Unfortunately, the author who curated this "Revised Edition", Jason Zweig, is no Ben Graham -- I appreciate much of the work he's done to bring the work up to date for 2003 (Graham's own editions went from the first one in 1949, to the fourth one in 1973), but I object to a lot of what he adds to the text (I'm particularly fuming about his unthinking and wrong-headed condemnation of covered call writing in his sidebar at the end of his commentary on Chapter 16 -- but, that's a specific technical subject for another post somewhat in the future). Fortunately, he does leave Graham's text substantially alone, only adding footnotes and commentary -- some helpful, some, not so much, but, worst case, a reader _can_ just skip them!-)
I can't summarize this masterpiece within a post, but, if 600+ pages are too much for you, get it anyway and read just one chapter -- Chapter 20,
"Margin of Safety" as the Central Concept of Investment(p. 512-524 in the paperback).
As for practical tips, start with the "General Portfolio Policy" discussed in Chapter 4 -- forget "Modern Portfolio Theory" and the utter idiocy of modern theories dictating your stocks/bonds split based on your age, or when you want to retire (totally ignoring the prices and yields of stocks vs bonds at any given time -- eep!-), and, instead, follow "the investor should never have less than 25% or more than 75% of his funds in common stocks, with a consequent inverse range of between 75% and 25% in bonds" (investments in other than negotiable securities -- real estate, commodities, art masterpieces, etc -- are totally outside the bounds of Graham's interests, as they are of mine in this blog; as are obvious but crucial considerations such as, pay off high-interest debts before you dream of "investing" anything, keep in ready cash any money you need -- or would need in an emergency -- for at least the next six months; and so on).
Graham makes extremely convincing points to support this simple rule -- convincing enough, that they easily convinced me (before reading and pondering them, I was convinced that I should have all in bonds when stocks are in a bubble, and vice versa; now, I'll never again stray outside the 25-75 boundaries). You should read and ponder the arguments yourself, but it boils down to two key points: no matter how accurately and closely you've analyzed the markets to convince yourself that stocks or bonds are in a bubble, still (a) you could be wrong, and, if that's unthinkable, nevertheless (b) the market might stay crazy for more and more years to come (before finally coming to its senses as it always does eventually) making you really sad about your timing; softening the most extreme allocation to 25-75 instead of 0-100 will proportionately soften the consequence of either issue, though it proportionately softens the gains from being right and "on time". Avoiding or reducing overall big losses is, in the long run, more important than achieving or enhancing overall big gains, and, you know that "the markets can stay crazy longer than you can stay liquid"...!-)
Case in point: by late '96, I had convinced myself that Mr Market (in stocks) was high into one of its manic periods, so I got entirely out of stocks and into bonds -- with the S&P500, as I recall, somewhere below 800. I wasn't too bad off in diagnosing the bubble... I was just way early in so doing, as S&P500 kept rising back up all the way to peaks over 2000 four year later (!). Had I kept 25% of my securities in stocks, and rebalanced once or twice a year, I would have been substantially better off, even though the S&P500 then crashed badly again to a low of 800 or so after another couple of years. Similarly, I've been convinced for a while that the bonds market is now in a bubble... but, nevertheless, keeping 25% of my securities in bonds (and rebalancing once or twice a year) lets me benefit from the fact that the market can (and often does) keep being crazy for years after dispassionate observers have called it out as being mad!-)
As for the details of how to invest in bonds -- I really can't be bothered much with the details, except for the obvious advantages (for US citizens or residents) of US Savings Bonds, which Graham already pointed out (they're the only bonds I know that are "callable by the lender" with little penalty, so if interest rates spikes you can sell your existing ones at essentially no loss and buy new and higher-yielding ones) -- each person can get about 5 or 10 thousand dollars' worth a year, so they won't fill your quota for bonds unless your overall holdings in securities are modest, and like all tax-advantaged investments make no sense in an IRA or 401K.
If, to reach your desired total of bonds, you need more than the amount of US Savings Bonds you can hold, or you need to keep some in an IRA or 401K, then reach for the bond ETFs (Exchange Traded Funds) of your choice to get the overall mix or differentiation you desire (US vs foreign advanced countries vs emerging countries, dollar-denominated vs other currencies, government vs investment-grade corporates vs junk bonds, mix of maturities, munis if you need to hold some in a taxable account, inflation-protected ((but never those in a taxable account!))... -- those choices depend too much on your personal situation and opinions; e.g., I want more exposure to foreign currencies than the typical US investor probably does, simply because I may decide after retirement to move back to Europe again... after all, I do retain my EU passport and citizenship, in the US I'm only a permanent resident).
With these investments, as well as any other "differentiation/diversification" plays you make in ETFs, I recommend a "set and forget" policy -- look at them only every 6 months or so when you consider rebalancing your whole portfolio of securities. Churning into and out of ETFs (or, for that matter, old-style mutual funds) makes no more sense than it does for common stocks -- even if your IRA and/or taxable account are with one of the growing number of firms that let you trade commission-free with respect to ETFs underwritten by the firm itself (e.g., my accounts with Vanguard have that feature). "Fund churning" is responsible for a huge loss for the many investors who practice it: many studies show that, while mutual funds overall way underperform a S&P500 index, individual investors in funds, in turn, way underperform "mutual funds overall" by an even worse margin: simple reason, too much fund churning in chasing the high-gaining fund of yesterday (which, by mean reversion, is unlikely to be the one you care about... the high-performing one of tomorrow!-).
My philosophy and approach is quite different for stocks, than it is for funds. But, more about that, and (separately;-) more about allocation, diversification, differentiation, and wonderful little tidbits or tips from Graham's masterpiece (as well as other books), in many future posts to come.
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