2/7/2018 0 Comments Chapter 2This second chapter delineates the argument that the intelligent investor should hold both stocks and bonds at all times. Benjamin Graham sets up the scenario of inflation, which begins the argument why stocks are necessary in a portfolio. When inflation goes up, the earnings that you receive on bonds (other than TIPS) goes down, and if the inflation rate outpaces the interest rate on the bond, investors may even lose money. Stocks, on the other hand, are not affected by inflation.
Changes in the market price generally trend with the growth of business earnings, and many believe that inflation must change the earnings rate of a corporation. Graham has found, however, that these two are not correlated, and even proves that earnings rates can go down even when inflation is increasing. Because of this, stocks offer a relatively effective hedge for inflation. Investors must, however, also be weary of maintaining an all-stock portfolio. While stocks do tend to earn more than bonds, they are less safe because they are unsecured by the government. By including bonds in a portfolio, you are adding a significant amount of safety, which can potentially enable you to make steadier earnings. In addition, those with all-stock portfolios may get caught up in the whims of the market, and make biased and ineffective investment decisions because of it.
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Synopsis (Taken from Goodreads)The greatest investment advisor of the twentieth century, Benjamin Graham taught and inspired people worldwide. Graham's philosophy of "value investing" -- which shields investors from substantial error and teaches them to develop long-term strategies -- has made The Intelligent Investor the stock market bible ever since its original publication in 1949. ArchivesCategories |