Common Stocks, less Risky

Thus we return to the statement, made at the outset, that the 120 The Intelligent Investorkind of securities to be purchased and the rate of return to be sought depend not on the investor’s financial resources but on his financial equipment in terms of knowledge, experience, and temperament.

Note on the Concept of “Risk” It is conventional to speak of good bonds as less risky than good preferred stocks and of the latter as less risky than good common stocks. From this was derived the popular prejudice against common stocks because they are not “safe,” which was demonstrated in the Federal Reserve Board’s survey of 1948. We should like to point out that the words “risk” and “safety” are applied to securities in two different senses, with a resultant confusion in thought.

A bond is clearly proved unsafe when it defaults its interest or principal payments. Similarly, if a preferred stock or even a common stock is bought with the expectation that a given rate of dividend will be continued, then a reduction or passing of the dividend means that it has proved unsafe. It is also true that an investment contains a risk if there is a fair possibility that the holder may have to sell at a time when the price is well below cost.