Thursday, April 2, 2009

Awakening of the Marginal Investor or Speculator

The Stater Investor Triangle

As of our April 5, 2023, update, we have changed our name from Marginal Investor to our current name, The Starter Investor. Please refer to our About Us page for further information.


TO SELL AT A MODEST PROFIT was an opportunity so tempting I took advantage of it without hesitation. I am referring to my decision last week of selling all of what my so-called stock portfolio consists - the 20 shares of Ayala Corporation at 220 pesos per share. I bought these shares in two board lots of 10 shares each:
  • 10 shares on January 29, 2009 at 207 pesos per share; and
  • 10 shares on February 23, 2009 at 198 pesos per share.
My total acquisition cost for these 20 shares is 4,050 pesos. This trading cycle gave me a net earnings of 350 pesos or close to 9% capital gains in three months.


Precisely, this is one situation the book The Intelligent Investor warns about when one is seriously involved in investing. Specifically, Chapter One of the book was entitled What the Intelligent Investor Can Accomplish. This chapter was organized as follows:

  • Introductory paragraphs
  • Investment Before World War I and Today
  • Results to Be Expected by the Defensive Investor
  • Tax-Exempt Bonds: State and Municipal
  • Results to Be Expected by the Aggressive Investor
  • "Yes" and "No" Table for the Investor
  • The Investor as Security Owner

Of course, some portions of this chapter may no longer be relevant today. But that is offset by the larger portion describing the valuable insights and suggestions that any beginning investor should know. The introductory paragraphs presented several concepts that are fundamental to understanding this whole idea of investing.

Investing Defined


"An investment operation is one which, upon thorough analysis, promises safety of principal, and a satisfactory return. Operations not meeting these requirements are speculative."

The Investor


Our typical investor contemplated by the book is one who:

  • emphasizes the safety of the principal.
  • buys securities outright.
  • holds these securities for a considerable period.
  • more interested in annual income than in quick price changes.

The word intelligent was given the meaning endowed with the capacity for knowledge and understanding. Interestingly, however, the intelligent investor is more about character than of the brain.

The two categories of investors are the defensive or conservative investor, and the aggressive or enterprising investor.

Defensive investor

For the defensive investor, intelligent action is largely the exercise of firmness in the application of relatively simple principles of sound procedures. 


Aggressive investor

In contrast, the first rule of intelligent action for the aggressive investor is never to embark on a security purchase which he does not fully comprehend and which he cannot justify by reference to the results of his personal study or experience.


Investing in Common Stock


The emerging trend at the time the book was written, was the inclusion of common stock as an integral and important part of a sound investment program. Among the advantages cited, related to tax considerations, is that common stock can be selected more on the basis of capital gains expectation rather than current income. There must be some caution, however, because paying attention to the appreciation of the principal may lead the investor into speculative attitudes and operations resulting in financial loss.

Another advantage of common stock is based on long-term experience. A diversified holding of representative common stocks was found to be more profitable than a bond portfolio. Provided, the shares were purchased at reasonable market levels, that is, levels that are reasonable with respect to well-defined standards derived from past experience.


Results to Be Expected by the Defensive and Aggressive Investors


Defensive return on investment

The defensive investor may expect a 4% return for his money. True, this is not a brilliant achievement. Nevertheless, it is attainable with minimum intelligent effort. 

Aggressive return on investment

The aggressive investor, should he or she listen to the warnings and positive suggestions presented, may expect to double the average annual return of the defensive investor.


Furthermore, The Intelligent Investor offers this encouragement: The genuine investor in common stocks does not need great equipment of brains, and knowledge, but he or she does need some unusual qualities of character.


Marginal Investor Notes


Let us go back to the main purpose of this website described in our page About Us. We said that it is about how one may start his or her stock trading and investing activities in the Philippines from scratch. In addition, we also said that we shall limit our investment to common stock and with only one issue: Ayala Corporation.

Considering the suggestions of The Intelligent Investor and the practical situation of our beginning marginal investor, it led me to the observation that there can only be a meaningful talk about investing when one's fund is in excess of 50,000 pesos.

For any amount less than this, it is impractical to create a diversified portfolio of common stocks because of the minimum board lot requirements for purchasing shares of stock in the Philippine Stock Exchange.

In addition, focusing more on capital gains at this level may easily give one more opportunity for earnings than just waiting for the dividends. This is why we sold out my portfolio of 20 shares of Ayala Corporation and gained 9% in the process. All we need to do now is to wait for the next price change until we could buy the same number of shares at our lowest purchase price of 198 pesos or even just about 10% discount on our selling price.

Stated in a different way and sounding more like an oxymoron, we shall grow our starting capital of 5,000 pesos using the speculative methods of stock trading that take advantage of quick price changes until we have the amount of over 50,000 pesos required for our investment goals. Therefore, any lesser amount should better be applied in the only alternative available: stock trading.


Previous Post: Awakening of the Intelligent Marginal Investor: Introduction
Next Post: The Investor and Stock-Market Fluctuations

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