‘The Intelligent Investor’: Chapter 15 Reviewed

In this chapter, Benjamin Graham addresses stock selection for enterprising, or more aggressive, investors. He did the same for defensive investors in chapter 14.

Beating the odds

For the enterprising investor, the goal is to make individual stock selections that will “prove more profitable than an across-the-board average.” The odds of doing this, Graham explains, are generally low. Not that it is immediately self-evident. As he says, exercising even a moderate degree of skill should deliver better results than a plain vanilla portfolio.

Alas, that is not usually true; even professional analysts with the highest qualifications have trouble doing it. Graham points to the records of many investment companies, including some that have operated many years. They can afford to attract the best financial or security analysts, yet:

“random portfolios of New York Stock Exchange stocks with equal investment in each stock performed on the average better over the period than did mutual funds in the same risk class.”

A personal note: I discovered in my recent survey of gurus, including prominent hedge fund managers, that relatively few of these professionals beat the S&P 500 over the past 10 years. Graham’s observation above continues to be true today.

Graham observes that most members of the public who invest in common stocks of their own choosing do not do “nearly” as well as investment funds. He sees two reasons for these failures to beat the averages:

The market likely captures not only all key information about current and past performance, but also whatever expectations “can reasonably be formed as to their future”. As a point of interest, Burton Malkiel published “A Random Walk Down Wall Street” in 1973, the same year Graham published his final edition of “The Intelligent Investor.” Second, Graham posits that securities analysts chase industries

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