearable.

Investing Is Not Gambling

Betting on the flip of a fair coin is a contest of pure chance that requires only luck. This is pure gambling. However, investing, if performed properly, is not pure gambling but as a strategic enterprise. Pure gambling entails no reasoned inference, nor does it presuppose calculation—investing does. The following paragraph contains perhaps the forty-five most important words concerning investing.

Proper investing demands both correct reasoning and compulsory calculation. Successful investing comes from eliminating risk, as much as possible, from the investment act before committing. Winning in the stock market does not happen merely because one takes a risk. Instead, achieve success by reducing risk.

Why do successful businesspersons and professionals, who are intelligent, cautious and experienced in their fields, invest without first knowing what they are doing? Presumably, because they think it looks so easy. They may straightforwardly pick out a stock on nothing more than a hunch based on outside advice, invest and then hope to root it on to victory.

Do not use the naïve approach to investing. The adage, It is easier to make money than to keep it, readily applies when discussing the stock market. An investor’s intelligence contests all others. You win by correctly assessing the facts, making the proper judgment and acting appropriately. Diversification versus concentration is a major concern when determining an investment strategy—a discussion follows.

Diversification Vs. Concentration

The goal of successful investing is safety of principal and security of the expected income. A strategy is a plan, scheme, or approach worked out before attempting to secure, through a course of action, the intended stated