Portfolio Policy For The Enterprising Investor: To Do’s

The goal of an enterprising investor should be to achieve a higher-than-average rate of return. Graham laid out 4 activities from which an enterprising investor can do to earn more than a defensive investor. These are:

1) Buying when the markets are low\falling and selling when markets are high\rising, i.e.,tactical asset allocation, buying growth stocks, buying discount issues, etc.

2) A defensive investor should stick close to a 50% bond, 50% stock, or plain cash allocation, an enterprising investor has more flexibility in his\her allocations. Rebalancing a portfolio should be based on the attractiveness of an asset’s valuation. Set an equity allocation of min. 25% and a max. of 75%, based on the attractiveness of valuation.

3) When an enterprising investor buys a growth stock, they have to find a large company that is currently unpopular. The price of a growth stock usually reflects the expected growth, which is generally overestimated by the market participants, which means an investor must be extra careful when picking up growth stocks. The best bargain would be a well-established company whose price should be well below its average P/E ratio and its average historical price.

4) The last task for an investor would be searching for a “special situation”. This can involve situations where a small company can be a good fit for a large company to acquire. Graham notes that only a small percentage of enterprise investors engage in this task. So, this provides another area from which profits can be made.