The Intelligent Investor

Never mingle your speculative and investment operations in the same account, nor in any part of your thinking.

All of human unhappiness comes from one single thing: not knowing how to remain at rest in a room. —Blaise Pascal

People who invest make money for themselves; people who speculate make money for their brokers.

Americans are getting stronger. Twenty years ago, it took two people to carry ten dollars’ worth of groceries. Today, a five-year-old can do it. —Henny Youngman

Rising prices allow Uncle Sam to pay off his debts with dollars that have been cheapened by inflation. Completely eradicating inflation runs against the economic self-interest of any government that regularly borrows money.7

In 50 of those 64 five-year periods (or 78% of the time), stocks outpaced inflation.9 That’s impressive, but imperfect; it means that stocks failed to keep up with inflation about one-fifth of the time.

For most investors, allocating at least 10% of your retirement assets to TIPS is an intelligent way to keep a portion of your money absolutely safe—and entirely beyond the reach of the long, invisible claws of inflation.

Because so few investors have the guts to cling to stocks in a falling market, Graham insists that everyone should keep a minimum of 25% in bonds. That cushion, he argues, will give you the courage to keep the rest of your money in stocks even when stocks stink.

Unless you’re in the lowest tax bracket,6 you should buy only tax-free (municipal) bonds outside your retirement accounts. Otherwise too much of your bond income will end up in the hands of the IRS. The only place to own taxable bonds is inside your 401(k) or another sheltered account, where you will owe no current tax on their income—and where municipal bonds have no place, since their tax advantage goes to waste.7

Savings bonds, unlike Treasuries, are not marketable; you cannot sell them to another investor, and you’ll forfeit three months of interest if you redeem them in less than five years. Thus they are suitable mainly as “set-aside money”

The few good annuities are bought, not sold; if an annuity produces fat commissions for the seller, chances are it will produce meager results for the buyer. Consider only those you can buy directly from providers with rock-bottom costs like Ameritas, TIAA-CREF, and Vanguard.11

The lesson is clear: Don’t just do something, stand there.

Grab a copy of today’s Wall Street Journal, turn to the “Money & Investing” section, and take a look at the NYSE and NASDAQ Scorecards to find the day’s lists of stocks that have hit new lows for the past year—a quick and easy way to search for companies that might pass Graham’s net-working-capital tests. (Online, try http://quote.

Putting up to a third of your stock money in mutual funds that hold foreign stocks (including those in emerging markets) helps insure against the risk that our own backyard may not always be the best place in the world to invest.

What you cannot do (despite all the pundits who say you can) is to “beat the pros at their own game.” The pros can’t even win their own game!

By selling when a style of investing is out of fashion, you not only lock in a loss but lock yourself out of the all-but-inevitable recovery.

A recent article in the Financial Analysts Journal confirmed what other studies (and the sad experience of many investors) have shown: that the fastest-growing companies tend to overheat and flame out.6