Two extreme behaviors of the market participants

While we were writing, we had to combat a widespread conviction that financial debacle was to be the permanent order; as we publish, we already see resurgent the age-old frailty of the investor-that his money burns a hole in his pocket. But it is the conservative investor who will need most of all to be reminded constantly of the lessons of 1931-1933 and of previous collapses. ... We have striven throughout to guard the student against overemphasis upon the superficial and the temporary. Twenty years of varied experience in Wall Street have taught the senior author that this overemphasis is at once the delusion and the nemesis of the world of finance.

- Preface to the First Edition of Security Analysis by Benjamin Graham & David L. Dodd.

The authors bring two extreme behaviors of the market participants in one sentence. During market collapses, people tend to extrapolate the severity and justify the permanency of what has already occurred. But market tends to ignore these opinion and bounce back even before people could realise it. Similarly, as the market rise up further and further, the investor loses his patience and jumps in into market. In both the situations, emotions would have overruled the investors logical investment decisions. The underlying cause in both the situations is to view the permanency of the current situation into the future. A conservative investor has to overcome this tendency and have to take logical decisions overcoming the emotions which are formed by what we see and read day in and out.

20 times PE

People who habitually purchase common stocks at more than about 20 times their average earnings are likely to lose considerable money in the long run.

- Benjamin Graham & David Dodd

High prices for the best common stocks

According to our view, the high prices paid for 'the best common stocks' make these purchases essentially speculative, because they require future growth to justify them.

- Benjamin Graham & David Dodd