Graham believed someone could be an intelligent investor in two ways:

ACTIVE OR ENTERPRISING INVESTORS –  These types of investors have a lot of time to spend on building and managing their portfolios and also have a high risk tolerance.  They must continually research, select, and monitor a dynamic mix of stocks, bonds, or mutual funds.

PASSIVE OR DEFENSIVE INVESTORS – These types of investors don’t have a lot of time to spend on a portfolio or can’t tolerate much risk.  They must create a permanent portfolio that runs on autopilot and requires no further effort.  This type of passive portfolio won’t be very exciting, but it will get you steady returns over your lifetime.

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Bullbear Stock Investing Notes

Personal Finance
Five Stock Sectors To Hold If The Market Crashes
 
Tim Begany, 09.13.10, 8:00 PM ET

Let’s face it, it wouldn’t take much right now to put stocks into a major tailspin. Things like an escalation of hostilities on the Korean peninsula, another surprise uptick in unemployment and unexpected earnings disappointments could send the market plunging 10-20% or more.

It’s hard to resist the urge to dump equities when the market goes south. But there are always stocks worth holding through a calamity because they’re likely to persevere, reward you over the long haul, and maybe even provide a smoother ride in terms of price volatility. At current prices, these companies are already attractive values and would become virtually irresistible if the market crashed. Here are some examples in various sectors.

Consumer Services/Retail
This area is always very iffy in a weak economy, but fans of consumer-oriented stocks shouldn’t let a correction cow them into ditching the higher-quality names such as Home Depot, Lowe’s and Costco. That’s because companies like these are considered “defensive,” meaning they’re large enough and sturdy enough to hold up well in tough times. Home Depot, Lowe’s and Costco all survived the recent recession in fine shape and are positioned for profitable long-term expansion.

Industrials
Industrial stocks usually do particularly well early in a recovery, which is where we are now, so it’s not a good idea to sell them when they’re plodding through a recession or during a panic. You probably would have regretted dumping diesel engine maker Cummins the last time the market crashed and the economy receded. Analysts foresee an increase in Cummins’ earnings to around $8 per share by 2014 from the current level of $3.84 a share.

Consumer Discretionary
You don’t want to panic and sell good stocks in this sector for the same reason you’d keep a worthy industrial stock during a downturn. When the economy starts to recover, it’s going to come back. And if it sells something people really seem to want, a crash and recession might not slow it up much at all. Take McDonald’s, for example. The company has consistently made money for investors through good times and bad with nearly half the volatility of the overall stock market, as indicated by a beta of 0.55.

Consumer Staples
These stocks are important to own because consumer staples are products people need even if the market tanks or a recession is on. Although the latest recession hurt Procter & Gamble, the company is rebounding nicely because most people can’t do without things like shampoo, laundry detergent and toilet paper. With new management leading the way, P&G is expected to deliver earnings growth of nearly 10% per year, on average, for some time. Investors can also take comfort in the fact that, like McDonald’s, P&G has a very low beta (0.53).

Technology
Not only are tech giants Intel and Cisco Systems already at roughly a 20-25% discount from their 52-week highs, they’re both positioned to grow their earnings by about 11% annually going forward. Notably, their betas–1.13 and 1.24, respectively–show that both tend to be somewhat more volatile than the market as a whole. That’s OK, though, because the added diversification you get with tech stocks will help to protect your overall portfolio over time, even in a recession.

Where to Be Extra Cautious
While stock picking is risky in general, certain sectors are especially hazardous now. The most obvious are health care and financial services because of sweeping reforms, which are apt to be a drag on those industries although exactly who will be affected most is hard to say. Picking stocks is tough enough, but amidst worries of a double-dip recession, be especially vigilant in what sectors you play.

http://www.forbes.com/2010/09/13/market-collapse-personal-finance-economy-stocks.html?boxes=Homepagemostpopular

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http://www.teensguidetomoney.com/Investing/stock-labels-mostly-unofficial-stock-classifications/

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Investment Policies (Based on Benjamin Graham)

…. brought to you by Bullbear

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8 Graham Stocks for 2010

Graham’s time-tested strategy for defensive investors beat the market again this year. But that shouldn’t come as a big surprise because it’s bested the market, often by a wide margin, in eight of the last nine years.

You can check out the yearly performance of the Graham stocks, the S&P500 (as tracked by the SPY exchange-traded fund), and the percentage point difference between the two in Table 1. If you had bought equal dollar amounts of each year’s Graham stocks in your RRSP and then replaced them with the new crop of stocks in each subsequent year, you would have gained 480% (or 22% annually) over the full period. On the other hand, the unfortunate index investor who bought and held the S&P500 ETF (NYSE:SPY) would have lost 11% over the same time. That even includes quarterly dividends reinvested annually. As you might imagine, I’ve been very pleased with the performance of my take on Graham’s defensive strategy.

