Investment Fundamentals: Then & Now By Theodor T onca October 30, 2010. As in life, there are very few absolute truths in investing. The o nly constant in both cases is change. While the above statement is universally indisputable, what is less understood and even less recognized is that throughout all this constant change and evolving market cycles the fundamental precepts of investment have remained the same. When King Solomon charged a group of wise men to invent him a sentence which should hold true and b e appropriate at all times and situations. They presented him the words: “And this, too shall pass away.” In much the same wa y Benjamin Graham boiled down the con cept of investing in a few simple words in the original 1934 edition of Security Analy sis: “An investment operation is one which upon thorough analysis promises safety of principle andan adequate return. Operations not meet ing these requirements are speculative.” The remainder of this paper will divulge the basic components which together constitute an investment operation, while highlighting common pitfalls along the way . Investment Operation Components As numerous compilations of data over long term time periods (10 years or more) have shown, including Michael Maubossin's study of over and und er performing mutual funds between 1992-2002. There are similar attributes and investment processes which set managers who consistently beat the market apart from those who don't. – Investment Style. The value investing approach en tails determining a company's intrinsic value before a purchase is ever mad e. The great majority of individuals who have co nsistently outperformed the market, be they Warren Buffett through Berkshire Hathawa y or Peter Lynch via the Magellan Fund espoused an intrinsic value approach to investing. Market Folly #1: Poor quality securities. One of the primary hazards confronting investors as history has taught comes fr om purchasing securities of inherently low quality at times o f favorable business conditions. One needs to look no further than the recent run up and subsequent crash of real estate prices andmortgage backed securities in 2008 for evidence of this. – Portfolio Concentration. Diversification can be a great thing, but too much of it especially uniform diversification as taught by conventional portfolio theory can be very risky. The key is to understand each business which co mprises your portfolio as if it were your own, ideally one will concentrate over 50% of their assets in a group of five-ten co mpanies which they
