We covered the first and second timeless investment principles for a smart investor here. The first timeless principle for investing is: Always Invest with a Margin of Safety. The second principle is Expect Volatility and Profit from it.

Today we cover Graham's third timeless investing principle for smart and intelligent investors. Graham advised that investors know their investment selves. So the Principle No.3 is : Know What Kind of Investor You Are

To illustrate this, he made clear distinctions among various groups operating in the stock market. The distinctions were between 1. Active and Passive Investors and 2. Speculator v/s Investor.

Speculator v/s Investor

Looking at the number of day traders in the market today, there are more speculators than investors. Graham believed that it was critical for people to determine whether they were investors or speculators. The difference is simple: an investor looks at a stock as part of a business and the stockholder as the owner of the business, while the speculator views himself as playing with expensive pieces of paper, with no intrinsic value. For the speculator, value is only determined by what someone will pay for the asset. To paraphrase Graham, there is intelligent speculating as well as intelligent investing - just be sure you understand which you are good at.

Active v/s Passive Investors

Graham referred to active and passive investors as "enterprising investors" and "defensive investors".

We have to make a serious commitment in time and energy to become a good investor who equates the quality and amount of hands-on research with the expected return. If this isn't your cup of tea, then be content to get a passive, and possibly lower, return but with much less time and work. Graham turned the academic notion of "risk = return" on its head. For him, "Work = Return". The more work you put into your investments, the higher your return should be.

The investing principles for those who want to get started was covered before here: links: Get started on Investingor The basics principles of Investing or What is an Investment.

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