The defensive (or passive) investor will place his chief emphasis on the avoidance of serious mistakes or losses. His second aim will be freedom from effort, annoyance, and the need for making frequent decisions. The determining trait of the enterprising (or active, or aggressive) investor is his willingness to devote time and care to the selection of securities that are both sound and more attractive than the average. Over many decades an enterprising investor of this sort could expect a worthwhile reward for his extra skill and effort, in the form of a better average
The intelligent investor realizes that stocks become riskier, not less, as their prices rise-and less risky, not more, as their prices fall. The intelligent investor dreads a bull market, since it makes stocks riskier and more expensive.
Note that investing, consists equally of three elements:
You must thoroughly analyze a company, and the soundness of its underlying businesses, before you buy its stock
You must deliberately protect yourself against serious losses
You must aspire to “adequate,” not extraordinary, performance
Invest only if you would be comfortable owning a stock even if you had no way of knowing its daily share price
Far from being an afterthought, dividends are the greatest force in stock investing.
Viewed logically, the decision of whether to own stocks today has nothing to do with how much money you might have lost by owning them a few years ago. When stocks are priced reasonably enough to give you future growth, then you should own them, regardless of the losses they may have cost you in the recent past. That’s all the truer when bond yields are low, reducing the future returns on income producing investments
The costs of trading wear away your returns like so many swipes of sandpaper. When you trade instead of investing, you turn long-term gains (taxed at a maximum capital-gains rate of 20%) into ordinary income (taxed at a maximum rate of 38.6%).
A great deal of brain power goes into this field, and undoubtedly some people can make money by being good stock- market analysts. But it is absurd to think that the general public can ever make money out of market forecasts.
The true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus, the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons’ mistakes of judgment.