“An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.” -Benjamin Graham, The Intelligent Investor
Are you concerned about the markets right now? Do you worry about how your investments might fair in a prolonged decline? If so, I encourage you to think them in terms of that quote above.
According to Ben Graham, Warren Buffett’s teacher at Columbia Business School, an investment must meet two simple criteria:
- First, does it offer safety of principal? In other words, ‘is my initial investment protected somehow such that I’m likely to get it back even if my analysis is faulty?’
- Second, will it provide an adequate return? In other words, ‘am I being adequately compensated for the risk I’m taking here?’
If you can honestly answer both of these questions with a confident ‘yes’ then you should have no worries.
If you answer either of these with a ‘no’ then you should probably have some sort of stop loss (like the primary trend) in place to make sure you don’t let a speculative position hurt you too badly if it goes against you.
Finally, if you don’t know where to begin in answering these questions then you’re clearly operating outside your own “circle of competence.”
In this case, you probably want to educate yourself a bit more so that you understand how to answer these questions and then focus your efforts going forward on investments that are within your own ability to analyze.
And why not start right where Buffett did with, “The Intelligent Investor“?