Which Type of Value Investor Are You?

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Benjamin Graham — Warren Buffett's mentor — wrote that knowing the category of investor one fit into was of vital significance.

Know Thyself

It's important to have a realistic picture of what kind of investor one is, and how much intelligent effort one can devote to one's investments.

Benjamin Graham — the founder of Value Investing and Warren Buffett's mentor — notably wrote:

"No great harm comes from some uncertainty of viewpoint regarding a single security, because such cases are exceptional and not a great deal is at stake in the matter. But the investor’s choice as between the defensive or the aggressive status is of major consequence to him, and he should not allow himself to be confused or compromised in this basic decision."

Benjamin Graham, Chapter 6: Portfolio Policy for the Enterprising Investor: Negative Approach, The Intelligent Investor.

Defensive

The first type of investor Graham described was one who was unable to devote a great deal of time or mental effort to his investments.

"We have made a basic distinction between two kinds of investors to whom this book was addressed—the “defensive” and the “enterprising.” The defensive (or passive) investor will place his chief emphasis on the avoidance of serious mistakes or losses. His second aim will be freedom from effort, annoyance, and the need for making frequent decisions."

Benjamin Graham, Introduction, The Intelligent Investor.

Enterprising

Graham described the second category of investors as those who had the time, willingness and aptitude required to build carefully customized portfolios.

"The determining trait of the enterprising (or active, or aggressive) investor is his willingness to devote time and care to the selection of securities that are both sound and more attractive than the average. Over many decades an enterprising investor of this sort could expect a worthwhile reward for his extra skill and effort, in the form of a better average return than that realized by the passive investor."

Benjamin Graham, Introduction, The Intelligent Investor.

Graham also explained that the task of the Enterprising investor was one of individual selection; while conversely, that of the Defensive investor was one of individual exclusion.

Professional

For professional investors, Graham described various special situations or "workouts". Most of Graham's famous students such as Warren Buffett and Bill Ruane would fall in this last category.

But Graham also wrote:

"The exploitation of special situations is a technical branch of investment which requires a somewhat unusual mentality and equipment. Probably only a small percentage of our enterprising investors are likely to engage in it..."

Chapter 7: Portfolio Policy for the Enterprising Investor: The Positive Side, The Intelligent Investor.

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요약하다
Benjamin Graham, the father of Value Investing and mentor to Warren Buffett, emphasized the importance of understanding one's investor type. He categorized investors into two main types: defensive and enterprising. Defensive investors prioritize avoiding significant losses and prefer a hands-off approach, focusing on minimizing mistakes rather than making frequent decisions. In contrast, enterprising investors are willing to invest time and effort into selecting securities that are sound and potentially more rewarding than average. They engage in active portfolio management, aiming for higher returns through careful selection. Graham also mentioned a third category for professional investors, who may exploit special situations in the market, requiring a unique mindset and skill set. He cautioned that only a small percentage of enterprising investors might engage in these complex strategies. Understanding these distinctions is crucial for investors to align their strategies with their capabilities and goals.