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

can be realized. Our own opinion is sceptical, perhaps jaundiced. We think that, regardless of preparation and method, success in trading is either accidental and impermanent or else due to ahighly uncommon talent. Hence the vast majority of stock traders are inevitably doomed to failure. We do not expect this conclusion to have much effect on the public. (Note our basic distinction between purchasing stocks at objectively low levels and selling them at high levels—which we term investment—and the popular practice of buying only when the market is “expected” to advance and selling when it is “due” to decline—which we call speculation.)
    c
. Purchase of “growth stocks” at generous prices. In calling this “speculation,” we contravene most authoritative views. For reasons previously expressed, we consider this popular approach to be inherently dangerous and increasingly so as it becomes more popular. But the chances of individual success are much brighter here than in the other forms of speculation, and there is a better field for the exercise of foresight, judgment and moderation.
    B. The Individual Investor of Large Means. Although he has obvious technical advantages over the small investor, he suffers from three special handicaps:
    1. He cannot solve his straight investment problem simply by buying nothing but United States Savings Bonds, since the amount that any individual may purchase is limited. Hence he must, perforce, consider the broader field of fixed-value investment. We believe that strict application of quantitative tests, plus reasonably good judgment in the qualitative area, should afford a satisfactory end result.
    2. However, the extraneous problem of possible inflation is more serious to him than to the small investor. Since 1932 there has been a strong common-sense argument for
some
common-stock holdings as a defensive measure. In addition, a substantial holding of common stocks corresponds with the traditional attitude and practice of the wealthy individual.
    3. The size of his investment unit is more likely to induce the large investor to concentrate on the popular and active issues. To some extent, therefore, he is handicapped in the application of the undervalued-security technique. However, we imagine that a more serious obstacle thereto will be found in his preferences and prejudices.
    C. Investment by Business Corporations. We believe that United States government bonds, carrying exemption from corporate income taxes, are almost the only logical medium for such business funds as mayproperly be invested for a term of years. (Under 1940 conditions short-time investment involves as much trouble as income.) It seems fairly evident, on the whole, that other types of investments by business enterprises—whether in bonds or in stocks—can offer an appreciably higher return only at risk of loss and of criticism.
    D. Institutional Investment. We shall not presume to suggest policies for financial institutions whose business it is to be versed in the theory and practice of investment. The same might be said for philanthropic and educational institutions, since these generally have the benefit of experienced financiers in shaping their financial policies. But in order not to dodge completely a very difficult issue, we venture the following final observation: An institution that can manage to get along on the low income provided by high-grade fixed-value issues should, in our opinion, confine its holdings to this field. We doubt if the better performance of common-stock indexes over past periods will, in itself, warrant the heavy responsibilities and the recurring uncertainties that are inseparable from a common-stock investment program. This conclusion may perhaps be modified either if there is substantial unanimity of view that inflation must be guarded against or if the insufficiency of income compels search for a higher return. In such case those in charge may be warranted in setting aside a portion of the institution’s funds for administration in other than fixed-value fields, in accordance with the canons and technique of security analysis. 7
    7 Yale University now follows a policy of investing part of its funds in “equities”—defined as common stocks and nonpaying senior issues. The percentage varies in accordance with a fixed formula, somewhat as follows: The initial proportion is 30% of the total fund. Whenever a rise in the market level advances this figure to 40%,