A new ‘investor’ should not rely on hearsay, hunches, gossip, or some kind of biased
guesswork. High numbered ‘baggers’ are very tempting but are speculative and highly risky.
Advice from Benjamin Franklin, mid-1700, was ‘an investment in knowledge pays the best
interest’.
An American General in WWII used the quotation, ‘plan the work and work the plan’
regularly. Its origin is lost in history. Victor Hugo, a well-known author, mid-1800s, had a
similar quote, ‘he who every morning plans the transaction of the day and follows out that
plan, carries a thread that will guide him through the maze of the busiest life. But where no
plan is laid, where the disposal of time is surrendered merely to the chance of incidence,
chaos will soon reign’.
From Albert Einstein, 1920’s and Nobel Prize winner, ‘The most powerful force in the
universe is compound interest.
Back in 1934 Ben Graham, the mentor of Warren Buffet, attempted a precise formulation of
investment as follows: ‘An investment operation is one which, upon thorough analysis
promises safety of principal and an adequate return. Operations not meeting these
requirements are speculative’. He also described ‘intelligent investing’ as requiring an
understanding of what you are doing, making your own decisions, ensuring that you are not
risking a substantial portion of your original investment, and sticking to your own judgements
without regard to market opinion.
Ralph Bing in 1971 reported that he had sent out a seven-part questionnaire to many
institutions. He received 34 replies from banks, mutual fund companies, consulting firms,
insurance companies and universities. He took two main components into account, return
on capital invested (dividends) and the ‘multiple’ for the stock (the Price-to-earnings ratio,
PE). The time horizon that was most popular was one to two years. The three favored
methods had very close scores, i.e., 23.8%, 27.2% and 23.8% respectively. All three used
the ‘multiple’ or PE and the estimated future earnings which can be taken as the dividends
being compounded plus any capital added over time. Three methods out of five were subtly
different, which explains why the scores were so close to each other. In conclusion of this
reference, it can be said that the choice of PE and dividend yield as the basis of analysis in
1961 to 1971 was sound then, and still applies post-2020, if they are not zero or negative. A
third important component is the volatility of the stock.
In 2011 Warren Buffett gave some advice. ‘If you understand chapters 8 and 20 of the book
‘The intelligent investor’, and chapter 12 of ‘General theory of employment, interest and
money’, then you do not need to read anything else and you can turn off your television’. He
also recommends restricting the trading of stocks to between 15 and 20.
A simple method is better than no method.
Marc Lichtenfeld’s book, forwarded by Alexander Green ‘Get rich with dividends’, in 2015,
says, ‘What really makes money for investors over time, and without hair raising volatility of
hypergrowth stocks, is steady businesses paying regular dividends’. ‘This investment
approach really works’. Coupled with this is the power of compound interest.
When a stock is chosen then a good second ‘need’ is to carefully read the Directors Annual
Report to the Shareholders of the Company. If the report reads negatively and with poor
footnotes, then abandon the stock and look for something positive. By: Dr. Alan Leigh Sheldrake
Mentor – Finablers
