The Intelligent Investor: The Definitive Book On Value part 7. The purpose of this book is to supply, in a form suitable for laymen, guidance in the adoption and execution of an investment policy. Comparatively little will be said here about the technique of analyzing securities; attention will be paid chiefly to investment principles and investors’ attitudes. We shall, however, provide a number of condensed comparisons of specific securities - chiefly in pairs appearing side by side in the New York Stock Exchange list in order to bring home in concrete fashion the important elements involved in specific choices of common stocks | 46 Commentary on Chapter 1 Sure enough instead of crushing the market The Foolish Four crushed the thousands of people who were fooled into believing that it was a form of investing. In 2000 alone the four Foolish stocks-Caterpillar Eastman Kodak SBC and General Motors-lost 14 while the Dow dropped by just . As these examples show there s only one thing that never suffers a bear market on Wall Street dopey ideas. Each of these so-called investing approaches fell prey to Graham s Law. All mechanical formulas for earning higher stock performance are a kind of self-destructive process-akin to the law of diminishing returns. There are two reasons the returns fade away. If the formula was just based on random statistical flukes like The Foolish Four the mere passage of time will expose that it made no sense in the first place. On the other hand if the formula actually did work in the past like the January effect then by publicizing it market pundits always erode-and usually eliminate-its ability to do so in the future. All this reinforces Graham s warning that you must treat speculation as veteran gamblers treat their trips to the casino You must never delude yourself into thinking that you re investing when you re speculating. Speculating becomes mortally dangerous the moment you begin to take it seriously. You must put strict limits on the amount you are willing to wager. Just as sensible gamblers take say 100 down to the casino floor and leave the rest of their money locked in the safe in their hotel room the intelligent investor designates a tiny portion of her total portfolio as a mad money account. For most of us 10 of our overall wealth is the maximum permissible amount to put at speculative risk. Never mingle the money in your speculative account with what s in your investment accounts never allow your speculative thinking to spill over into your investing activities and never put more than 10 of your assets into your mad money account no matter what .
