Defining "Investment" - The Sensible Interpretation

investment means putting money aside now, in order to gain later. That’s it. For an even more specific definition, the intelligent investor should adhere to the following:

“An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return.” -Ben Graham.

I’ll break down Graham’s genius definition even further.

Safety of Principal in Investment

The most important part of the quote is “promises safety of principal”. If this condition is not met to the highest certainty possible, you should not proceed with an investment. The key to winning is not losing. Survival is more important than gain. You have more control over the safety of principal than possible gain. Like they say, it’s better to be approximately right than precisely wrong.

Safety first. In life and especially in investing.

Thorough Analysis

You need to do your research, there’s no way around it. Understand the business, know it’s competitive positioning, and get it for a good price. You need to have evaluated the management. Do they have skin in the game? Is their track record successful? Do they talk the talk, and walk the walk? Accept the fact that you will never have full information. Most of the time, you’ll learn more about the business during the period you own it.

Researching a business is actually fun, once the stock has passed your first main filters.

Satisfactory Return on Investment

The definition on what a satisfactory return is may differ between individuals. A satisfactory return on investment is the reward you get for meeting the other two conditions first. Otherwise, the result will be mediocre, or worse. The more satisfying a return you wan’t, the better you must have done thorough analysis, and secured your principal. The larger the margin of safety, the higher your potential for return.