Notes from Chapter 5, "The Defensive Investor and Common Stock"

One of my favourite book is "The Intelligent Investor" and chapter 5 describe principles that a defensive investor (one who wish to be free from worry, in other words, passive) should look for.

4 rules were prescribed

1. Diversification of between 10-30 securities
2. Companies involved should be large and modestly-financed. This means a certain amount of market capitalization and manageable debts
3. A long record of dividend payments. 20 years might be a good start.
4. PE of average earnings of less than 25, no more than 20 for the Trailing-Twelve-Months (TTM) PE. Note the term "average earnings." Earnings tend to fluctuate all the time, hence an average PE might make more sense especially when a company might have only 1 good year out of 5.

The idea of Dollar Cost Averaging (DCA) is also broached, with almost guaranteed satisfactory return at the end of such implement, despite liquidating on a bad year.

The excellent commentary by Jason Zweig talks about the danger of "buying what you know" (made famous by Peter Lynch) without making the necessary research. Complacency in buying stocks, especially if it is something familiar to you, is nefarious as an investor.

DCA into index funds is stressed once again, as disciplined buying will enable one to have gains even during the worst bear market.