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Reading with AI 05 | The Intelligent Investor: Chapter 5 — The Defensive Investor and Common Stocks
The stock/bond split is settled, so what should the stock half buy? Graham lays down four non-negotiable rules: diversify across industries with 10–30 stocks, every one of them large, prominent, and conservatively financed, with a long record of continuous dividends, and a P/E no higher than 25 on 7-year average earnings. The fourth rule sweeps every hottest growth stock of the day out of the portfolio in one stroke—because they demand you get three things right in a row, and Texas Instruments' stock rose 5× as fast as its earnings, then fell 80% when earnings fell 50%; Cisco replayed it verbatim thirty years later. Plus the classic definition that "fluctuation is not risk, but overpaying is," three case studies (the widow, the doctor, and the young person), and Jason Zweig's blistering takedown of "buy what you know": Barbra Streisand's Starbucks, the Legg Mason Value Trust fund (Bill Miller) down 73.2%, Enron employees' retirement savings, and three sets of numbers on home bias.
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