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Hi Everyone,

Here's a quick summary of Chapter 4.

Chapter 4, General Portfolio Policy: The Defensive Investor, basically deals with some distinction between Defensive vs Enterprising Investing, a proper mix of stock vs. bonds, and some details on factors pertaining to the bond component of investment.

- The basic characteristics of an investment portfolio are usually determined by the position & characterisitics of the owner or owners.

- It has been an old and sound principle that those who cannot afford to take risks should be content with a relatively low return on their invested funds.

- The general notion is that the rate of return which the investor should aim for is more or less proportionate to the degree of risk, but II's view is that the rate of return should be dependent on the amount of intelligent effort the investor is willing and able to bring to the investment.

- A mimimum return can be aimed for by the passive investor who looks for both safety and freedom from concern. A maximum return can be aimed for by the enterprising investor who can bring maximum intelligent and skill to bear on the investment.

- The defensive (passive) investor should divide their funds between high grade bonds and high grade stocks.

1. The fundamental rule is that there is a 75%-25% range parameter where one would increase the common stock portion when there would seem to be common stock bargains (a protracted bear market) and decrease them when the market level becomes dangerously high.

2. This maxim is easy to enunciate but difficult to follow because it goes against that very human nature which produces the excesses that create bull and bear markets.

3. So the most practical allocation may be an approx. 50-50 split.

- The major choice of issues for the defensive bond compnent is based on two main factors:

1. Taxable or Tax Free
2. Short or Long Maturities

- The tax decision is mainly a matter of calculation based upon yields offered and individual tax rates.

- The longer versus shorter maturity issue deals with quite a different question. Does the investor want to assure himself against a decline in the price of his bonds, but at the cost of a lower annual yield and loss of the possibility of an appreciable gain in principal value. This question is looked at closer in Chapter 8.

- For many years the only sensible bond purchase for individuals was a US Savings issue and they are still the easiest and best choice for small individual investors.

- On pages 45 - 48, there are brief descriptions of the major bond types. US Savings Bonds, Other US Bonds, State & Municiple Bonds, and Corporation Bonds.

- You can get higher yields by sacrificing quality but for the ordinary investor, these higher yielding bonds expose the owner to too many individual risks. (But for enterprising investors, who underatke special study, bargain opportunities occur fairly often with these lower quality bonds)

- Certain savings deposits (or equivalents) may be a suitable substitute for short term bonds.

- Convertible Bond issues are discussed in Chapter 16 & Chapter 8.

- It's often worth sacrificing a small amount of yield in long term issues to obtain the assurance of non-callability.

- Preferred issues should be bought by individual investors on a bargain basis but corporations have a tax advantage that make preferred's more attractive.

- Security forms are explained a bit on page 51. It's noted that the form of the security can offer pro's and con's on the merits of the investment but that it's important to review the individual nature of the security regardless of the characteristics of the form or the habits of Wall Street.

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