Security Analysis : Sixth Edition, Foreword by Warren Buffett: Additional Aspects of Security Analysis. Discrepencies Between Price and Value

determination of definite price discrepancies existing between related securities, which situations may justify making exchanges or initiating hedging or arbitrage operations.
A SUMMARY OF OUR VIEWS ON
INVESTMENT POLICIES
    If we transfer our attention, finally, from the analyst to the owner of securities, we may briefly express our views on what he may soundly do and not do. The following résumé makes some allowance for different categories of investors.
    A. The Investor of Small Means.
1. Investment for Income. In his case the only sensible investment for safety and accumulated income, under present conditions, is found in United States Savings Bonds
. Other good investments yield little if any more, and they have not equal protection against both ultimate and intermediate loss. Straight bonds and preferred stocks ostensibly offering a higher return are almost certain to involve an appreciable risk factor. The various types of “savings plans” and similar securities offered by salesmen are full of pitfalls; the investor persuaded by their promise of liberal income to prefer them to United States Savings Bonds is very, very likely to regret his choice.
    2.
Investment for Profit
. Four approaches are open to both the small and the large investor:
    a
. Purchase of representative common stocks when the market level is clearly low as judged by objective, long-term standards. This policy requires patience and courage and is by no means free from the possibility of grave miscalculation. Over a long period we believe that it will show good results.
    b
. Purchase of individual issues with special growth possibilities, when these can be obtained at reasonable prices in relation to actual accomplishment.
    Where growth is
generally
expected, the price is rarely reasonable. If the basis of purchase is a confidence in future growth not held by the public, the operation may prove sound and profitable; it may also prove ill-founded and costly.
    c
. Purchase of well-secured privileged senior issues. A combination of really adequate security with a promising conversion or similar right is a
    U NITED S TATES S TEEL C OMMON , 1901–1939

    rare but by no means unknown phenomenon. A policy of careful selection in this field should bring good results, provided the investor has the patience and persistence needed to find his opportunities.
    d
. Purchase of securities selling well below intrinsic value. Intrinsic value takes into account not only past earnings and liquid asset values but also future earning power, conservatively estimated—in other words, qualitative as well as quantitative elements. We think that since a large percentage of
all
issues nowadays are relatively unpopular, there must be many cases in which the market goes clearly and crassly astray, thus creating real opportunities for the discriminating student. These may be found in bonds, preferred stocks and common stocks.
    In our view, the search for and the recognition of security values of the types just discussed are not beyond the competence of the small investor who wishes to practice security analysis in a nonprofessional capacity, although he will undoubtedly need better than average intelligence and training. But we think it should be a necessary rule that the nonprofessional investor submit his ideas to the criticism of a professional analyst, such as the statistician of a New York Stock Exchange firm. Surely modesty is not incompatible with self-confidence; and there is logic in the thought that unless a man is qualified to advise others professionally, he should not, unaided, prescribe for himself.
    3.
Speculation
. The investor of small means is privileged, of course, to step out of his role and become a speculator. (He is also privileged to regret his action afterwards.) There are various types of speculation, and they offer varying chances of success:
    a
. Buying stock in new or virtually new ventures. This we can condemn unhesitatingly and with emphasis. The odds are so strongly against the man who buys into these new flotations that he might as well throw three-quarters of the money out of the window and keep the rest in the bank.
    b
. Trading in the market. It is fortunate for Wall Street as an institution that a small minority of people can trade successfully and that many others think they can. The accepted view holds that stock trading is like anything else;
i.e.
, with intelligence and application, or with good professional guidance, profits