Defining the Enterprising Investor and General Stock Market Strategy

Key Insight

The enterprising investor is characterized by a commitment to achieving investment results superior to the average. This pursuit involves exploring various bond opportunities, including tax-free New Housing Authority and high-yielding New Community bonds, both guaranteed by the United States government. Additional options encompass tax-free industrial bonds, which are serviced by strong corporate lease payments, and lower-quality bonds that may present genuine bargain opportunities within the realm of 'special situations.' In the common stock sector, the enterprising investor's activities are systematically categorized into four main areas: actively buying during market downturns and selling during peaks, carefully selecting 'growth stocks', identifying and purchasing diverse 'bargain issues', and engaging in complex 'special situations'.

While a historical perspective once suggested the simplicity and feasibility of 'formula timing' to enter depressed markets and exit during booms, market behavior since 1949 has demonstrated that such operations are not reliably executable on a purely mathematical basis, often requiring a specialized talent or intuitive 'feel' for trading. For the general investor in 1972, a '50-50 plan' represented the most effective automatic allocation formula. However, enterprising investors are afforded a broader discretion, allowing them to adjust their common stock allocation between a minimum of 25% and a maximum of 75% based on their strong convictions regarding overall market conditions. Fundamentally, an enterprising investor must cultivate substantial knowledge of security values, approaching their investment activities as a rigorous business enterprise, as there is no viable middle ground between a purely passive and an actively aggressive investment stance.

Given these requirements, the majority of security owners should logically adopt a defensive investment classification if they lack the requisite time, determination, or mental aptitude for a quasi-business investing approach. Conversely, the enterprising investor is appropriately positioned to undertake any security operation where their training and judgment are sufficient, and the opportunity appears promising when evaluated against established business standards. Specific security categories, such as foreign bonds, ordinary preferred stocks, and secondary common stocks—especially at 'full prices' (defined as close to par for bonds/preferred or fair business value for common)—are generally excluded for defensive investors. Enterprising investors, however, may consider these only when obtainable at 'bargain prices,' specified as not exceeding two-thirds of their appraisal value. This strategy acknowledges that secondary issues frequently trade below their fair value, reaching or surpassing it typically only in the advanced stages of bull markets, reinforcing the principle that satisfactory results from secondary common stocks, for the ordinary outside investor, depend on purchasing them below their value to a private owner.