TABLE 1: PERFORMANCE OF PAST GRAHAM STOCKS
Year	Graham	S&P500	+/-
2000 – 2001	20.4%	-22.2%	42.6
2001 – 2002	28.2%	-15.1%	43.3
2002 – 2003	56.8%	16.5%	40.3
2003 – 2004	32.2%	9.4%	22.8
2004 – 2005	46.6%	12.8%	33.8
2005 – 2006	-3.8%	10.7%	-14.5
2006 – 2007	34.4%	16.1%	18.3
2007 – 2008	-6.5%	-22.1%	15.6
2008 – 2009	2.2%	-6.2%	8.4
Total Gain	479.5%	-10.8%	490.3
Annualized	22.0%	-1.3%	23.3

Graham first described his method for defensive investors in The Intelligent Investor. Graham, the dean of value investing, passed away in 1976 but an updated edition of The Intelligent Investor (ISBN 0060555661), with new commentary from veteran columnist Jason Zweig, was published in 2003. The original text is presented in its entirety and Zweig’s commentary is thoughtfully separated into copious footnotes at the end of each chapter. If you don’t already have a copy of The Intelligent Investor then this is the version to get. Serious Graham buffs will also want to check out the sixth edition of Securities Analysis (ISBN 0071592539) which includes commentary from some of today’s famous value investors. But, clocking in at 700 pages, it’s not for dilettantes.

Because Graham’s rules for defensive investors are extraordinarily strict, I use a more moderate version. My Graham-inspired rules are shown in Table 2. For example, I require some dividend growth over the last five years whereas Graham demanded a twenty-year record of uninterrupted dividend payments. Similarly, I focus on five years worth of earnings growth instead of ten years largely because the five-year figures are provided by many free internet stock screeners.

TABLE 2: GRAHAM-INSPIRED RULES

1. P/E Ratio less than 15 2. P/Book Ratio less than 1.5 3. Book Value more than 0.01 4. Current Ratio more than 2 5. Annual EPS Growth (5-Yr Avg) more than 3% 6. 5-Year Dividend Growth more than 0% 7. 5-Year P/E Low more than 0.01 8. 1-Year Revenue more than $400 Million

Even with my less-stringent version of Graham’s rules, very few U.S. stocks usually pass the test. Indeed, the list peaked at 10 stocks in 2002, bottomed out at 2 stocks in 2003, and contained only 4 candidates last year. This year, the list is back up near its highs and contains 8 stocks. While that’s a relatively high number of stocks, the list is tiny compared to the thousands of stocks which trade each day. As a result, even my version of Graham’s approach remains quite strict.

The current crop of Graham stocks is shown in Table 3. Before diving in, you should always examine any stock in great detail and remember that ten stocks can not be said to form a well-diversified portfolio. Do your own due diligence and be on the look out for problems that might not be reflected in a company’s latest numbers. Study news stories, press releases, and regulatory filings.

If you’d like more information on Graham stocks, I publish the Graham Value Stocks letter which covers several Graham-inspired strategies and highlights value stocks in both the U.S. and Canada. Just send me an email, and I’ll be happy to provide an online sample.

Remember that value stocks can be psychologically difficult to hold and some stocks will disappoint. While Graham’s Defensive method has avoided running into any serious trouble so far, it can’t be expected to outperform all of the time. Indeed, significant periods of underperformance are likely. I’m particularly concerned that you might dive right in based on past performance alone. Don’t. Be sure to focus at least as much on what can go wrong as on what might go right.

http://www.ndir.com/SI/articles/1109.shtml

From the Great Depression to 1995, US had nine recessions.  So in your lifetime, you’re likely to be subjected to a dozen or more. 

Each time it happens, you’ll hear from the reporters and the TV commentators that the country is falling apart and that owning stocks is too risky. 

The thing to remember is that we’ve wiggled out of every recession since the one that turned into the Great Depression.

Reviewing the period from the Great Depressions to 1995 shows that

• the average recession lasts 11 months and 1.62 million jobs are lost, while
• the average recovery lasts 50 months and 9.24 million jobs are created.

The seasoned investor realizes that stock prices may drop

• in anticipation of a recession, or because
• Wall Street is worried about inflation

But there’s no sense in trying to anticipate either predicament, because the economic climate is unpredictable. 

You have to have faith that inflation will cool down eventually, and that recessions will thaw out.